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Lee vs. Court of Appeals
G.R. No. 117913. February 1, 2002.*
CHARLES LEE, CHUA SIOK SUY, MARIANO SIO, ALFONSO YAP, RICHARD VELASCO and ALFONSO CO,
petitioners, vs. COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.
G.R. No. 117914. February 1, 2002.*
MICO METALS CORPORATION, petitioner, vs. COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.
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8 Rollo, pp. 460-461.


* SECOND DIVISION.
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SUPREME COURT REPORTS ANNOTATED
Lee vs. Court of Appeals
Civil Procedure; During the trial of an action, the party who has the burden of proof upon an issue may
be aided in establishing his claim or defense by the operation of a presumption, or, expressed
differently, by the probative value which the law attaches to a specific state of facts; A presumption may
operate against his adversary who has not introduced proof to rebut the presumption.During the trial
of an action, the party who has the burden of proof upon an issue may be aided in establishing his claim
or defense by the operation of a presumption, or, expressed differently, by the probative value which
the law attaches to a specific state of facts. A presumption may operate against his adversary who has
not introduced proof to rebut the presumption. The effect of a legal presumption upon a burden of
proof is to create the necessity of presenting evidence to meet the legal presumption or the prima facie
case created thereby, and which if no proof to the contrary is presented and offered, will prevail. The
burden of proof remains where it is, but by the presumption the one who has that burden is relieved for
the time being from introducing evidence in support of his averment, because the presumption stands
in the place of evidence unless rebutted.

Commercial Law; Negotiable Instruments Law; Essential Requisites of a Negotiable Instrument; Letters
of credit and trust receipts are not negotiable instruments.Negotiable instruments which are meant to
be substitutes for money, must conform to the following requisites to be considered as such a) it must
be in writing; b) it must be signed by the maker or drawer; c) it must contain an unconditional promise
or order to pay a sum certain in money; d) it must be payable on demand or at a fixed or determinable
future time; e) it must be payable to order or bearer; and f) where it is a bill of exchange, the drawee
must be named or otherwise indicated with reasonable certainty. Negotiable instruments include
promissory notes, bills of exchange and checks. Letters of credit and trust receipts are, however, not
negotiable instruments. But drafts issued in connection with letters of credit are negotiable instruments.
Same; Same; Same; A trust receipt is a document of security pursuant to which a bank acquires a
security interest in the goods under trust receipt.A trust receipt is considered as a security
transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or
resources to finance the importation or purchase of merchandise, and who may not be able to acquire
credit except through utilization, as collateral of the merchandise imported or purchased. A trust
receipt, therefor, is a document of security pursuant to which a bank acquires a security interest in the
goods under trust receipt. Under a letter of credit-trust receipt arrangement, a bank extends a loan
covered by a letter
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Lee vs. Court of Appeals
of credit, with the trust receipt as a security for the loan. The transaction involves a loan feature
represented by a letter of credit, a security feature which is in the covering trust receipt which secures
an indebtedness.
PETITIONS for review of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.


Lim, Duran & Associates for petitioner C. Lee.
Silvestre J. Acejas & Associates for petitioner Mico Metals Corp.
Laogan, Silva, Baeza & Llantino Law Office for private respondent PBCOM.
DE LEON, JR., J.:

Before us is the joint and consolidated petition for review of the Decision1 dated June 15, 1994 of the
Court of Appeals in CA-G.R. CV No. 27480 entitled, Philippine Bank of Communications vs. Mico Metals
Corporation, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co,
which reversed the decision of the Regional Trial Court (RTC) of Manila, Branch 55 dismissing the
complaint for a sum of money filed by private respondent Philippine Bank of Communications against
herein petitioners, Mico Metals Corporation (MICO, for brevity), Charles Lee, Chua Siok Suy,2 Mariano
Sio, Alfonso Yap, Richard Velasco and Alfonso Co.3 The dispositive portion of the said Decision of the
Court of Appeals, reads:
_______________

1 Penned by Associate Justice Corona Ibay-Somera and concurred in by Associate Justices Fidel P.
Purisima and Asaali S. Isnani, Second Division; Rollo, G.R. No. 117913, pp. 57-84.
2 Should not have been included as petitioner since the RTC granted the motion of private respondent
to drop his name as one of the defendants inasmuch as he was in Taiwan where he later died when the
RTC issued the summons and alias summons for service, to petitioner Suy.
3 Should not have been included as petitioner since the RTC granted the motion of private respondent
to drop his name as one of the defendants, without prejudice, since the summons and the alias service
of sum582

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Lee vs. Court of Appeals
WHEREFORE, the decision of the Regional Trial Court is hereby reversed and in lieu thereof, a new one is
entered:
a) Ordering the defendants-appellees jointly and severally to pay plaintiff PBCom the sum of Five million
four hundred fifty-one thousand six hundred sixty-three pesos and ninety centavos (P5,451,663.90)
representing defendants-appellees unpaid obligations arising from ordinary loans granted by the
plaintiff plus legal interest until fully paid.
b) Ordering defendants-appellees jointly and severally to pay PBCom the sum of Four hundred sixty-one
thousand six hundred pesos and sixty-six centavos (P461,600.66) representing defendants-appellees

unpaid obligations arising from their letters of credit and trust receipt transactions with plaintiff PBCom
plus legal interest until fully paid.
c) Ordering defendants-appellees jointly and severally to pay PBCom the sum of P50,000.00 as
attorneys fees.
No pronouncement as to costs.
The facts of the case are as follows:
On March 2, 1979, Charles Lee, as President of MICO wrote private respondent Philippine Bank of
Communications (PBCom) requesting for a grant of a discounting loan/credit line in the sum of Three
Million Pesos (P3,000,000.00) for the purpose of carrying out MICOs line of business as well as to
maintain its volume of business.
On the same day, Charles Lee requested for another discounting loan/credit line of Three Million Pesos
(P3,000,000.00) from PBCom for the purpose of opening letters of credit and trust receipts.
In connection with the requests for discounting loan/credit lines, PBCom was furnished by MICO the
following resolution which was adopted unanimously by MICOs Board of Directors:
RESOLVED, that the President, Mr. Charles Lee, and the Vice-President and General Manager, Mr.
Mariana A. Sio, singly or jointly, be and they are duly authorized and empowered for and in behalf of
this Corporation to apply for, negotiate and secure the approval of commercial loans and other banking
facilities and accommodations, such as, but not
_______________

mons could not be served on him inasmuch as his whereabouts are unknown.
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limited to discount loans, letters of credit, trust receipts, lines for marginal deposits on foreign and
domestic letters of credit, negotiate out-of-town checks, etc. from the Philippine Bank of
Communications, 216 Juan Luna, Manila in such sums as they shall deem advantageous, the principal of
all of which shall not exceed the total amount of TEN MILLION PESOS (P10,000,000.00), Philippine
Currency, plus any interests that may be agreed upon with said Bank in such loans and other credit lines

of the same kind and such further terms and conditions as may, upon granting of said loans and other
banking facilities, be imposed by the Bank; and to make, execute, sign and deliver any contracts of
mortgage, pledge or sale of one, some or all of the properties of the Company, or any other agreements
or documents of whatever nature or kind, including the signing, indorsing, cashing, negotiation and
execution of promissory notes, checks, money orders or other negotiable instruments, which may be
necessary and proper in connection with said loans and other banking facilities, or with their
amendments, renewals and extensions of payment of the whole or any part thereof.4
On March 26, 1979, MICO availed of the first loan of One Million Pesos (P1,000,000.00) from PBCom.
Upon maturity of the loan, MICO caused the same to be renewed, the last renewal of which was made
on May 21, 1982 under Promissory Note BNA No. 26218.5
Another loan of One Million Pesos (P1,000,000.00) was availed of by MICO from PBCom which was
likewise later on renewed, the last renewal of which was made on May 21, 1982 under Promissory Note
BNA No. 26219.6 To complete MICOs availment of Three Million Pesos (P3,000,000.00) discounting
loan/credit line with PBCom, MICO availed of another loan from PBCom in the sum of One Million Pesos
(P1,000,000.00) on May 24, 1979. As in previous loans, this was rolled over or renewed, the last renewal
of which was made on May 25, 1982 under Promissory Note BNA No. 26253.7
As security for the loans, MICO through its Vice-President and General Manager, Mariano Sio, executed
on May 16, 1979 a Deed
_______________

4 Exhibit E, Records, p. 372.


5 Exhibit I, Records, p. 383.
6 Exhibit J, Records, p. 384.
7 Exhibit K, Records, p. 385.
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Lee vs. Court of Appeals
of Real Estate Mortgage over its properties situated in Pasig, Metro Manila covered by Transfer
Certificates of Title (TCT) Nos. 11248 and 11250.

On March 26, 1979 Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap and Richard Velasco, in their
personal capacities executed a Surety Agreement8 in favor of PBCom whereby the petitioners jointly
and severally, guaranteed the prompt payment on due dates or at maturity of overdrafts, promissory
notes, discounts, drafts, letters of credit, bills of exchange, trust receipts, and other obligations of every
kind and nature, for which MICO may be held accountable by PBCom. It was provided, however, that the
liability of the sureties shall not at any one time exceed the principal amount of Three Million Pesos
(P3,000,000.00) plus interest, costs, losses, charges and expenses including attorneys fees incurred by
PBCom in connection therewith.
On July 14, 1980, petitioner Charles Lee, in his capacity as president of MICO, wrote PBCom and applied
for an additional loan in the sum of Four Million Pesos (P4,000,000.00). The loan was intended for the
expansion and modernization of the companys machineries. Upon approval of the said application for
loan, MICO availed of the additional loan of Four Million Pesos (P4,000,000.00) as evidenced by
Promissory Note TA No. 094.9
As per agreement, the proceeds of all the loan availments were credited to MICOs current checking
account with PBCom. To induce the PBCom to increase the credit line of MICO, Charles Lee, Chua Siok
Suy, Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co (hereinafter referred to as petitionerssureties), executed another surety agreement10 in favor of PBCom on July 28, 1980, whereby they
jointly and severally guaranteed the prompt payment on due dates or at maturity of overdrafts,
promissory notes, discounts, drafts, letters of credit, bills of exchange, trust receipts and all other
obligations of any kind and nature for which MICO may be held accountable by PBCom. It was provided,
however, that their liability shall not at any one time exceed the sum of
_______________

8 Exhibit G, Records, pp. 377-378.


9 Exhibit N, Records, pp. 389-390.
10 Exhibit H, Records, pp. 380-381.
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Seven Million Five Hundred Thousand Pesos (P7,500,000.00) including interest, costs, charges, expenses
and attorneys fees incurred by MICO in connection therewith.

On July 29, 1980, MICO furnished PBCom with a notarized certification issued by its corporate secretary,
Atty. P.B. Barrera, that Chua Siok Suy was duly authorized by the Board of Directors to negotiate on
behalf of MICO for loans and other credit availments from PBCom. Indicated in the certification was the
following resolution unanimously approved by the Board of Directors:
RESOLVED, AS IT IS HEREBY RESOLVED, That Mr. Chua Siok Suy be, as he is hereby authorized and
empowered, on behalf of MICO METALS CORPORATION from time to time, to borrow money and obtain
other credit facilities, with or without security, from the PHILIPPINE BANK OF COMMUNICATIONS in
such amount(s) and under such terms and conditions as he may determine, with full power and
authority to execute, sign and deliver such contracts, instruments and papers in connection therewith,
including real estate and chattel mortgages, pledges and assignments over the properties of the
Corporation; and to renew and/or extend and/or roll-over and/or reavail of the credit facilities granted
thereunder, either for lesser or for greater amount(s), the intention being that such credit facilities and
all securities of whatever kind given as collaterals therefor shall be a continuing security.
RESOLVED FURTHER, That said bank is hereby authorized, empowered and directed to rely on the
authority given hereunder, the same to continue in full force and effect until written notice of its
revocation shall be received by said Bank.11
On July 2, 1981, MICO filed with PBCom an application for a domestic letter of credit in the sum of Three
Hundred Forty-Eight Thousand Pesos (P348,000.00).12 The corresponding irrevocable letter of credit
was approved and opened under LC No. L-16060.13 Thereafter, the domestic letter of credit was
negotiated and accepted by MICO as evidenced by the corresponding bank draft issued for the
purpose.14 After the supplier of the merchandise was
_______________

11 Exhibit L, Records, p. 386.


12 Exhibit O, Records, p. 391.
13 Exhibit O-1, Records, p. 392.
14 Exhibit O-2, Records, p. 393.
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paid, a trust receipt upon MICOs own initiative, was executed in favor of PBCom.15
On September 14, 1981, MICO applied for another domestic letter of credit with PBCom in the sum of
Two Hundred Ninety Thousand Pesos (P290,000.00).16 The corresponding irrevocable letter of credit
was issued on September 22, 1981 under LC No. L-16334.17 After the beneficiary of the said letter of
credit was paid by PBCom for the price of the merchandise, the goods were delivered to MICO which
executed a corresponding trust receipt18 in favor of PBCom.
On November 10, 1981, MICO applied for authority to open a foreign letter of credit in favor of Ta Jih
Enterprises Co., Ltd.,19 and thus, the corresponding letter of credit20 was then issued by PBCom with a
cable sent to the beneficiary, Ta Jih Enterprises Co., Ltd. advising that said beneficiary may draw funds
from the account of PBCom in its correspondent banks New York Office.21 PBCom also informed its
corresponding bank in Taiwan, the Irving Trust Company, of the approved letter of credit. The
correspondent bank acknowledged PBComs advice through a confirmation letter22 and by debiting
from PBComs account with the said correspondent bank the sum of Eleven Thousand Nine Hundred
Sixty US Dollars ($11,960.00).23 As in past transactions, MICO executed in favor of PBCom a
corresponding trust receipt.24
On January 4, 1982, MICO applied, for authority to open a foreign letter of credit in the sum of One
Thousand Nine Hundred US Dollars ($1,900.00), with PBCom.25 Upon approval, the corre_______________

15 Exhibit O-4, Records, p. 395.


16 Exhibit P, Records, p. 396.
17 Exhibit P-1, Records, p. 397.
18 Exhibit P-4, Records, p. 400.
19 Exhibit Q, Records, p. 401.
20 Exhibit Q-1, Records, p. 405.
21 Exhibit Q-2, Records, p. 406.
22 Exhibit Q-3, Records, p. 407.
23 Exhibit Q-4, Records, p. 408.
24 Exhibit Q-7, Records, p. 411.
25 Exhibit R, Records, p. 412.
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sponding letter of credit denominated as LC No. 6229326 was issued whereupon PBCom advised its
correspondent bank and MICO27 of the same. Negotiation and proper acceptance of the letter of credit
were then made by MICO. Again, a corresponding trust receipt28 was executed by MICO in favor of
PBCom.
In all the transactions involving foreign letters of credit, PBCom turned over to MICO the necessary
documents such as the bills of lading and commercial invoices to enable the latter to withdraw the
goods from the port of Manila.
On May 21, 1982 MICO obtained from PBCom another loan in the sum of Three Hundred Seventy-Seven
Thousand Pesos (P377,000.00) covered by Promissory Note BA No. 7458.29
Upon maturity of all credit availments obtained by MICO from PBCom, the latter made a demand for
payment.30 For failure of petitioner MICO to pay the obligations incurred despite repeated demands,
private respondent PBCom extrajudicially foreclosed MICOs real estate mortgage and sold the said
mortgaged properties in a public auction sale held on November 23, 1982. Private respondent PBCom
which emerged as the highest bidder in the auction sale, applied the proceeds of the purchase price at
public auction of Three Million Pesos (P3,000,000.00) to the expenses of the foreclosure, interest and
charges and part of the principal of the loans, leaving an unpaid balance of Five Million Four Hundred
Forty-One Thousand Six Hundred Sixty-Three Pesos and Ninety Centavos (P5,441,663.90) exclusive of
penalty and interest charges. Aside from the unpaid balance of Five Million Four Hundred Forty-One
Thousand Six Hundred Sixty-Three Pesos and Ninety Centavos (P5,441,663.90), MICO likewise had
another standing obligation in the sum of Four Hundred Sixty-One Thousand Six Hundred Pesos and Six
Centavos (P461, 600.06) representing its trust receipts liabilities to private respondent. PBCom then
demanded the settlement of the aforesaid obligations from herein
_______________

26 Exhibit R-1, Records, p. 416.


27 Exhibit R-3, Records, p. 418.
28 Exhibit R-5, Records, p. 420.
29 Records, p. 440.
30 Exhibit T, Records, p. 422.

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Lee vs. Court of Appeals
petitioners-sureties who, however, refused to acknowledge their obligations to PBCom under the surety
agreements. Hence, PBCom filed a complaint with prayer for writ of preliminary attachment before the
Regional Trial Court of Manila, which was raffled to Branch 55, alleging that MICO was no longer in
operation and had no properties to answer for its obligations. PBCom further alleged that petitioner
Charles Lee has disposed or concealed his properties with intent to defraud his creditors. Except for
MICO and Charles Lee, the sheriff of the RTC failed to serve the summons on herein petitioners-sureties
since they were all reportedly abroad at the time. An alias summons was later issued but the sheriff was
not able to serve the same to petitioners Alfonso Co and Chua Siok Suy who was already sickly at the
time and reportedly in Taiwan where he later died.
Petitioners (MICO and herein petitioners-sureties) denied all the allegations of the complaint filed by
respondent PBCom, and alleged that: a) MICO was not granted the alleged loans and neither did it
receive the proceeds of the aforesaid loans; b) Chua Siok Suy was never granted any valid Board
Resolution to sign for and in behalf of MICO; c) PBCom acted in bad faith in granting the alleged loans
and in releasing the proceeds thereof; d) petitioners were never advised of the alleged grant of loans
and the subsequent releases therefor, if any; e) since no loan was ever released to or received by MICO,
the corresponding real estate mortgage and the surety agreements signed concededly by the
petitioners-sureties are null and void.
The trial court gave credence to the testimonies of herein petitioners and dismissed the complaint filed
by PBCom. The trial court likewise declared the real estate mortgage and its foreclosure null and void. In
ruling for herein petitioners, the trial court said that PBCom failed to adequately prove that the
proceeds of the loans were ever delivered to MICO. The trial court pointed out, among others, that
while PBCom claimed that the proceeds of the Four Million Pesos (P4,000,000.00) loan covered by
promissory note TA 094 were deposited to the current account of petitioner MICO, PBCom failed to
produce the ledger account showing such deposit. The trial court added that while PBCom may have
loaned to MICO the other sums of Three Hundred Forty-Eight Thousand Pesos (P348,000.00) and Two
Hundred Ninety Thousand Pesos
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(P290,000.00), no proof has been adduced as to the existence of the goods covered and paid by the said
amounts. Hence, inasmuch as no consideration ever passed from PBCom to MICO, all the documents
involved therein, such as the promissory notes, real estate mortgage including the surety agreements
were all void or nonexistent for lack of cause or consideration. The trial court said that the lack of proof
as regards the existence of the merchandise covered by the letters of credit bolstered the claim of
herein petitioners that no purchases of the goods were really made and that the letters of credit
transactions were simply resorted to by the PBCom and Chua Siok Suy to accommodate the latter in his
financial requirements.
The Court of Appeals reversed the ruling of the trial court, saying that the latter committed an
erroneous application and appreciation of the rules governing the burden of proof. Citing Section 24 of
the Negotiable Instruments Law which provides that Every negotiable instrument is deemed prima
facie to have been issued for valuable consideration and every person whose signature appears thereon
to have become a party thereto for value, the Court of Appeals said that while the subject promissory
notes and letters of credit issued by the PBCom made no mention of delivery of cash, it is presumed that
said negotiable instruments were issued for valuable consideration. The Court of Appeals also cited the
case of Gatmaitan vs. Court of Appeals31 which holds that there is a presumption that an instrument
sets out the true agreement of the parties thereto and that it was executed for valuable consideration.
The appellate court noted and found that a notarized Certification was issued by MICOs corporate
secretary, P.B. Barrera, that Chua Siok Suy, was duly authorized by the Board of Directors of MICO to
borrow money and obtain credit facilities from PBCom.
Petitioners filed a motion for reconsideration of the challenged decision of the Court of Appeals but this
was denied in a Resolution dated November 7, 1994 issued by its Former Second Division. Petitionerssureties then filed a petition for review on certiorari with this Court, docketed as G.R. No. 117913,
assailing the decision of the Court of Appeals. MICO likewise filed a separate peti_______________

31 200 SCRA 37, 44 (1991).


590

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tion for review on certiorari, docketed as G.R. No. 117914, with this Court assailing the same decision
rendered by the Court of Appeals. Upon motion filed by petitioners, the two (2) petitions were
consolidated on January 11, 1995.32
Petitioners contend that there was no proof that the proceeds of the loans or the goods under the trust
receipts were ever delivered to and received by MICO. But the record shows otherwise. Petitionerssureties further contend that assuming that there was delivery by PBCom of the proceeds of the loans
and the goods, the contracts were executed by an unauthorized person, more specifically Chua Siok Suy
who acted fraudulently and in collusion with PBCom to defraud MICO.
The pertinent issues raised in the consolidated cases at bar are: a) whether or not the proceeds of the
loans and letters of credit transactions were ever delivered to MICO; and b) whether or not the
individual petitioners, as sureties, may be held liable under the two (2) Surety Agreements executed on
March 26, 1979 and July 28, 1980.
In civil cases, the party having the burden of proof must establish his case by preponderance of
evidence.33 Preponderance of evidence means evidence which is more convincing to the court as
worthy of belief than that which is offered in opposition thereto. Petitioners contend that the alleged
promissory notes, trust receipts and surety agreements attached to the complaint filed by PBCom did
not ripen into valid and binding contracts inasmuch as there is no evidence of the delivery of money or
loan proceeds to MICO or to any of the petitioners-sureties. Petitioners claim that under normal banking
practice, borrowers are required to accomplish promissory notes in blank even before the grant of the
loans applied for and such documents become valid written contracts only when the loans are actually
released to the borrower.
We are not convinced.
During the trial of an action, the party who has the burden of proof upon an issue may be aided in
establishing his claim or de_______________

32 G.R. No. 117913, Rollo, p. 9.


33 Section 1, Rule 133 Rules of Court.
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fense by the operation of a presumption, or, expressed differently, by the probative value which the law
attaches to a specific state of facts. A presumption may operate against his adversary who has not
introduced proof to rebut the presumption. The effect of a legal presumption upon a burden of proof is
to create the necessity of presenting evidence to meet the legal presumption or the prima facie case
created thereby, and which if no proof to the contrary is presented and offered, will prevail. The burden
of proof remains where it is, but by the presumption the one who has that burden is relieved for the
time being from introducing evidence in support of his averment, because the presumption stands in
the place of evidence unless rebutted.
Under Section 3, Rule 131 of the Rules of Court the following presumptions, among others, are
satisfactory if uncontradicted: a) That there was a sufficient consideration for a contract; and b) That a
negotiable instrument was given or indorsed for sufficient consideration. As observed by the Court of
Appeals, a similar presumption is found in Section 24 of the Negotiable Instruments Law which provides
that every negotiable instrument is deemed prima facie to have been issued for valuable consideration
and every person whose signature appears thereon to have become a party for value. Negotiable
instruments which are meant to be substitutes for money, must conform to the following requisites to
be considered as such a) it must be in writing; b) it must be signed by the maker or drawer; c) it must
contain an unconditional promise or order to pay a sum certain in money; d) it must be payable on
demand or at a fixed or determinable future time; e) it must be payable to order or bearer; and f) where
it is a bill of exchange, the drawee must be named or otherwise indicated with reasonable certainty.
Negotiable instruments include promissory notes, bills of exchange and checks. Letters of credit and
trust receipts are, however, not negotiable instruments. But drafts issued in connection with letters of
credit are negotiable instruments.
Private respondent PBCom presented the following documentary evidence to prove petitioners credit
availments and liabilities:
1) Promissory Note No. BNA -26218 dated May 21, 1982 in the sum of P1,000,000.00 executed by MICO
in favor of PBCom.
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2) Promissory Note No. BNA -26219 dated May 21, 1982 in the sum of P1,000,000.00 executed by MICO
in favor of PBCom.
3) Promissory Note No. BNA -26253 dated May 25, 1982 in the sum of P1,000,000.00 executed by MICO
in favor of PBCom.

4) Promissory Note No. BNA -7458 dated May 21, 1982 in the sum of P377,000.00 executed by MICO in
favor of PBCom.
5) Promissory Note No. TA -094 dated July 29, 1980 in the sum of P4,000,000.00 executed by MICO in
favor of PBCom.
6) Irrevocable letter of credit No. L-16060 dated July 2, 1981 issued in favor of Perez Battery Center for
account of Mico Metals Corp.
7) Draft dated July 2, 1981 in the sum of P348,000.00 issued by Perez Battery Center, beneficiary of
irrevocable Letter of Credit No. L-16060 and accepted by MICO Metals corporation.
8) Letter dated July 2, 1981 from Perez Battery Center addressed to private respondent PBCom showing
that proceeds of the irrevocable letter of credit No. L-16060 was received by Mr. Moises Rosete,
representative of Perez Battery Center.
9) Trust receipt dated July 2, 1981 executed by MICO in favor of PBCom covering the merchandise
purchased under Letter of Credit No. 16060.
10) Irrevocable letter of credit No. L-16334 dated September 22, 1981 issued in favor of Perez Battery
Center for account of MICO Metals Corp.
11) Draft dated September 22, 1981 in the sum of P290,000.00 issued by Perez Battery Center and
accepted by MICO.
12) Letter dated September 17, 1981 from Perez Battery addressed to PBCom showing that the
proceeds of credit No. L-16344 was received by Mr. Moises Rosete, a representative of Perez Battery
Center.
13) Trust Receipt dated September 22, 1981 executed by MICO in favor of PBCom covering the
merchandise under Letter of Credit No. L-16334.
14) Irrevocable Letter of Credit No. 61873 dated November 10, 1981 for US$11,960.00 issued by PBCom
in favor of TA JIH Enterprises Co. Ltd., through its correspondent bank, Irving Trust Company of Taipei,
Taiwan.
15) Trust Receipt dated December 15, 1981 executed by MICO in favor of PBCom showing that
possession of the merchandise covered by Irrevocable Letter of Credit No. 61873 was released by
PBCom to MICO.
16) Letters dated March 2, 1979 from MICO signed by its president, Charles Lee showing that MICO
sought credit line from PBCom in
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the form of loans, letters of credit and trust receipt in the sum of P7,500,000.00.
17) Letter dated July 14, 1980 from MICO signed by its president, Charles Lee, showing that MICO
requested for additional financial assistance in the sum of P4,000,000.00.
18) Board resolution dated March 6, 1979 of MICO authorizing Charles Lee and Mariano Sio singly or
jointly to act and sign for and in behalf of MICO relative to the obtention of credit facilities from PBCom.
19) Duly notarized Deed of Mortgage dated May 16, 1979 executed by MICO in favor of PBCom over
MICOs real properties covered by TCT Nos. 11248 and 11250 located in Pasig.
20) Duly notarized Surety Agreement dated March 26, 1979 executed by herein petitioners Charles Lee,
Mariano Sio, Alfonso Yap, Richard Velasco and Chua Siok Suy in favor of PBCom.
21) Duly notarized Surety Agreement dated July 28, 1980 executed by herein petitioners Charles Lee,
Mariano Sio, Alfonso Yap, Richard Velasco and Chua Siok Suy in favor of PBCom.
22) Duly notarized certification dated July 28, 1980 issued by MICOs corporate secretary, Mr. P.B.
Barrera, attesting to the adoption of a board resolution authorizing Chua Siok Suy to sign, for and in
behalf of MICO, all the necessary documents including contracts, loan instruments and mortgages
relative to the obtention of various credit facilities from PBCom.
The above-cited documents presented have not merely created a prima facie case but have actually
proved the solidary obligation of MICO and the petitioners, as sureties of MICO, in favor of respondent
PBCom. While the presumption found under the Negotiable Instruments Law may not necessarily be
applicable to trust receipts and letters of credit, the presumption that the drafts drawn in connection
with the letters of credit have sufficient consideration. Under Section 3(r), Rule 131 of the Rules of Court
there is also a presumption that sufficient consideration was given in a contract. Hence, petitioners
should have presented credible evidence to rebut that presumption as well as the evidence presented
by private respondent PBCom. The letters of credit show that the pertinent materials/merchandise have
been received by MICO. The drafts signed by the beneficiary/suppliers in connection with the
corresponding letters of credit proved that said suppliers were paid by PBCom for the account of MICO.
On the other hand, aside from
594

594
SUPREME COURT REPORTS ANNOTATED

Lee vs. Court of Appeals


their bare denials petitioners did not present sufficient and competent evidence to rebut the evidence
of private respondent PBCom. Petitioner MICO did not proffer a single piece of evidence, apart from its
bare denials, to support its allegation that the loan transactions, real estate mortgage, letters of credit
and trust receipts were issued allegedly without any consideration.
Petitioners-sureties, for their part, presented the By-Laws34 of Mico Metals Corporation (MICO) to
prove that only the president of MICO is authorized to borrow money, arrange letters of credit, execute
trust receipts, and promissory notes and consequently, that the loan transactions, letters of credit,
promissory notes and trust receipts, most of which were executed by Chua Siok Suy in representation of
MICO were not allegedly authorized and hence, are not binding upon MICO. A perusal of the By-Laws of
MICO, however, shows that the power to borrow money for the company and issue mortgages, bonds,
deeds of trust and negotiable instruments or securities, secured by mortgages or pledges of property
belonging to the company is not confined solely to the president of the corporation. The Board of
Directors of MICO can also borrow money, arrange letters of credit, execute trust receipts and
promissory notes on behalf of the corporation.35 Significantly, this power of the Board of Directors
according to the by-laws of MICO, may be delegated to any of its standing committee, officer or
agent.36 Hence, PBCom had every right to rely on the Certification issued by MICOs corporate
secretary, P.B. Barrera, that Chua Siok Suy was duly authorized by its Board of Directors to borrow
money and obtain credit facilities in behalf of MICO from PBCom.
Petitioners-sureties also presented a letter of their counsel dated October 9, 1982, addressed to private
respondent PBCom purportedly to show that PBCom knew that Chua Siok Suy allegedly used the credit
and good names of the petitioner-sureties for his benefit, and that petitioner-sureties were made to sign
blank documents and were furnished copies of the same. The letter, however, is in fact merely a reply of
petitioners-sureties counsel to PBComs
_______________

34 Exhibit 1, Records, p. 641.


35 By-laws, Article II (d), Records, p. 642.
36 By-laws, Article II (e), Records, p. 642.
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demand for payment of MICOs obligations, and appears to be an inconsequential piece of self-serving
evidence.
In addition to the foregoing, MICO and petitioners-sureties cited the decision of the trial court which
stated that there was no proof that the proceeds of the loans were ever delivered to MICO. Although
the private respondents witness, Mr. Gardiola, testified that the proceeds of the loans were deposited
in MICOs current account with PBCom, his testimony was allegedly not supported by any bank record,
note or memorandum. A careful scrutiny of the record including the transcript of stenographic notes
reveals, however, that although private respondent PBCom was willing to produce the corresponding
account ledger showing that the proceeds of the loans were credited to MICOs current account with
PBCom, MICO in fact vigorously objected to the presentation of said document. That point is shown in
the testimony of PBComs witness, Gardiola, thus:
Q:
Now, all of these promissory note Exhibits I and J which as you have said previously (sic) availed
originally by defendant Mico Metals Corp. sometime in 1979, my question now is, do you know what
happened to the proceeds of the original availment?
A:
Well, it was credited to the current account of Mico Metals Corp.
Q:
Why did it was credited to the proceeds to the account of Mico Metals Corp? (sic)
A:
Well, that is our understanding.
ATTY. DURAN:

Your honor, may we be given a chance to object, the best evidence is the so-called current account . . .
COURT:

Can you produce the ledger account?


A:
Yes, Your Honor, I will bring.

COURT:

The ledger or record of the current account of Mico Metals Corp.


A:
Yes, Your Honor.
ATTY. ACEJAS:
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SUPREME COURT REPORTS ANNOTATED
Lee vs. Court of Appeals

Your Honor, these are a confidential record, and they might not be disclosed without the consent of the
person concerned, (sic)
ATTY. SANTOS:

Well, you are the one who is asking that.


ATTY. DURAN:

Your Honor, Im precisely want to show for the . . . (sic)


COURT:

But the amount covered by the current account of defendant Mico Metals Corp. is the subject matter of
this case.

xxx

xxx

xxx

Q:
Are those availments were release? (sic)
A:
Yes, Your Honor, to the defendant corporation.
Q:
By what means?
A:
By the credit to their current account.
ATTY. ACEJAS:

We object to that, your Honor, because the disclose is the secrecy of the bank deposit. (sic)

xxx

xxx

xxx

Q:
Before the recess Mr. Gardiola, you stated that the proceeds of the three (3) promissory notes were
credited to the accounts of Mico Metals Corporation, now do you know what kind of current account
was that which you are referring to?
ATTY. ACEJAS:

Objection your Honor, that is the disclose of the deposit of defendant Mico Metals Corporation and it
cannot disclosed without the authority of the depositor. (sic)37
That proceeds of the loans which were originally availed of in 1979 were delivered to MICO is bolstered
by the fact that more than a year later, specifically on July 14, 1980, MICO through its president,
petitioner-surety Charles Lee, requested for an additional loan of Four Million Pesos (P4,000,000.00)
from PBCom. The fact that MICO was requesting for an additional loan implied that it has already
availed of earlier loans from PBCom.
_______________

37 TSN, November 15, 1983, pp. 24-25, 27, 28.


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Lee vs. Court of Appeals
Petitioners allege that PBCom presented no evidence that it remitted payments to cover the domestic
and foreign letters of credit. Petitioners placed much reliance on the erroneous decision of the trial
court which stated that private respondent PBCom allegedly failed to prove that it actually made
payments under the letters of credit since the bank drafts presented as evidence show that they were
made in favor of the Bank of Taiwan and First Commercial Bank.
Petitioners allegations are untenable.
Modern letters of credit are usually not made between natural persons. They involve bank-to-bank
transactions. Historically, the letter of credit was developed to facilitate the sale of goods between,
distant and unfamiliar buyers and sellers. It was an arrangement under which a bank, whose credit was
acceptable to the seller, would at the instance of the buyer agree to pay drafts drawn on it by the seller,
provided that certain documents are presented such as bills of lading accompanied the corresponding
drafts. Expansion in the use of letters of credit was a natural development in commercial banking.38
Parties to a commercial letter of credit include (a) the buyer or the importer, (b) the seller, also referred
to as beneficiary, (c) the opening bank which is usually the buyers bank which actually issues the letter
of credit, (d) the notifying bank which is the correspondent bank of the opening bank through which it
advises the beneficiary of the letter of credit, (e) negotiating bank which is usually any bank in the city of
the beneficiary. The services of the notifying bank must always be utilized if the letter of credit is to be
advised to the beneficiary through cable, (f) the paying bank which buys or discounts the drafts
contemplated by the letter of credit, if such draft is to be drawn on the opening bank or on another
designated bank not in the city of the beneficiary. As a rule, whenever the facilities of the opening bank
are used, the beneficiary is supposed to present his drafts to the notifying bank for negotiation, and (g)
the confirming bank which, upon the request of the beneficiary, confirms the letter of credit issued by
the opening bank.
_______________

38 50 AM JUR 2d, Letters of Credit 1.


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SUPREME COURT REPORTS ANNOTATED
Lee vs. Court of Appeals
From the foregoing, it is clear that letters of credit, being usually bank-to-bank transactions, involve
more than just one bank. Consequently, there is nothing unusual in the fact that the drafts presented in
evidence by respondent bank were not made payable to PBCom. As explained by respondent bank, a
draft was drawn on the Bank of Taiwan by Ta Jih Enterprises Co., Ltd. of Taiwan, supplier of the goods
covered by the foreign letter of credit. Having paid the supplier, the Bank of Taiwan then presented the
bank draft for reimbursement by PBComs correspondent bank in Taiwan, the Irving Trust Company
which explains the reason why on its face, the draft was made payable to the Bank of Taiwan. Irving
Trust Company accepted and endorsed the draft to PBCom. The draft was later transmitted to PBCom to
support the latters claim for payment from MICO. MICO accepted the draft upon presentment and
negotiated it to PBCom.
Petitioners further aver that MICO never requested that legal possession of the merchandise be
transferred to PBCom by way of trust receipts. Petitioners insist that assuming that MICO transferred
possession of the merchandise to PBCom by way of trust receipts, the same would be illegal since
PBCom, being a banking institution, is not authorized by law to engage in the business of importing and
selling goods.
A trust receipt is considered as a security transaction intended to aid in financing importers and retail
dealers who do not have sufficient funds or resources to finance the importation or purchase of
merchandise, and who may not be able to acquire credit except through utilization, as collateral of the
merchandise imported or purchased.39 A trust receipt, therefor, is a document of security pursuant to
which a bank acquires a security interest in the goods under trust receipt. Under a letter of credit-trust
receipt arrangement, a bank extends a loan covered by a letter of credit, with the trust receipt as a
security for the loan. The transaction involves a loan feature represented by a letter of credit, a security
feature which is in the covering trust receipt which secures an indebtedness.
_______________

39 Vintola v. Insular Bank of Asia and America, 150 SCRA 578, 583-584 (1987) citing Samo v. People, 5
SCRA 354, 356-357 (1962).
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Lee vs. Court of Appeals
Petitioners averments with regard to the second issue are no less incredulous. Petitioners contend that
the letters of credit, surety agreements and loan transactions did not ripen into valid and binding
contracts since no part of the proceeds of the loan transactions were delivered to MICO or to any of the
petitioners-sureties. Petitioners-sureties allege that Chua Siok Suy was the beneficiary of the proceeds
of the loans and that the latter made them sign the surety agreements in blank. Thus, they maintain that
they should not be held accountable for any liability that might arise therefrom.
It has not escaped our notice that it was petitioner-surety Charles Lee, as president of MICO Metals
Corporation, who first requested for a discounting loan of Three Million Pesos (P3,000,000.00) from
PBCom as evidenced by his letter dated March 2, 1979.40 On the same day, Charles Lee, as President of
MICO, requested for a Letter of Credit and Trust Receipt line in the sum of Three Million Pesos
(P3,000,000.00).41 Still, on the same day, Charles Lee again as President of MICO, wrote another letter
to PBCOM requesting for a financing line in the sum of One Million Five Hundred Thousand Pesos
(P1,500,000.00) to be used exclusively as marginal deposit for the opening of MICOs foreign and local
letters of credit with PBCom.42 More than a year later, it was also Charles Lee, again in his capacity as
president of MICO, who asked for an additional loan in the sum of Four Million Pesos (P4,000,000.00).
The claim, therefore, of petitioners that it was Chua Siok Suy, in connivance with the respondent
PBCom, who applied for and obtained the loan transactions and letters of credit strains credulity
considering that even the Deed of the Real Estate Mortgage in favor of PBCom was executed by
petitioner-surety Mariano Sio in his capacity as general manager of MICO43 to secure the loan
accommodations obtained by MICO from PBCom.
Petitioners-sureties allege that they were made to sign the surety agreements in blank by Chua Siok Suy.
Petitioner Alfonso
_______________

40 Exhibit A, Records, p. 368.


41 Exhibit B, Records, p. 369.
42 Exhibit C, Records, p. 370.
43 Exhibit F, Records, pp. 373-376.
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SUPREME COURT REPORTS ANNOTATED


Lee vs. Court of Appeals
Yap, the corporate treasurer, for his part testified that he signed booklets of checks, surety agreements
and promissory notes in blank; that he signed the documents in blank despite his misgivings since Chua
Siok Suy assured him that the transaction can easily be taken cared of since Chua Siok Suy personally
knew the Chairman of the Board of PBCom; that he was not receiving salary as treasurer of Mico Metals
and since Chua Siok Suy had a direct hand in the management of Malayan Sales Corporation, of which
Yap is an employee, he (Yap) signed the documents in blank as consideration for his continued
employment in Malayan Sales Corporation. Petitioner Antonio Co testified that he worked as office
manager for MICO from 1978-1982. As office manager, he was the one in charge of transacting business
like purchasing, selling and paying the salary of the employees. He was also in charge of the handling of
documents pertaining to surety agreements, trust receipts and promissory notes;44 that when he first
joined MICO Metals Corporation, he was able to read the by-laws of the corporation and he came to
know that only the chairman and the president can borrow money in behalf of the corporation; that
Chua Siok Suy once called him up and told him to secure an invoice so that a credit line can be opened in
the bank with a local letter of credit; that when the invoice was secured, he (Co) brought it together
with the application for a credit line to Chua Siok Suy, and that he questioned the authority of Chua Siok
Suy pointing out that he (Co) is not empowered to sign the document inasmuch as only the latter, as
president, was authorized to do so. However, Chua Siok Suy allegedly just said that he had already
talked with the Chairman of the Board of PBCom; and that Chua Siok Suy reportedly said that he needed
the money to finance a project that he had with the Taipei government. Co also testified that he knew of
the application for domestic letter of credit in the sum of Three Hundred Forty-Eight Thousand Pesos
(P348,000.00); and that a certain Moises Rosete was authorized to claim the check covering the Three
Hundred Forty-Eight Thousand Pesos (P348,000.00) from PBCom; and that after claiming the check
Rosete brought it
_______________

44 TSN, June 25, 1985, pp. 25-26.


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Lee vs. Court of Appeals

to Perez Battery Center for indorsement after which the same was deposited to the personal account of
Chua Siok Suy.45
We consider as incredible and unacceptable the claim of petitioners-sureties that the Board of Directors
of MICO was so careless about the business affairs of MICO as well as about their own personal
reputation and money that they simply relied on the say so of Chua Siok Suy on matters involving
millions of pesos. Under Section 3 (d), Rule 131 of the Rules of Court, it is presumed that a person takes
ordinary care of his concerns. Hence, the natural presumption is that one does not sign a document
without first informing himself of its contents and consequences. Said presumption acquires greater
force in the case at bar where not only one but several documents were executed at different times and
at different places by the petitioner sureties and Chua Siok Suy as president of MICO.
MICO and herein petitioners-sureties insist that Chua Siok Suy was not duly authorized to negotiate for
loans in behalf of MICO from PBCom. Petitioners allegation, however, is belied by the July 28, 1980
Certification issued by the corporate secretary of PBCom, Atty. P.B. Barrera, that MICOs Board of
Directors gave Chua Siok Suy full authority to negotiate for loans in behalf of MICO with PBCom. In fact,
the Certification even provided that Chua Siok Suys authority continues until and unless PBCom is
notified in writing of the withdrawal thereof by the said Board. Notably, petitioners failed to contest the
genuineness of the said Certification which is notarized and to show any written proof of any alleged
withdrawal of the said authority given by the Board of Directors to Chua Siok Suy to negotiate for loans
in behalf of MICO.
There was no need for PBCom to personally inform the petitioners-sureties individually about the terms
of the loans, letters of credit and other loan documents. The petitioners-sureties themselves happen to
comprise the Board of Directors of MICO, which gave full authority to Chua Siok Suy to negotiate for
loans in behalf of MICO. Notice to MICOs authorized representative, Chua Siok Suy, was notice to MICO.
The Certification issued by PBComs corporate secretary, Atty. P.B. Barrera, indicated that
_______________

45 TSN, June 25, 1985, pp. 30-34.


602

602
SUPREME COURT REPORTS ANNOTATED
Lee vs. Court of Appeals

Chua Siok Suy had full authority to negotiate and sign the necessary documents, in behalf of MICO, for
loans from PBCom. Respondent PBCom therefore had the right to rely on the said notarized Certification
of MICOs Corporate Secretary.
Anent petitioners-sureties contention that they obtained no consideration whatsoever on the surety
agreements, we need only point out that the consideration for the sureties is the very consideration for
the principal obligor, MICO, in the contracts of loan. In the case of Willex Plastic Industries Corporation
vs. Court of Appeals,46 we ruled that the consideration necessary to support a surety obligation need
not pass directly to the surety, a consideration moving to the principal alone being sufficient. For a
guarantor or surety is bound by the same consideration that makes the contract effective between the
parties thereto. It is not necessary that a guarantor or surety should receive any part or benefit, if such
there be, accruing to his principal.
Petitioners placed too much reliance on the rule in evidence that the burden of proof does not shift
whereas the burden of going forward with the evidence does pass from party to party. It is true that said
rule is not changed by the fact that the party having the burden of proof has introduced evidence which
established prima facie his assertion because such evidence does not shift the burden of proof; it merely
puts the adversary to the necessity of producing evidence to meet the prima facie case. Where the
defendant merely denies, either generally or otherwise, the allegations of the plaintiffs pleadings, the
burden of proof continues to rest on the plaintiff throughout the trial and does not shift to the
defendant until the plaintiffs evidence has been presented and duly offered. The defendant has then no
burden except to produce evidence sufficient to create a state of equipoise between his proof and that
of the plaintiff to defeat the latter, whereas the plaintiff has the burden, as in the beginning, of
establishing his case by a preponderance of evidence.47 But where the defendant has failed to present
and marshall evidence sufficient to create a states of equipoise between his
_______________

46 256 SCRA 478, 486 (1996).


47 I.B. JONES, THE LAW ON EVIDENCE IN CIVIL CASES 313-314 178 (4TH ed., 1938).
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Lee vs. Court of Appeals
proof and that of plaintiff, the prima facie case presented by the plaintiff will prevail.

In the case at bar, respondent PBCom, as plaintiff in the trial court, has in fact presented sufficient
documentary and testimonial evidence that proved by preponderance of evidence its subject collection
case against the defendants who are the petitioners herein. In view of all the foregoing, the Court of
Appeals committed no reversible error in its appealed Decision.
WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R. CV No. 27480 entitled, Philippine
Bank of Communications vs. Mico Metals Corporation, Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso
Yap, Richard Velasco and Alfonso Co, is AFFIRMED in toto.
Costs against the petitioners.
SO ORDERED.
Bellosillo (Chairman), Mendoza, Quisumbing and Buena, JJ., concur.
Judgment affirmed in toto.
Note.In a letter of credit, there are three distinct and independent contracts: (1) the contract of sale
between the buyer and the seller; (2) the contract of the buyer with the issuing bank; and (3) the letter
of credit proper in which the bank promises to pay the seller pursuant to the terms and conditions
stated therein. (Keng Hua Paper Products Co., Inc. vs. Court of Appeals, 286 SCRA 257 [1998])
o0o

604

Copyright 2014 Central Book Supply, Inc. All rights reserved. [Lee vs. Court of Appeals, 375 SCRA
579(2002)]

Sesbreo vs. Court of Appeals


G.R. No. 89252. May 24, 1993.*
RAUL SESBREO, petitioner, vs. HON. COURT OF APPEALS, DELTA MOTORS CORPORATION and
PILIPINAS BANK, respondents.
Commercial Law; Non-negotiable Promissory Notes; An instrument though marked non-negotiable, may
nevertheless be assigned or transferred.A non-negotiable instrument may, obviously, not be
negotiated; but it may be assigned or transferred, absent an express prohibition against assignment or
transfer written in the face of the instrument: The words not negotiable, stamped on the face of the

bill of lading, did not destroy its assignability, but the sole effect was to exempt the bill from the
statutory provisions relative thereto, and a bill, though not negotiable, may be transferred by
assignment; the assignee taking subject to the equities between the original parties. DMC PN No. 2731,
while marked non-negotiable, was not at the same time stamped non-transferrable or nonassignable. It contained no stipulation which prohibited Philfinance from assigning or transferring, in
whole or in part, that Note.
Same; Assignment of Credit; Debtors consent not needed to effectuate assignment.Apropos Deltas
complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been effected without the
consent of Delta, we note that such consent was not necessary for the validity and enforceability of the
assignment in favor of petitioner. Deltas argument that Philfinances sale or assignment of part of its
rights to DMC PN No. 2731 constituted conventional subrogation, which required its (Deltas) consent, is
quite mistaken.
Same; Same; Agreement prohibiting transfer cannot be invoked against assignee who, without notice
parted with valuable consideration in good faith.We find nothing in his Letter of Agreement which
can be reasonably construed as a prohibition upon Philfinance assigning or transferring all or part of
DMC PN No. 2731, before the maturity thereof. It is scarcely necessary to add that, even had this Letter
of Agreement set forth an explicit prohibition of transfer upon Philfinance, such a prohibition cannot be
invoked against an assignee or transferee of the Note who parted with valuable consideration in good
faith and without notice of such prohibition. It is not disputed that
_______________

* THIRD DIVISION.
467

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467
Sesbreo vs. Court of Appeals
petitioner was such an assignee or transferee.
Same; Corporations; Grounds for piercing the veil of corporate fiction.Secondly, it is not disputed that
Philfinance and private respondents Delta and Pilipinas have been organized as separate corporate
entities. Petitioner asks us to pierce their separate corporate entities, but has been able only to cite the
presence of a common DirectorMr. Ricardo Silverio, Sr., sitting on the Boards of Directors of all three
(3) companies. Petitioner has neither alleged nor proved that one or another of the three (3) concededly
related companies used the other two (2) as mere alter egos or that the corporate affairs of the other

two (2) were administered and managed for the benefit of one. There is simply not enough evidence of
record to justify disregarding the separate corporate personalities of Delta and Pilipinas and to hold
them liable for any assumed or undetermined liability of Philfinance to petitioner.
Same; Civil Law; For the protection of investors, depositary or custodianship agreements made an
integral part of money market transactions.We believe and so hold that a contract of deposit was
constituted by the act of Philfinance in designating Pilipinas as custodian or depositary bank. The
depositor was initially Philfinance; the obligation of the depositary was owed, however, to petitioner
Sesbreo as beneficiary of the custodianship or depositary agreement. We do not consider that this is a
simple case of a stipulation pour autri. The custodianship or depositary agreement was established as an
integral part of the money market transaction entered into by petitioner with Philfinance. Petitioner
bought a portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas
in order that the thing sold would be placed outside the control of the vendor.
Same; Same; Extinguishment of Obligation; Compensation may defeat assignees rights before notice of
the assignment is given to the debtor.In other words, petitioner notified Delta of his rights as assignee
after compensation had taken place by operation of law because the offsetting instruments had both
reached maturity. It is a firmly settled doctrine that the rights of an assignee are not any greater than
the rights of the assignor, since the assignee is merely substituted in the place of the assignor and that
the assignee acquires his rights subject to the equitiesi.e., the defenseswhich the debtor could have
set up against the original assignor before notice of the assignment was given to the debtor. At the time
that Delta was first put to notice of the assignment in petitioners favor on 14 July 1981, DMC PN No.
2731 had already been discharged by compensation. Since the assignor
468

468
SUPREME COURT REPORTS ANNOTATED
Sesbreo vs. Court of Appeals
Philfinance could not have then compelled payment anew by Delta of DMC PN No. 2731, petitioner, as
assignee of Philfmance, is similarly disabled from collecting from Delta the portion of the Note assigned
to him.
Same; Same; Solidary Liability.The solidary liability that petitioner seeks to impute to Pilipinas cannot,
however, be lightly inferred. Under Article 1207 of the Civil Code, there is a solidary liability only when
the obligation expressly so states, or when the law or the nature of the obligation requires solidarity.
The record here exhibits no express assumption of solidary liability vis-a-vis petitioner, on the part of
Pilipinas. Petitioner has not pointed us to any law which imposed such liability upon Pilipinas nor has
petitioner argued that the very nature of the custodianship assumed by private respondent Pilipinas
necessarily implies solidary liability under the securities, custody of which was taken by Pilipinas.

Accordingly, we are unable to hold Pilipinas solidarity liable with Philfinance and private respondent
Delta under DMC PN No. 2731.
PETITION for review on certiorari of the decision of the Court of Appeals.

The facts are stated in the opinion of the Court.


Salva, Villanueva & Associates for Delta Motors Corporation.
Reyes, Salazar & Associates for Pilipinas Bank.
FELICIANO, J.:

On 9 February 1981, petitioner Raul Sesbreo made a money market placement in the amount of
P300,000.00 with the Philippine Underwriters Finance Corporation (Philfinance), Cebu Branch; the
placement, with a term of thirty-two (32) days, would mature on 13 March 1981. Philfinance, also on 9
February 1981, issued the following documents to petitioner:
(a) the Certificate of Confirmation of Sale, without recourse, No. 20496 of one (1) Delta Motors
Corporation Promissory Note (DMC PN) No. 2731 for a term of 32 days at 17.0% per annum;
(b) the Certificate of Securities Delivery Receipt No. 16587 indicating the sale of DMC PN No. 2731 to
petitioner, with the notation that the said security was in custodianship of Pilipinas Bank, as per
469

VOL. 222, MAY 24, 1993


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Sesbreo vs. Court of Appeals
Denominated Custodian Receipt (DCR) No. 10805 dated 9 February 1981; and
(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of petitioners investment), with
petitioner as payee, Philfinance as drawer, and Insular Bank of Asia and America as drawee, in the total
amount of P304,533.33.
On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance. However,
the checks were dishonored for having been drawn against insufficient funds.

On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private respondent
Pilipinas Bank (Pilipinas). It read as follows:
PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila

February 9, 1991

VALUE DATE

TO Raul Sesbreo

April 6, 1981

MATURITY DATE

NO. 10805
DENOMINATED CUSTODIAN RECEIPT

This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE UNDERWRITERS
FINANCE CORPORATION, we have in our custody the following securities to you [sic] the extent herein
indicated.
SERIAL
MAT.
FACE
ISSUED
REGISTERED
AMOUNT
NUMBER
DATE
VALUE
BY
HOLDER PAYEE

2731
4-6-81
2,300,833.34
DMC
PHIL. UNDERWRITERS FINANCE CORP.
307,933.33
470

470
SUPREME COURT REPORTS ANNOTATED

Sesbreo vs. Court of Appeals


We further certify that these securities may be inspected by you or your duly authorized representative
at any time during regular banking hours.
Upon your written instructions we shall undertake physical delivery of the above securities fully assigned
to you should this Denominated Custodianship Receipt remain outstanding in your favor thirty (30) days
after its maturity.
PILIPINAS BANK
(By Elizabeth De Villa
Illegible Signature)1
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, Makati
Branch, and handed to her a demand letter informing the bank that his placement with Philfinance in
the amount reflected in the DCR No. 10805 had remained unpaid and outstanding, and that he in effect
was asking for the physical delivery of the underlying promissory note. Petitioner then examined the
original of the DMC PN No. 2731 and found: that the security had been issued on 10 April 1980; that it
would mature on 6 April 1981; that it had a face value of P2,300,833.33, with Philfinance as payee and
private respondent Delta Motors Corporation (Delta) as maker; and that on face of the promissory
note was stamped NON-NEGOTIABLE. Pilipinas did not deliver the Note, nor any certificate of
participation in respect thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981,2 again asking private
respondent Pilipinas for physical delivery of the original of DMC PN No. 2731. Pilipinas allegedly referred
all of petitioners demand letters to Philfinance for written instructions, as had been supposedly agreed
upon in a Securities Custodianship Agreement between Pilipinas and Philfinance. Philfinance never did
provide the appropriate instructions; Pilipinas never released DMC PN No. 2731, nor any other
instrument in respect thereof, to petitioner.
______________

1 Exhibit C, Folder of Exhibits, p. 3; TSN, 14 June 1983, p. 41.


2 Records, p. 441; Plaintiffs Memorandum, p. 3.
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Sesbreo vs. Court of Appeals


Petitioner also made a written demand on 14 July 19813 upon private respondent Delta for the partial
satisfaction of DMC PN No. 2731, explaining that Philfinance, as payee thereof, had assigned to him said
Note to the extent of P307,933.33. Delta, however, denied any liability to petitioner on the promissory
note, and explained in turn that it had previously agreed with Philfinance to offset its DMC PN No. 2731
(along with DMC PN No. 2730) against Philfinance PN No. 143-A issued in favor of Delta.
In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the Securities
and Exchange Commission (SEC) and the Central Bank. Pilipinas delivered to the SEC DMC PN No.
2731, which to date apparently remains in the custody of the SEC.4
As petitioner had failed to collect his investment and interest thereon, he filed on 28 September 1982 an
action for damages with the Regional Trial Court (RTC) of Cebu City, Branch 21, against private
respondents Delta and Pilipinas.5 The trial court, in a decision dated 5 August 1987, dismissed the
complaint and counterclaims for lack of merit and for lack of cause of action, with costs against
petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a decision dated 21
March 1989, the Court of Appeals denied the appeal and held: 6
Be that as it may, from the evidence on record, if there is anyone that appears liable for the travails of
plaintiff-appellant, it is Philfinance. As correctly observed by the trial court:
This act of Philfinance in accepting the investment of plaintiff and charging it against DMC P.N. No. 2731
when its entire face value was already obligated or earmarked for set-off or compensation is difficult to
comprehend and may have been
_______________

3 Id., p. 451; Plaintiffs Memorandum, p. 13.


4 TSN, 14 June 1983, p. 35.
5 Petitioner explained that he did not implead Philfinance as party defendant because the latter was
under rehabilitation by the Securities and Exchange Commission (TSN of the Pre-trial Conference, pp. 6
and 30, dated 04 March 1983).
6 Court of Appeals Decision, p. 8; Rollo, p. 90.
472

472

SUPREME COURT REPORTS ANNOTATED


Sesbreo vs. Court of Appeals
motivated with bad faith. Philfinance, therefore, is solely and legally obligated to return the investment
of plaintiff, together with its earnings, and to answer all the damages plaintiff has suffered incident
thereto. Unfortunately for plaintiff, Philfinance was not impleaded as one of the defendants in this case
at bar; hence, this Court is without jurisdiction to pronounce judgment against it. (p. 11, Decision).
WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby affirmed in
toto. Cost against plaintiff-appellant.
Petitioner moved for reconsideration of the above Decision, without success.
Hence, this Petition for Review on Certiorari.
After consideration of the allegations contained and issues raised in the Pleadings, the Court resolved to
give due course to the petition and required the parties to file their respective memoranda.7
Petitioner reiterates the assignment of errors he directed at the trial court decision, and contends that
respondent Court of Appeals gravely erred: (i) in concluding that he cannot recover from private
respondent Delta his assigned portion of DMC PN No. 2731; (ii) in failing to hold private respondent
Pilipinas solidarity liable on the DMC PN No. 2731 in view of the provisions stipulated in DCR No. 10805
issued in favor of petitioner; and (iii) in refusing to pierce the veil of corporate entity between
Philfinance, and private respondents Delta and Pilipinas, considering that the three (3) entities belong to
the Silverio Group of Companies under the leadership of Mr. Ricardo Silverio, Sr.8
There are at least two (2) sets of relationships which we need to address: firstly, the relationship of
petitioner vis-a-vis Delta; secondly, the relationship of petitioner in respect of Pilipinas. Actually, of
course, there is a third relationship that is of critical importance: the relationship of petitioner and
Philfinance. However, since Philfinance has not been impleaded in this case, neither the trial court nor
the Court of Appeals acquired jurisdic_______________

7 Private respondent Delta adopted as its own the Memorandum filed by private respondent Pilipinas
(Rollo, pp. 269-73).
8 Rollo, p. 6.; Petition, p. 5.
473

VOL. 222, MAY 24, 1993

473
Sesbreo vs. Court of Appeals
tion over the person of Philfinance. It is, consequently, not necessary for present purposes to deal with
this third relationship, except to the extent it necessarily impinges upon or intersects the first and
second relationships.
I
We consider first the relationship between petitioner and Delta.
The Court of Appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the
Delta promissory note (DMC PN No. 2731) which Philfinance sold without recourse to petitioner, to
the extent of P304,533.33. The Court of Appeals said on this point:
Nor could plaintiff-appellant have acquired any right over DMC P.N. No. 2731 as the same is nonnegotiable as stamped on its face (Exhibit 6), negotiation being defined as the transfer of an
instrument from one person to another so as to constitute the transferee the holder of the instrument
(Sec. 30, Negotiable Instruments Law). A person not a holder cannot sue on the instrument in his own
name and cannot demand or receive payment (Section 51, id.).9
Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that that Note had been
validly transferred, in part, to him by assignment and that as a result of such transfer, Delta as debtormaker of the Note, was obligated to pay petitioner the portion of that Note assigned to him by the
payee Philfinance.
Delta, however, disputes petitioners contention and argues:
(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise transferred by Philfinance as
manifested by the word non-negotiable stamp across the face of the Note10 and because maker Delta
and payee Philfinance intended that this Note would be offset against the outstanding obligation of
Philfinance represented by Philfinance PN No. 143-A issued to Delta as payee;
(2) that the assignment of DMC PN No. 2731 by Philfinance was without Deltas consent, if not against
its instructions; and
_______________

9 Id., p. 88.
10 TSN, 17 August 1983, p. 36.
474

474
SUPREME COURT REPORTS ANNOTATED
Sesbreo vs. Court of Appeals
(3) assuming (arguendo only) that the partial assignment in favor of petitioner was valid, petitioner took
that Note subject to the defenses available to Delta, in particular, the offsetting of DMC PN No. 2731
against Philfmance PN No. 143-A.11
We consider Deltas arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be
distinguished from the assignment or transfer of an instrument whether that be negotiable or nonnegotiable. Only an instrument qualifying as a negotiable instrument under the relevant statute may be
negotiated either by indorsement thereof coupled with delivery, or by delivery alone where the
negotiable instrument is in bearer form. A negotiable instrument may, however, instead of being
negotiated, also be assigned or transferred. The legal consequences of negotiation as distinguished from
assignment of a negotiable instrument are, of course, different. A non-negotiable instrument may,
obviously, not be negotiated; but it may be assigned or transferred, absent an express prohibition
against assignment or transfer written in the face of the instrument:
The words not negotiable, stamped on the face of the bill of lading, did not destroy its assignability,
but the sole effect was to exempt the bill from the statutory provisions relative thereto, and a bill,
though not negotiable, may be transferred by assignment; the assignee taking subject to the equities
between the original parties.12 (Italics added)
DMC PN No. 2731, while marked non-negotiable, was not at the same time stamped nontransferrable or non-assignable. It contained no stipulation which prohibited Philfinance from
assigning or transferring, in whole or in part, that Note.
Delta adduced the Letter of Agreement which it had entered into with Philfinance and which should
be quoted in full:
_______________

11 Records, pp. 36-37.


12 National Bank of Bristol v. Baltimore & O.R. Co., 59 A. 134, 138. See also, in this connection,
Consolidated Plywood v. IFC Leasing, 149 SCRA 449 (1987).
475

VOL. 222, MAY 24, 1993


475
Sesbreo vs. Court of Appeals
April 10, 1980
Philippine Underwriters Finance Corp.
Benavidez St., Makati
Metro Manila
Attention: Mr. Alfredo O. Banaria
SVP-Treasurer
GENTLEMEN:
This refers to our outstanding placement of P4,601,666.67 as evidenced by your Promissory Note No.
143-A, dated April 10, 1980, to mature on April 6, 1981.
As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731 for P2,000,000.00
each, dated April 10, 1980, to be offsetted [sic] against your PN No. 143-A upon co-terminal maturity.
Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.
Very Truly Yours,
(Sgd.)
Florencio B. Biagan
Senior Vice President13
We find nothing in his Letter of Agreement which can be reasonably construed as a prohibition upon
Philfinance assigning or transferring all or part of DMC PN No. 2731, before the maturity thereof. It is
scarcely necessary to add that, even had this Letter of Agreement set forth an explicit prohibition of
transfer upon Philfinance, such a prohibition cannot be invoked against an assignee or transferee of the
Note who parted with valuable consideration in good faith and without notice of such prohibition. It is
not disputed that petitioner was such an assignee or transferee. Our conclusion on this point is
reinforced by the fact that what Philfinance and Delta were doing by their exchange of promissory notes
was this: Delta invested, by making a money market placement with Philfinance, approximately
P4,600,000.00 on 10 April 1980; but promptly, on the same day,

______________

13 Exhibit 3, Records, p. 240.


476

476
SUPREME COURT REPORTS ANNOTATED
Sesbreo vs. Court of Appeals
borrowed back the bulk of that placement, i.e., P4,000,000.00, by issuing its two (2) promissory notes:
DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance was left with
not P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta promissory notes.
Apropos Deltas complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been
effected without the consent of Delta, we note that such consent was not necessary for the validity and
enforceability of the assignment in favor of petitioner.14 Deltas argument that Philfinances sale or
assignment of part of its rights to DMC PN No. 2731 constituted conventional subrogation, which
required its (Deltas) consent, is quite mistaken. Conventional subrogation, which in the first place is
never lightly inferred,15 must be clearly established by the unequivocal terms of the subtituting
obligation or by the evident incompatibility of the new and old obligations on every point.16 Nothing of
the sort is present in the instant case.
It is in fact difficult to be impressed with Deltas complaint, since it released its DMC PN No. 2731 to
Philfinance, an entity engaged in the business of buying and selling debt instruments and other
securities, and more generally, in money market transactions. In Perez v. Court of Appeals,17 the Court,
speaking through Mme. Justice Herrera, made the following important statement:
There is another aspect to this case. What is involved here is a money market transaction. As defined
by Lawrence Smith the money market is a market dealing in standardized short-term credit instruments
(involving large amounts) where lenders and borrowers do not deal directly with each other but through
a middle man or dealer in the open market. It involves commercial papers which are instruments
evidencing indebtedness of any person or entity . . . ., which are issued, endorsed, sold or transferred or
in any manner conveyed to another person or entity, with or without recourse. The fundamental
_______________

14 National Investment and Development Corporation v. De los Angeles, 40 SCRA 487 (1971); Bastida v.
Dy Buncio & Co., 93 Phil. 195 (1953). See also Articles 1285 and 1626, Civil Code.

15 Article 1300, Civil Code.


16 Article 1292, id.
17 127 SCRA 636 (1984).
f
477

VOL. 222, MAY 24, 1993


477
Sesbreo vs. Court of Appeals
function of the money market device in its operation is to match and bring together in a most
impersonal manner both the fund users and the fund suppliers. The money market is an impersonal
market, free from personal considerations. The market mechanism is intended to provide quick
mobility of money and securities.
The impersonal character of the money market device overlooks the individuals or entities concerned.
The issuer of a commercial paper in the money market necessarily knows in advance that it would be
expeditiously transacted and transferred to any investor/lender without need of notice to said issuer. In
practice, no notification is given to the borrower or issuer of commercial paper of the sale or transfer to
the investor.
xxx

xxx

xxx

There is no need to individuate a money market transaction, a relatively novel institution in the
Philippine commercial scene. It has been intended to facilitate the flow and acquisition of capital on an
impersonal basis. And as specifically required by Presidential Decree No. 678, the investing public must
be given adequate and effective protection in availing of the credit of a borrower in the commercial
paper market.18 (Citations omitted; italics supplied)
We turn to Deltas arguments concerning alleged compensation or offsetting between DMC PN No. 2731
and Philfinance PN No. 143-A. It is important to note that at the time Philfinance sold part of its rights
under DMC PN No. 2731 to petitioner on 9 February 1981, no compensation had as yet taken place and
indeed none could have taken place. The essential requirements of compensation are listed in the Civil
Code as follows:
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 are 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. (Italics supplied)
_______________

18 127 SCRA at 645-646.


478

478
SUPREME COURT REPORTS ANNOTATED
Sesbreo vs. Court of Appeals
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was explicitly
recognized by Delta in its 10 April 1980 Letter of Agreement with Philfinance, where Delta
acknowledged that the relevant promissory notes were to be offsetted (sic) against *Philfinance+ PN
No. 143-A upon coterminal maturity.
As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days
before the co-terminal maturity date, that is to say, before any compensation had taken place.
Further, the assignment to petitioner would have prevented compensation from taking place between
Philfinance and Delta, to the extent of P304,533.33, because upon execution of the assignment in favor
of petitioner, Philfinance and Delta would have ceased to be creditors and debtors of each other in their
own right to the extent of the amount assigned by Philfinance to petitioner. Thus, we conclude that the
assignment effected by Philfinance in favor of petitioner was a valid one and that petitioner accordingly
became owner of DMC PN No. 2731 to the extent of the portion thereof assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on
14 July 1981,19 that is, after the maturity not only of the money market placement made by petitioner
but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified
Delta of his rights as assignee after compensation had taken place by operation of law because the
offsetting instruments had both reached maturity. It is a firmly settled doctrine that the rights of an
assignee are not any greater than the rights of the assignor, since the assignee is merely substituted in

the place of the assignor20 and that the assignee acquires his rights subject to the equitiesi.e., the
defenseswhich the debtor could have set up
_______________

19 Records, p. 451; Plaintiffs Memorandum, p. 13.


20 Gonzales v. Land Bank of the Philippines, 183 SCRA 520 (1990); Philippine National Bank v. General
Acceptance and Finance Corp., 161 SCRA 449 (1988); National Investment and Development
Corporation v. De los Angeles, 40 SCRA 489 (1971); Montinola v. Philippine National Bank, 88 Phil. 178
(1951); National Exchange Company, Ltd. v. Ramos, 51 Phil. 310 (1927); Sison v. Yap-Tico, 37 Phil. 584
(1918).
479

VOL. 222, MAY 24, 1993


479
Sesbreo vs. Court of Appeals
against the original assignor before notice of the assignment was given to the debtor. Article 1285 of the
Civil Code provides that:
ART. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a
third person, cannot set up against the assignee the compensation which would pertain to him against
the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he
reserved his right to the compensation.
If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may
set up the compensation of debts previous to the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up the compensation of all
credits prior to the same and also later ones until he had knowledge of the assignment. (Italics
supplied)
Article 1626 of the same Code states that: the debtor who, before having knowledge of the
assignment, pays his creditor shall be released from the obligation. In Sison v. Yap-Tico,21 the Court
explained that:
*n+o man is bound to remain a debtor: he may pay to him with whom he contracted to pay; and if he
pay before notice that his debt has been assigned, the law holds him exonerated, for the reason that it is

the duty of the person who has acquired a title by transfer to demand payment of the debt, to give his
debtor notice.22
At the time that Delta was first put to notice of the assignment in petitioners favor on 14 July 1981,
DMC PN No. 2731 had already been discharged by compensation. Since the assignor Philfinance could
not have then compelled payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of
Philfinance, is similarly disabled from collecting from Delta the portion of the Note assigned to him.
It bears some emphasis that petitioner could have notified Delta of the assignment in his favor as soon
as that assignment
_______________

21 37 Phil. 584 (1918).


22 37 Phil. at 589. See also Rodriguez v. Court of Appeals, 207 SCRA 553, 559 (1992). See, generally,
Philippine National Bank v. General Acceptance and Finance Corp., 161 SCRA 449, 457 (1988).
480

480
SUPREME COURT REPORTS ANNOTATED
Sesbreo vs. Court of Appeals
or sale was effected on 9 February 1981. He could have also notified Delta as soon as his money market
placement matured on 13 March 1981 without payment thereof being made by Philfinance; at that
time, compensation had yet to set in and discharge DMC PN No. 2731. Again, petitioner could have
notified Delta on 26 March 1981 when petitioner received from Philfinance the Denominated
Custodianship Receipt (DCR) No. 10805 issued by private respondent Pilipinas in favor of petitioner.
Petitioner could, in fine, have notified Delta at any time before the maturity date of DMC PN No. 2731.
Because petitioner failed to do so, and because the record is bare of any indication that Philfinance had
itself notified Delta of the assignment to petitioner, the Court is compelled to uphold the defense of
compensation raised by private respondent Delta. Of course, Philfinance remains liable to petitioner
under the terms of the assignment made by Philfinance to petitioner.
II
We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner
contends that Pilipinas became solidarily liable with Philfinance and Delta when Pilipinas issued DCR No.
10805 with the following words:

Upon your written instructions, we *Pilipinas+ shall undertake physical delivery of the above securities
fully assigned to you.23
The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part of
Pilipinas to pay petitioner the amount of P307,933.33 nor any assumption of liability in solidum with
Philfinance and Delta under DMC PN No. 2731. We read the DCR as a confirmation on the part of
Pilipinas that:
(1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a certain face value, to
mature on 6 April 1981 and payable to the order of Philfinance;
(2)Pilipinas was, from and after said date of the assignment by Philfinance to petitioner (9 February)
1981), holding that Note on
_______________

23 Petitioners Memorandum, p. 12; Rollo, p. 221.


481

VOL. 222, MAY 24, 1993


481
Sesbreo vs. Court of Appeals
behalf and for the benefit of petitioner, at least to the extent it had been assigned to petitioner by
payee Philfinance;24
(3) petitioner may inspect the Note either personally or by authorized representative; at any time
during regular bank hours; and
(4)upon written instructions of petitioner, Pilipinas would physically deliver the DMC PN No. 2731 (or a
participation therein to the extent of P307,933.33) should this Denominated Custodianship Receipt
remain outstanding in *petitioners+ favor thirty (30) days after its maturity.
Thus, we find nothing written in printers ink on the DCR which could reasonably be read as converting
Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to petitioner, either upon
maturity thereof or at any other time. We note that both in his complaint and in his testimony before
the trial court, petitioner referred merely to the obligation of private respondent Pilipinas to effect
physical delivery to him of DMC PN No. 2731.25 Accordingly, petitioners theory that Pilipinas had
assumed a solidary obligation to pay the amount represented by the portion of the Note assigned to him
by Philfinance, appears to be a new theory constructed only after the trial court had ruled against him.

The solidary liability that petitioner seeks to impute to Pilipinas cannot, however, be lightly inferred.
Under Article 1207 of the Civil Code, there is a solidary liability only when the obligation expressly so
states, or when the law or the nature of the obligation requires solidarity. The record here exhibits no
express assumption of solidary liability vis-a-vis petitioner, on the part of Pilipinas. Petitioner has not
pointed us to any law which imposed such liability upon Pilipinas nor has petitioner argued that the very
nature of the custodianship assumed by private respondent Pilipinas necessarily implies solidary liability
_______________

24 The DCR specified the amount of P307,933.33 as the extent to which DMC PN No. 2731 pertained to
petitioner Raul Sesbreo. This amount probably refers to the placement of P300,000.00 by petitioner
plus interest from 9 February 1981 until the maturity date of DMC PN No. 2731, i.e., 6 April 1981.
25 Complaint, pp. 2-3; Rollo, pp. 23-24; TSN of 11 April 1983, p. 51; TSN, 9 October 1986, pp. 15-16. See
also Minutes of the Pre-trial Conference, dated 04 March, 1983, p. 9.
482

482
SUPREME COURT REPORTS ANNOTATED
Sesbreo vs. Court of Appeals
under the securities, custody of which was taken by Pilipinas. Accordingly, we are unable to hold
Pilipinas solidarity liable with Philfinance and private respondent Delta under DMC PN No. 2731.
We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of
petitioner under the terms of the DCR. To the contrary, we find, after prolonged analysis and
deliberation, that private respondent Pilipinas had breached its undertaking under the DCR to petitioner
Sesbreno.
We believe and so hold that a contract of deposit was constituted by the act of Philfinance in
designating Pilipinas as custodian or depositary bank. The depositor was initially Philfinance; the
obligation of the depositary was owed, however, to petitioner Sesbreno as beneficiary of the
custodianship or depositary agreement. We do not consider that this is a simple case of a stipulation
pour autri. The custodianship or depositary agreement was established as an integral part of the money
market transaction entered into by petitioner with Philfinance. Petitioner bought a portion of DMC PN
No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in order that the thing sold
would be placed outside the control of the vendor. Indeed, the constituting of the depositary or
custodianship agreement was equivalent to constructive delivery of the Note (to the extent it had been
sold or assigned to petitioner) to petitioner. It will be seen that custodianship agreements are designed

to facilitate transactions in the money market by providing a basis for confidence on the part of the
investors or placers that the instruments bought by them are effectively taken out of the pocket, as it
were, of the vendors and placed safely beyond their reach, that those instruments will be there available
to the placers of funds should they have need of them. The depositary in a contract of deposit is obliged
to return the security or the thing deposited upon demand of the depositor (or, in the presented case,
of the beneficiary) of the contract, even though a term for such return may have been established in the
said contract.26 Accordingly, any stipulation in the contract of deposit or custodianship that runs
counter to the fundamental purpose of that agreement or which
______________

26 Article 1988, Civil Code.


483

VOL. 222, MAY 24, 1993


483
Sesbreo vs. Court of Appeals
was not brought to the notice of and accepted by the placer-beneficiary, cannot be enforced as against
such beneficiary-placer.
We believe that the position taken above is supported by considerations of public policy. If there is any
party that needs the equalizing protection of the law in money market transactions, it is the members of
the general public who place their savings in such market for the purpose of generating interest
revenues.27 The custodian bank, if it is not related either in terms of equity ownership or management
control to the borrower of the funds, or the commercial paper dealer, is normally a preferred or
traditional banker of such borrower or dealer (here, Philfinance). The custodian bank would have every
incentive to protect the interest of its client the borrower or dealer as against the placer of funds. The
providers of such funds must be safeguarded from the impact of stipulations privately made between
the borrowers or dealers and the custodian banks, and disclosed to fund-providers only after trouble
has erupted.
In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited with
it when petitioner first demanded physical delivery thereof on 2 April 1981. We must again note, in this
connection, that on 2 April 1981, DMC PN No. 2731 had not yet matured and therefore, compensation
or offsetting against Philfinance PN No. 143-A had not yet taken place. Instead of complying with the
demand of petitioner, Pilipinas purported to require and await the instructions of Philfinance, in obvious
contravention of its undertaking under the DCR to effect physical delivery of the Note upon receipt of

written instructions from petitioner Sesbreo. The ostensible term written into the DCR (i.e., should
this [DCR] remain outstanding in your favor thirty *30+ days after its maturity) was not a defense
against petitioners demand for physical surrender of the Note on at least three grounds: firstly, such
term was never brought to the attention of petitioner Sesbreo at the time the money market
placement with Philfinance was made; secondly, such term runs counter to the very purpose of the
custodianship
_______________

27 See, in this connection, the second and third whereas clauses of P.D. No. 678, dated 2 April 1975.
484

484
SUPREME COURT REPORTS ANNOTATED
Sesbreo vs. Court of Appeals
or depositary agreement as an integral part of a money market transaction; and thirdly, it is inconsistent
with the provisions of Article 1988 of the Civil Code noted above. Indeed, in principle, petitioner became
entitled to demand physical delivery of the Note held by Pilipinas as soon as petitioners money market
placement matured on 13 March 1981 without payment from Philfinance.
We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages
sustained by him arising out of its breach of duty. By failing to deliver the Note to the petitioner as
depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully deprived petitioner of
the Note deposited with it. Whether or not Pilipinas itself benefited from such conversion or unlawful
deprivation inflicted upon petitioner, is of no moment for present purposes. Prima facie, the damages
suffered by petitioner consisted of P304,533.33, the portion of the DMC PN No. 2731 assigned to
petitioner but lost by him by reason of discharge of the Note by compensation, plus legal interest of six
percent (6%) per annum counting from 14 March 1981.
The conclusion we have here reached is, of course, without prejudice to such right of reimbursement as
Pilipinas may have vis-a-vis Philfinance.
III
The third principal contention of petitionerthat Philfinance and private respondents Delta and
Pilipinas should be treated as one corporate entityneed not detain us for long.

In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired either
by the trial court nor by the respondent Court of Appeals. Petitioner similarly did not seek to implead
Philfinance in the Petition before us.
Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been
organized as separate corporate entities. Petitioner asks us to pierce their separate corporate entities,
but has been able only to cite the presence of a common DirectorMr. Ricardo Silverio, Sr., sitting on
the Boards of Directors of all three (3) companies. Petitioner has neither alleged nor proved that one or
another of the three (3) concededly
485

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485
Sesbreo vs. Court of Appeals
related companies used the other two (2) as mere alter egos or that the corporate affairs of the other
two (2) were administered and managed for the benefit of one. There is simply not enough evidence of
record to justify disregarding the separate corporate personalities of Delta and Pilipinas and to hold
them liable for any assumed or undetermined liability of Philfinance to petitioner.28
WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-G.R. CV
No. 15195 dated 21 March 1989 and 17 July 1989, respectively, are hereby MODIFIED and SET ASIDE, to
the extent that such Decision and Resolution had dismissed petitioners complaint against Pilipinas
Bank. Private respondent Pilipinas Bank is hereby ORDERED to indemnify petitioner for damages in the
amount of P304,533.33, plus legal interest thereon at the rate of six percent (6%) per annum counted
from 2 April 1981. As so modified, the Decision and Resolution of the Court of Appeals are hereby
AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
Bidin, Davide, Jr., Romero and Melo, JJ., concur.
Decision and resolution affirmed with modification.
Notes.An assignment of credit is the process of transferring the right of the assignor to the assignee
who would then have the right to proceed against the debtor (Rodriguez vs. Court of Appeals, 207 SCRA
553).
Consent is not necessary in order that assignment may fully produce legal effects (Rodriguez vs. Court of
Appeals, 207 SCRA 553).

o0o

_______________

28 Pabalan v. National Labor Relations Commission, 184 SCRA 495 (1990); Del Rosario v. National Labor
Relations Commission, 187 SCRA 777 (1990); Remo, Jr. v. Intermediate Appellate Court, 172 SCRA 405
(1989).
486

Copyright 2014 Central Book Supply, Inc. All rights reserved. [Sesbreo vs. Court of Appeals, 222 SCRA
466(1993)]

G.R. No. 177828. February 13, 2009.*


ANNABELLE DELA PEA and ADRIAN VILLAREAL, petitioners, vs. THE COURT OF APPEALS and RURAL
BANK OF BOLINAO, INC., respondents.
Judgments; Due Process; A decision which contains no reference to any legal basis in reaching its
conclusions, not citing any legal authority or principle to support its conclusion does not conform to the
requirements of the Constitution and the Rules of Court that a decision should state clearly and
distinctly the facts and the law on which it is based; Faithful adherence to the requirements of Section
14, Article VIII of the Constitution is indisputably a paramount component of due process and fair play
the parties to a litigation should be informed of how it was decided, with an explanation of the factual
and legal reasons that led to the conclusions of the court.We agree with the petitioners that the
above decision did not conform to the requirements of the Constitution and of the Rules of Court. The
decision contained no reference to any legal basis in reaching its conclusions. It did not cite any legal
authority or principle to support its conclusion that petitioners are liable to pay respondent the amount
claimed including interests, penalties, attorneys fees and the costs of suit. In Yao v. Court of Appeals,
344 SCRA 202 (2000), we held: Faithful adherence to the requirements of Section 14, Article VIII of the
Constitution is indisputably a paramount component of due process and fair play. It is likewise
demanded by the due process clause of the Constitution. The parties to a litigation should be informed
of how it was decided, with an explanation of the factual and legal reasons that led to the conclusions of
the court. The court can_______________

* THIRD DIVISION.
397

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Dela Pea vs. Court of Appeals
not simply say that judgment is rendered in favor of X and against Y and just leave it at that without any
justification whatsoever for its action. The losing party is entitled to know why he lost, so he may appeal
to the higher court, if permitted, should he believe that the decision should be reversed. A decision that
does not clearly and distinctly state the facts and the law on which it is based leaves the parties in the
dark as to how it was reached and is precisely prejudicial to the losing party, who is unable to pinpoint
the possible errors of the court for review by a higher tribunal. More than that, the requirement is an
assurance to the parties that, in reaching judgment, the judge did so through the processes of legal
reasoning. It is, thus, a safeguard against the impetuosity of the judge, preventing him from deciding
ipse dixit. Vouchsafed neither the sword nor the purse by the Constitution but nonetheless vested with
the sovereign prerogative of passing judgment on the life, liberty or property of his fellowmen, the judge
must ultimately depend on the power of reason for sustained public confidence in the justness of his
decision.
Same; Remand of Cases; Jurisprudence dictates that remand of a case to a lower court does not follow
if, in the interest of justice, the Supreme Court itself can resolve the dispute based on the records before
it.We cannot grant petitioners plea to reinstate the RTC decision remanding the case to the MTC for
further proceedings. Jurisprudence dictates that remand of a case to a lower court does not follow if, in
the interest of justice, the Supreme Court itself can resolve the dispute based on the records before it.
As a rule, remand is avoided in the following instances: (a) where the ends of justice would not be
subserved by a remand; or (b) where public interest demands an early disposition of the case; or (c)
where the trial court had already received all the evidence presented by both parties, and the Supreme
Court is in a position, based upon said evidence, to decide the case on its merits.
Obligations and Contracts; Evidence; Burden of Proof; Words and Phrases; Burden of proof is the duty of
a party to present evidence of the facts in issue necessary to prove the truth of his claim or defense by
the amount of evidence required by lawa party who pleads payment as a defense has the burden of
proving that such payment has, in fact, been made; Receipts of payment, although not exclusive, are
deemed the best evidence of the fact of payment.Jurisprudence is replete with rulings that in civil
cases, the party who alleges a fact has the burden of proving it. Burden of proof is the
398

398
SUPREME COURT REPORTS ANNOTATED
Dela Pea vs. Court of Appeals
duty of a party to present evidence of the facts in issue necessary to prove the truth of his claim or
defense by the amount of evidence required by law. Thus, a party who pleads payment as a defense has
the burden of proving that such payment has, in fact, been made. When the plaintiff alleges
nonpayment, still, the general rule is that the burden rests on the defendant to prove payment, rather
than on the plaintiff to prove nonpayment. In Alonzo v. San Juan, 451 SCRA 45 (2005), we held that the
receipts of payment, although not exclusive, are deemed the best evidence of the fact of payment. In
this case, no receipt was presented to substantiate the claim of payment as petitioners did not take
advantage of all the opportunities to present their evidence in the proceedings a quo. Not even a
photocopy of the alleged proof of payment was appended to their answer. Verily, petitioners failed to
discharge the burden. Accordingly, we reject their defense of payment.
Same; Promissory Notes; A promissory note is a solemn acknowledgment of a debt and a formal
commitment to repay it on the date and under the conditions agreed upon by the borrower and the
lender.As we held in Sierra v. Court of Appeals, 211 SCRA 785 (1992), and recently in Henry dela Rama
Co v. Admiral United Savings Bank, 551 SCRA 472 (2008): A promissory note is a solemn
acknowledgment of a debt and a formal commitment to repay it on the date and under the conditions
agreed upon by the borrower and the lender. A person who signs such an instrument is bound to honor
it as a legitimate obligation duly assumed by him through the signature he affixes thereto as a token of
his good faith. If he reneges on his promise without cause, he forfeits the sympathy and assistance of
this Court and deserves instead its sharp repudiation. Thus, petitioners cannot renege on their
commitment to pay their obligation, including interest and penalty, to the respondent.
PETITION for review on certiorari of the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Romarico F. Lutap for petitioners.
Tanopo & Serafica for private respondent.
399

VOL. 579, FEBRUARY 13, 2009


399
Dela Pea vs. Court of Appeals
NACHURA, J.:

This petition for review on certiorari filed by petitioners Annabelle dela Pea and Adrian Villareal
(petitioners) seeks to nullify and set aside the October 31, 2006 Decision1 and May 8, 2007 Resolution2
of the Court of Appeals (CA) in CA-G.R. SP No. 91338.
On October 20, 1983, respondent Rural Bank of Bolinao, Inc. (respondent) extended a loan of EightyOne Thousand Pesos (P81,000.00) to petitioners. The loan was evidenced by a promissory note,3 and
was payable on or before October 14, 1984.
Petitioners failed to pay their obligation in full when it became due. Demands for payment4 were made
by respondent, but these were not heeded. Consequently, respondent filed a collection case against the
petitioners with the Municipal Trial Court (MTC) of Bolinao, Pangasinan, docketed as Civil Case No. 838.5
At the pre-trial conference set on October 17, 1995, petitioners did not appear. Consequently, upon
motion by respondent, petitioners were declared as in default, and respondent was allowed to present
its evidence ex parte.
On November 2, 1995, the MTC rendered a Decision6 decreeing that:
WHEREFORE, the Court hereby renders judgment in favor of the *respondent+ and against the
[petitioners], to wit:
_______________

1 Penned by Presiding Justice Ruben T. Reyes (a retired member of this Court), with Associate Justices
Juan Q. Enriquez, Jr. and Vicente S.E. Veloso, concurring, Rollo, pp. 19-41.
2 Id., at p. 46.
3 Records, p. 5.
4 Id., at pp. 53-54.
5 Id., at pp. 1-3.
6 Id., at pp. 60-62.
400

400
SUPREME COURT REPORTS ANNOTATED
Dela Pea vs. Court of Appeals

1. ORDERING, the [petitioners] to jointly and severally pay the [respondent] the remaining principal
loan in the sum of P77,722.67 outstanding as of October 17, 1995, plus interest of 12% per annum and
penalty of 3% per annum, until full payment of the principal loan thereof;
2. ORDERING, the [petitioners] to jointly and severally pay the [respondent] the interest due as of
October 17, 1995, in the sum of P105,951.91;
3. ORDERING, the [petitioners] to jointly and severally pay the [respondent] the penalty due as of
October 17, 1995, in the sum of P25,670.21;
4. ORDERING, the [petitioners] to jointly and severally pay the [respondent] the litigation expenses, in
the sum of P4,500.00;
5. ORDERING, the [petitioners] to jointly and severally pay attorneys fees in the sum of P7,722.27;
6. ORDERING, the [petitioners] to jointly and severally pay the [respondent bank] the collection fees in
the sum of P50.00; and
7. To pay the cost of suit.
SO ORDERED.7
On appeal by petitioners, the Regional Trial Court (RTC) remanded the case to the MTC for further
proceedings, viz.:
This Court finds Exhibit A, which is Annex A to the complaint, as not material to the allegations in
paragraph 2 of the complaint since the Promissory Note was allegedly granted on October 20, 1983 and
the due date October 14, 1984. By the allegations of paragraph 2 of the complaint stating that the
[petitioners] obtained a loan from the [respondent] on October 20, 1993 for P81,000.00 which was to be
paid on October 20, 1984, hence, it is indeed a very great error to state in the complaint the date of
October 20, 1993 as the date of the loan was obtained when the evidence shows that it was granted on
October 20, 1983.
WHEREFORE, in view of the foregoing, this case is ordered remanded back to the lower court for further
proceedings in order to determine what was the exact date when the loan was taken from
_______________

7 Id., at p. 62.
401

VOL. 579, FEBRUARY 13, 2009

401
Dela Pea vs. Court of Appeals
the [respondent] by the [petitioners] and the due date of such Promissory Note and for other matters.
The declaration of the petitioners as in default is hereby set aside for purposes of continuation of
reception of parties.
IT IS SO ORDERED.8
After the case was remanded, respondent moved for leave to amend its complaint to conform to the
promissory note.9 The motion was granted by the MTC10 and the amended complaint11 was admitted.
The case was then set for hearing on November 16, 2000,12 but petitioners failed to appear, thus,
respondent introduced and offered the pieces of evidence which it had earlier presented ex parte.
Subsequently, on November 28, 2000, the MTC promulgated a Decision13 reiterating in full its
November 2, 1995 judgment.
Petitioners again elevated this adverse decision to the RTC. On June 14, 2001, the RTC set aside the MTC
decision and remanded the case for further proceedings. In so ruling, it held that the MTC did not
adhere to the RTC order to conduct further proceedings. Despite its earlier ruling setting aside the
declaration of default against the petitioners, the MTC did not require petitioners to file their answer.
Likewise, it did not set the case anew for pre-trial and presentation of evidence of both parties.
Petitioners failure to attend the scheduled hearing can only be construed as waiver of their right to
cross-examine the witnesses, but not a waiver of their right to present evidence. The RTC declared that
petitioners right to due process had been violated when they were not given an opportunity to present
countervailing evidence.14 The dispositive portion of the decision reads:
_______________

8 Id., at p. 103.
9 Id., at pp. 113-114.
10 Id., at p. 149.
11 Id., at pp. 115-119.
12 Id., at p. 150.
13 Id., at pp. 154-158.
14 Id., at pp. 211-217.
402

402
SUPREME COURT REPORTS ANNOTATED
Dela Pea vs. Court of Appeals
In view of the foregoing consideration, the Court renders judgment declaring the proceedings of the
MTC of Bolinao in this case from after its admission of *respondents+ amended *complaint] as null and
void; and setting aside the decision dated November 28, 2000, and ordering the remand of this case to
the said Court for further proceedings by allowing the [petitioners] to file their answer to the amended
complaint conducting the mandatory pre-trial conference of the parties and hearing their respective
evidences before rendering decision thereon.
SO ORDERED.15
Upon remand, respondent caused the re-service of summons upon petitioners,16 who filed their
Answer17 on July 7, 2003. Petitioners admitted obtaining a loan from respondent bank, but alleged that
they substantially paid their obligation.
On July 28, 2003, the MTC issued a notice setting the case for pre-trial on August 29, 2003.18 However,
a day before the scheduled pre-trial, petitioners moved for postponement;19 thus, the pre-trial was
reset to September 26, 2003.20 On September 16, 2003, petitioners again moved for postponement of
pre-trial,21 which was also granted by the MTC. The pre-trial was again reset to November 14, 2003.22
On November 14, 2003, respondent appeared, but no pre-trial was held because petitioners, for the
third time, moved for its postponement in a motion filed on November 11, 2003.23 The MTC again
granted the motion and rescheduled the pre_______________

15 Id., at p. 217.
16 Id., at p. 228.
17 Id., at pp. 243-244.
18 Id., at p. 254.
19 Id., at p. 259.
20 Id., at p. 256.
21 Id., at p. 265.

22 Id., at p. 267.
23 See Order dated November 14, 2003, id., at p. 271.
403

VOL. 579, FEBRUARY 13, 2009


403
Dela Pea vs. Court of Appeals
trial to December 12, 2003,24 but again no pre-trial was held as it was further moved to January 30,
2004. On December 17, 2003, petitioners filed another motion for postponement reiterating their
request to conduct pre-trial on January 30, 2004.25
On January 30, 2004, respondent appeared, while petitioners did not. Consequently, the MTC, upon
motion of respondent, allowed the presentation of its evidence ex parte. Thereafter, on February 9,
2004, respondent filed a Motion to Render Judgment.26
Petitioners then filed a Motion for Reconsideration (with Motion to Set Aside Order of Default).27 They
averred that they were not able to attend the pre-trial conference on January 30, 2004 because
petitioner Villareal suddenly felt weak, and petitioner Dela Pea took care of him. They were not able to
inform the court that they could not make it to the pre-trial because there was no way they could
immediately communicate with the court. Finally, they averred that they have a meritorious defense.
Accordingly, they prayed that they be allowed to regain their standing in court.
Respondent opposed the motion. Citing Section 5, Rule 18 of the 1997 Revised Rules of Civil Procedure,
respondent averred that the MTC was correct in allowing the presentation of evidence ex parte in view
of petitioners failure to appear at the pre-trial conference. It also claimed that the motion for
reconsideration is already moot and academic, considering that the case had already been submitted for
resolution.28
_______________

24 Id.
25 Records, pp. 278-279.
26 Id., at pp. 283-284.
27 Id., at pp. 285-288.
28 Id., at pp. 291-292.

404

404
SUPREME COURT REPORTS ANNOTATED
Dela Pea vs. Court of Appeals
On March 12, 2004, the MTC issued an Order29 denying petitioners motion for reconsideration for lack
of merit. It agreed with respondent that the motion is already moot and academic, and further declared
that granting the motion would give rise to endless litigation.
On August 16, 2004, the MTC rendered a Decision30 ordering petitioners to pay respondent bank their
unpaid obligation of P77,722.67 with interest at 3% per annum, from October 17, 1995 until its full
payment. Petitioners were likewise held liable for the payment of the interests and penalties due as of
October 17, 1995 amounting to P105,951.91 and P25,670.21, respectively, litigation expenses of
P4,500.00, attorneys fees of P7,722.27, collection fees of P50.00 and the cost of suit.
Petitioners appealed to the RTC. They objected to the form and substance of the MTC decision on the
ground that it did not state the law on which its findings were based, in utter disregard of Section 1, Rule
36 of the 1997 Rules of Civil Procedure. Petitioners further claimed denial of due process, for they were
not given an opportunity to present countervailing evidence.31
On May 25, 2005, the RTC set aside the MTC decision and remanded the case for further proceedings.32
It declared that the assailed MTC decision was a nullity for lack of legal basis. According to the RTC, the
MTC failed to clearly and distinctly state the law which was made the basis of its decision. The RTC also
found that petitioners were not duly notified of the scheduled pre-trial conference as the record is
bereft of proof that an order setting the case for pre-trial conference on January 30, 2004 was issued.
Neither was there any order allowing the respondent to adduce evidence ex parte in view of
_______________

29 Id., at pp. 293-294.


30 Id., at p. 299-300.
31 Id., at pp. 320-335.
32 Id., at pp. 348-351.
405

VOL. 579, FEBRUARY 13, 2009


405
Dela Pea vs. Court of Appeals
petitioners failure to appear on the said date. The RTC concluded that the MTC decision was issued
without due process. Accordingly, the case was remanded for pre-trial conference and for presentation
of evidence.
Dissatisfied with the RTC decision, respondent appealed to the CA. On October 31, 2006, the CA
rendered the assailed Decision. Reversing the RTC, the CA found that petitioners had sufficient notice
that the pre-trial conference will be held on January 30, 2004 for this setting had been chosen and
confirmed twice by the petitioners. According to the CA, petitioners should have appointed a
representative, armed with a special power of attorney, to appear on their behalf if they could not make
it to the scheduled pre-trial, especially in this case where several postponements had already been
granted. It added that petitioners cannot repeatedly ask for the postponement of a pre-trial on account
of their insistence to personally attend and participate in the same; otherwise, the entire proceedings
would be left at the mercy and whims of a cunning litigant. Accordingly, the CA upheld the MTC in
allowing the ex parte presentation of evidence, and in rendering judgment on the basis of the evidence
presented.
Petitioners filed a motion for reconsideration, but the CA denied the same on May 8, 2007.
Hence, this recourse by petitioners arguing that:
1. THE COURT OF APPEALS ERRED IN REIN[S]TATING THE DECISION OF THE MUNICIPAL TRIAL COURT
OF BOLINAO WHICH IS NULL AND VOID FOR FAILURE TO STATE THE LAW ON WHICH ITS FINDINGS OF
FACTS ARE BASED CONTRARY TO THE REQUIREMENT UNDER SECTION 1, RULE 36 OF THE 1997 RULES OF
CIVIL PROCEDURE.
2. THE COURT OF APPEALS ERRED WHEN IT REINSTATED THE DECISION OF THE MUNICIPAL TRIAL
COURT OF BOLINAO EVEN WHEN THE LOWER COURT OMITTED AND FAILED TO ISSUE AN ORDER AFTER
THE PRE-TRIAL CONFERENCE PROCEEDINGS.
406

406
SUPREME COURT REPORTS ANNOTATED
Dela Pea vs. Court of Appeals

3. THE COURT OF APPEALS AFFIRMATION OF THE DECISION OF THE MUNICIPAL TRIAL COURT OF
BOLINAO AMOUNTS TO DENIAL OF THE PETITIONERS CONSTITUTIONAL RIGHT TO DUE PROCESS OF
LAW ON MERE TECHNICALITY.33
Petitioners fault the CA for reversing the RTC, and for reinstating and upholding the MTC decision.
Reiterating their arguments before the RTC, they assert that the MTC decision is null and void for it does
not conform to the requirement of Section 14, Article VIII of the Constitution and of the Rules of Court.
Section 14, Article VIII of the 1987 Constitution directs that:
SEC. 14. No decision shall be rendered by any court without expressing therein clearly and distinctly
the facts and the law on which it is based.
Section 1, Rule 36 of the Rules of Court reflects the foregoing mandate, thus:
SECTION 1. Rendition of judgments and final orders.A judgment or final order determining the
merits of the case shall be in writing personally and directly prepared by the judge, stating clearly and
distinctly the facts and the law on which it is based, signed by him, and filed with the clerk of court.
The August 16, 2004 MTC decision reads in full:
This is an inherited case by the undersigned Judge-Designate, filed way back in September 14, 1994.
Likewise, the instant case is an off-shoot of the appealed decision of this court to the Regional Trial
Court, Alaminos, Pangasinan, which remanded back in its order dated August 29, 1996 x x x.
_______________

33 Rollo, p. 11.
407

VOL. 579, FEBRUARY 13, 2009


407
Dela Pea vs. Court of Appeals
Proceedings were held whereby [respondent] moved with leave of court to amend paragraph 2 of the
complaint to conform to evidence.
Accordingly, the amended complaint was granted by the court during the hearing on September 18,
2000. With the admission of the amended complaint of the respondent, the case was set for hearing
with due notices to [petitioners] and counsel for further reception of evidence the [respondent] may

desire to adduce. On the said scheduled date of hearing, the [petitioners] and counsel did not show up
in court. [Respondent], thru counsel, re-introduced in toto the documentary evidences which they have
previously presented which they then re-offered in evidence and prayed for their re-admission and
thereafter rested their case. There being no more supervening facts or new documentary evidences
introduced by the plaintiff in the instant case, the court deemed no necessity in having a different
decision from the appealed decision of this court, except, of course maybe its change of date, so it was
already wise and unmistakable to just re-write and adapt the decision of this Court dated November 2,
1995 by the then Honorable Antonio V. Tiong, Municipal Trial Judge.
From the evidence adduced by the [respondent], it has clearly been established that the [petitioners]
obtained a loan from [respondent] Rural Bank of Bolinao, Inc., with office address at Poblacion, Bolinao,
Pangasinan, in the sum of EIGHTY-ONE THOUSAND PESOS (P81,000.00), on October 20, 1983, as
evidenced by a promissory note duly signed and executed by the herein [petitioners] spouses Annabelle
dela Pea and Adrian Villareal at the place of business of the [respondent] as a banking institution in the
presence of the witnesses of the [respondent], namely Cederico C. Catabay and Maximo Tiangsing who
are both employees of the [respondent], that the [petitioners] have paid a part of the principal loan with
a remaining outstanding balance of P77,772.67, but has from then defaulted in the last payment of the
loan which has and have matured on October 14, 1984 (Exh. A). Accordingly, letters of demand by
Mateo G. Caasi, then General Manager of the respondent Rural Bank of Bolinao, Inc., were sent by
registered mail to *petitioners+ at their given address but turned deaf eared (Exh. C & D); that, as a
result of the utter disregard and failures of the [petitioners] in payment of their long overdue loan, the
[respondent] was constrained to engage the legal services of a lawyer in the filing of the instant case for
collection and has incurred litigation expenses and attorneys
408

408
SUPREME COURT REPORTS ANNOTATED
Dela Pea vs. Court of Appeals
fees; that, together with collection fees which [respondent] is legally entitled to and the remaining
unpaid balance up to the present; that the grand total amount of money the [petitioners] are obliged to
pay [respondent] as of October 17, 1995, as reflected in the Statement of Account prepared and
submitted by Lito C. Altezo, Bookkeeper of the [respondent] Rural Bank is Two Hundred Twenty-One
Thousand Six Hundred and Sixty-Seven Pesos and Six Centavos (P221,667.06)- Exh. B.34
WHEREFORE, clearly viewed in the light of all the foregoing considerations, the court hereby renders
judgment in favor of the [respondent] and against the petitioners, to wit:

1. Ordering the [petitioners] to pay jointly and severally the [respondent] the remaining principal
(obligation) loan in the sum of P77.722.67 outstanding as of October 17, 1995, plus interest of 3% per
annum, until full payment of the principal loan is made thereof;
2. Ordering [petitioners] to pay jointly and severally the [respondent] the interest due as of October
17, 1995, in the sum of P105, 951.91;
3. Ordering the [petitioners] to pay jointly and severally the [respondent] the penalty due as of
October 17, 1995, in the sum of P25,670.21;
4. Ordering the [petitioners] to pay jointly and severally the [respondent] the litigation expenses in the
sum of PP4,500.00;
5. Ordering the *petitioners+ to pay jointly and severally attorneys fees in the sum of P7,722.27;
6. Ordering the [petitioners] to pay jointly and severally the [respondent] the collection fees in the sum
of P50.00; and
7. To pay the cost of the suit;
SO ORDERED.35
We agree with the petitioners that the above decision did not conform to the requirements of the
Constitution and of the Rules of Court. The decision contained no reference to any legal basis in reaching
its conclusions. It did not cite any legal authority or principle to support its conclusion that petition_______________

34 Id., at p. 82.
35 Records, pp. 299-300.
409

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Dela Pea vs. Court of Appeals
ers are liable to pay respondent the amount claimed including interests, penalties, attorneys fees and
the costs of suit.
In Yao v. Court of Appeals,36 we held:

Faithful adherence to the requirements of Section 14, Article VIII of the Constitution is indisputably a
paramount component of due process and fair play. It is likewise demanded by the due process clause
of the Constitution. The parties to a litigation should be informed of how it was decided, with an
explanation of the factual and legal reasons that led to the conclusions of the court. The court cannot
simply say that judgment is rendered in favor of X and against Y and just leave it at that without any
justification whatsoever for its action. The losing party is entitled to know why he lost, so he may appeal
to the higher court, if permitted, should he believe that the decision should be reversed. A decision that
does not clearly and distinctly state the facts and the law on which it is based leaves the parties in the
dark as to how it was reached and is precisely prejudicial to the losing party, who is unable to pinpoint
the possible errors of the court for review by a higher tribunal. More than that, the requirement is an
assurance to the parties that, in reaching judgment, the judge did so through the processes of legal
reasoning. It is, thus, a safeguard against the impetuosity of the judge, preventing him from deciding
ipse dixit. Vouchsafed neither the sword nor the purse by the Constitution but nonetheless vested with
the sovereign prerogative of passing judgment on the life, liberty or property of his fellowmen, the judge
must ultimately depend on the power of reason for sustained public confidence in the justness of his
decision.
Thus, the Court has struck down as void, decisions of lower courts and even of the Court of Appeals
whose careless disregard of the constitutional behest exposed their sometimes cavalier attitude not
only to their magisterial responsibilities but likewise to their avowed fealty to the Constitution.
Thus, we nullified or deemed to have failed to comply with Section 14, Article VIII of the Constitution, a
decision, resolution or order which: contained no analysis of the evidence of the parties nor reference to
any legal basis in reaching its conclusions; contained nothing more than a summary of the testimonies of
the witnesses of both parties; convicted the accused of libel but failed to cite any legal
_______________

36 398 Phil. 86; 344 SCRA 202 (2000).


410

410
SUPREME COURT REPORTS ANNOTATED
Dela Pea vs. Court of Appeals
authority or principle to support conclusions that the letter in question was libelous; consisted merely of
one (1) paragraph with mostly sweeping generalizations and failed to support its conclusion of parricide;
consisted of five (5) pages, three (3) pages of which were quotations from the labor arbiters decision

including the dispositive portion and barely a page (two [2] short paragraphs of two [2] sentences each)
of its own discussion or reasonings; was merely based on the findings of another court sans transcript of
stenographic notes; or failed to explain the factual and legal bases for the award of moral damages.37
The CA, therefore, erred in upholding the validity of and in reinstating the MTC decision.
However, we cannot grant petitioners plea to reinstate the RTC decision remanding the case to the
MTC for further proceedings. Jurisprudence dictates that remand of a case to a lower court does not
follow if, in the interest of justice, the Supreme Court itself can resolve the dispute based on the records
before it.
As a rule, remand is avoided in the following instances: (a) where the ends of justice would not be
subserved by a remand; or (b) where public interest demands an early disposition of the case; or (c)
where the trial court had already received all the evidence presented by both parties, and the Supreme
Court is in a position, based upon said evidence, to decide the case on its merits.38
Petitioners plead for a remand of their case to the MTC on ground that they were denied due process.
They claim that they were not given an opportunity to present countervailing evidence.
The argument does not persuade.
We perused the record of the case and we failed to see the lack of due process claimed by the
petitioners. On the con_______________

37 Id., at pp. 105-106; pp. 219-220.


38 Rizza Lao @ Nerissa Laping v. People of the Philippines, G.R. No. 159404, June 27, 2008, 556 SCRA
120.
411

VOL. 579, FEBRUARY 13, 2009


411
Dela Pea vs. Court of Appeals
trary, petitioners had been afforded more than what is due them. This case was remanded to the MTC
twice to give petitioners an opportunity to be heard. Lest it be forgotten, petitioners were first declared
as in default on October 17, 1995 for their failure to appear at the pre-trial conference. The MTC
thereafter rendered judgment in favor of the respondent. However, on appeal, the RTC set aside the

judgment and remanded the case for further proceedings. Upon remand, the MTC set the case for
hearing, but again petitioners failed to appear at the scheduled hearing. Accordingly, respondent was
allowed to present its evidence ex parte, and a judgment in favor of the respondent was issued. But
again on appeal, the RTC set aside the MTC decision and remanded the case, for the second time, to the
MTC, to give petitioners ample opportunity to present countervailing evidence. Upon remand,
respondent caused the re-service of summons to petitioners, who filed their answer to the complaint.
When the case was set for pre-trial conference, petitioners repeatedly moved for its postponement; and
despite several postponements, petitioners still failed to appear at the pre-trial conference set on
January 30, 2004.
Clearly, petitioners abused the legal processes, effectively defeating the justice which had long been
denied the respondent. We note that this case was filed on September 13, 1994, and petitioners,
through legal maneuverings, managed to delay its resolution. To date, this simple collection suit has
been pending for more than fourteen (14) years. We will not countenance this patent flouting of the law
and the rules by petitioners and counsel. Accordingly, we will now resolve the case based on the
evidence before us.
Petitioners did not deny or question the authenticity and due execution of the promissory note. They,
however, offered the defense that the loan obligation covered by the promissory note had already been
paid.
Jurisprudence is replete with rulings that in civil cases, the party who alleges a fact has the burden of
proving it. Burden
412

412
SUPREME COURT REPORTS ANNOTATED
Dela Pea vs. Court of Appeals
of proof is the duty of a party to present evidence of the facts in issue necessary to prove the truth of his
claim or defense by the amount of evidence required by law.39 Thus, a party who pleads payment as a
defense has the burden of proving that such payment has, in fact, been made. When the plaintiff alleges
nonpayment, still, the general rule is that the burden rests on the defendant to prove payment, rather
than on the plaintiff to prove nonpayment.40
In Alonzo v. San Juan,41 we held that the receipts of payment, although not exclusive, are deemed the
best evidence of the fact of payment. In this case, no receipt was presented to substantiate the claim of
payment as petitioners did not take advantage of all the opportunities to present their evidence in the
proceedings a quo. Not even a photocopy of the alleged proof of payment was appended to their

answer. Verily, petitioners failed to discharge the burden. Accordingly, we reject their defense of
payment.
By signing the promissory note, petitioners acknowledged receipt of the loan amounting to P81,000.00,
and undertook to pay the same, plus interest and penalty, on or before October 14, 1984.
Records show that as of October 17, 1995, petitioners unpaid obligation under the note is
P77,722.67,42 excluding interest of 12% per annum, penalty charge of 3% per annum, and attorneys
fees, which they bound themselves to pay under the note.43
_______________

39 Rules Of Court, Rule 131, Sec 1.


40 See Bulos, Jr. v. Yasuma, G.R. No. 164159, July 17, 2007, 527 SCRA 727, 739; Alonzo v. San Juan, G.R.
No. 137549, February 11, 2005, 451 SCRA 45, 55-56.
41 Supra.
42 See Statement of Account, Records, p. 55.
43 Records, p. 5.
413

VOL. 579, FEBRUARY 13, 2009


413
Dela Pea vs. Court of Appeals
As we held in Sierra v. Court of Appeals,44 and recently in Henry dela Rama Co v. Admiral United Savings
Bank:45
A promissory note is a solemn acknowledgment of a debt and a formal commitment to repay it on the
date and under the conditions agreed upon by the borrower and the lender. A person who signs such an
instrument is bound to honor it as a legitimate obligation duly assumed by him through the signature he
affixes thereto as a token of his good faith. If he reneges on his promise without cause, he forfeits the
sympathy and assistance of this Court and deserves instead its sharp repudiation.
Thus, petitioners cannot renege on their commitment to pay their obligation, including interest and
penalty, to the respondent.

WHEREFORE, the petition is DENIED. Petitioners Annabelle dela Pea and Adrian Villareal are ordered,
jointly and severally, to pay respondent Rural Bank of Bolinao, Inc. P77,722.67, with interest at 12% per
annum and penalty charge of 3% per annum from October 14, 1984 until the loan is fully paid. In
addition, petitioners are adjudged liable to pay respondent P40,000.00, as attorneys fees.
SO ORDERED.
Ynares-Santiago (Chairperson), Austria-Martinez, Chico-Nazario and Leonardo-De Castro,** JJ., concur.
Petition denied.
Note.Where the promissory notes signed by the borrowers do not contain any stipulation on the
payment of handling charges, the bank cannot collect the same. (Consolidated Bank and Trust Company
[Solidbank] vs. Court of Appeals, 246 SCRA 193 [1995])
o0o
_______________

44 G.R. No. 90270, July 24, 1992, 211 SCRA 785, 795.
45 G.R. No. 154740, April 16, 2008, 551 SCRA 472.
** Per Raffle dated July 30, 2008.
Copyright 2014 Central Book Supply, Inc. All rights reserved. [Dela Pea vs. Court of Appeals, 579
SCRA 396(2009)]

PREME COURT REPORTS ANNOTATED


Inciong, Jr. vs. Court of Appeals
G.R. No. 96405. June 26, 1996.*
BALDOMERO INCIONG, JR., petitioner, vs. COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.
Actions; Pleadings and Practice; A party after having lost his chance to fully ventilate his factual claims
below may no longer be accorded the same opportunity in the absence of grave abuse of discretion on
the part of the court below.The above-stated points are clearly factual. Petitioner is to be reminded of
the basic rule that this Court is not a trier of facts. Having lost the chance to fully ventilate his factual
claims below, petitioner may no longer be accorded the same opportunity in the absence of grave abuse
of discretion on the part of the court below. Had he presented Judge Pantanosas affidavit before the

lower court, it would have strengthened his claim that the promissory note did not reflect the correct
amount of the loan.
Contracts; Evidence; Parol Evidence Rule; Negotiable Instruments; Promissory Notes; The parol evidence
rule does not specify that the written agreement be a public document.Nor is there merit in
petitioners assertion that since the promissory note is not a public deed with the formalities
prescribed by law but x x x a mere commercial paper which does not bear the signature of x x x attesting
witnesses, parol evidence may overcome the contents of the promissory note. The first paragraph of
the parol evidence rule states: When the terms of an agreement have been reduced to writing, it is
considered as containing all the terms agreed upon and there can be, between the parties and their
successors in interest, no evidence of such terms other than the contents of the written agreement.
Clearly, the rule does not specify that the written agreement be a public document.
Same; Same; Same; Same; Same; For the parol evidence rule to apply, a written contract need not be in
any particular form, or be signed by both partiesas a general rule, bills, notes and other instruments of
a similar nature are not subject to be varied or contradicted by parol or extrinsic evidence.What is
required is that
_______________

* SECOND DIVISION.
579

VOL. 257, JUNE 26, 1996


579
Inciong, Jr. vs. Court of Appeals
the agreement be in writing as the rule is in fact founded on long experience that written evidence is so
much more certain and accurate than that which rests in fleeting memory only, that it would be unsafe,
when parties have expressed the terms of their contract in writing, to admit weaker evidence to control
and vary the stronger and to show that the parties intended a different contract from that expressed in
the writing signed by them. Thus, for the parol evidence rule to apply, a written contract need not be in
any particular form, or be signed by both parties. As a general rule, bills, notes and other instruments of
a similar nature are not subject to be varied or contradicted by parol or extrinsic evidence.
Same; Same; Same; Fraud; Fraud must be established by clear and convincing evidence, mere
preponderance of evidence not even being adequateand a partys attempt to prove fraud must fail
where it was evidenced only by his own uncorroborated and self-serving testimony.By alleging fraud
in his answer, petitioner was actually in the right direction towards proving that he and his co-makers

agreed to a loan of P5,000.00 only considering that, where a parol contemporaneous agreement was
the inducing and moving cause of the written contract, it may be shown by parol evidence. However,
fraud must be established by clear and convincing evidence, mere preponderance of evidence, not even
being adequate. Petitioners attempt to prove fraud must, therefore, fail as it was evidenced only by his
own uncorroborated and, expectedly, self-serving testimony.
Same; Obligations; Joint and Solidary Obligations and Guaranty, Distinguished.A solidary or joint and
several obligation is one in which each debtor is liable for the entire obligation, and each creditor is
entitled to demand the whole obligation. On the other hand, Article 2047 of the Civil Code states: By
guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the
principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such a
case the contract is called a suretyship. (Italics supplied.)
Same; Same; Same; While a guarantor may bind himself solidarily with the principal debtor, the liability
of a guarantor is different from that of a solidary debtor.While a guarantor may bind himself solidarily
with the principal debtor, the liability of a
580

580
SUPREME COURT REPORTS ANNOTATED
Inciong, Jr. vs. Court of Appeals
guarantor is different from that of a solidary debtor. Thus, Tolentino explains: A guarantor who binds
himself in solidum with the principal debtor under the provisions of the second paragraph does not
become a solidary co-debtor to all intents and purposes. There is a difference between a solidary codebtor and a fiador in solidum (surety). The latter, outside of the liability he assumes to pay the debt
before the property of the principal debtor has been exhausted, retains all the other rights, actions and
benefits which pertain to him by reason of the fiansa; while a solidary co-debtor has no other rights than
those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the Civil Code.
Same; Same; Same; There is a solidary liability only when the obligation expressly so states, when the
law so provides or when the nature of the obligation so requires.Section 4, Chapter 3, Title I, Book IV
of the Civil Code states the law on joint and several obligations. Under Art. 1207 thereof, when there are
two or more debtors in one and the same obligation, the presumption is that the obligation is joint so
that each of the debtors is liable only for a proportionate part of the debt. There is a solidary liability
only when the obligation expressly so states, when the law so provides or when the nature of the
obligation so requires.

Same; Same; Same; Where the promissory note expressly states that the three signatories therein are
jointly and severally liable, any one, some or all of them may be proceeded against for the entire
obligationthe choice is left to the solidary creditor to determine against whom he will enforce
collection.Because the promissory note involved in this case expressly states that the three signatories
therein are jointly and severally liable, any one, some or all of them may be proceeded against for the
entire obligation. The choice is left to the solidary creditor to determine against whom he will enforce
collection. Consequently, the dismissal of the case against Judge Pontanosas may not be deemed as
having discharged petitioner from liability as well. As regards Naybe, suffice it to say that the court never
acquired jurisdiction over him. Petitioner, therefore, may only have recourse against his co-makers, as
provided by law.
PETITION for review on certiorari of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.


581

VOL. 257, JUNE 26, 1996


581
Inciong, Jr. vs. Court of Appeals
Emilio G. Abrogena for petitioner.
Teogenes X. Velez for private respondent.
ROMERO, J.:

This is a petition for review on certiorari of the decision of the Court of Appeals affirming that of the
Regional Trial Court of Misamis Oriental, Branch 18,1 which disposed of Civil Case No. 10507 for
collection of a sum of money and damages, as follows:
WHEREFORE, defendant BALDOMERO L. INCIONG, JR. is adjudged solidarily liable and ordered to pay to
the plaintiff Philippine Bank of Communications, Cagayan de Oro City, the amount of FIFTY THOUSAND
PESOS (P50,000.00), with interest thereon from May 5, 1983 at 16% per annum until fully paid; and 6%
per annum on the total amount due, as liquidated damages or penalty from May 5, 1983 until fully paid;
plus 10% of the total amount due for expenses of litigation and attorneys fees; and to pay the costs.
The counterclaim, as well as the cross claim, are dismissed for lack of merit.

SO ORDERED.
Petitioners liability resulted from the promissory note in the amount of P50,000.00 which he signed
with Rene C. Naybe and Gregorio D. Pantanosas on February 3, 1983, holding themselves jointly and
severally liable to private respondent Philippine Bank of Communications, Cagayan de Oro City branch.
The promissory note was due on May 5, 1983.
Said due date expired without the promissors having paid their obligation. Consequently, on November
14, 1983 and on June 8, 1984, private respondent sent petitioner telegrams demanding payment
thereof.2 On December 11, 1984 private respondent also sent by registered mail a final letter of
_____________________

1 Presided by Judge Senen C. Pearanda.


2 Exhs. D-1 & D.
582

582
SUPREME COURT REPORTS ANNOTATED
Inciong, Jr. vs. Court of Appeals
demand to Rene C. Naybe. Since both obligors did not respond to the demands made, private
respondent filed on January 24, 1986 a complaint for collection of the sum of P50,000.00 against the
three obligors.
On November 25, 1986, the complaint was dismissed for failure of the plaintiff to prosecute the case.
However, on January 9, 1987, the lower court reconsidered the dismissal order and required the sheriff
to serve the summonses. On January 27, 1987, the lower court dismissed the case against defendant
Pantanosas as prayed for by the private respondent herein. Meanwhile, only the summons addressed to
petitioner was served as the sheriff learned that defendant Naybe had gone to Saudi Arabia.
In his answer, petitioner alleged that sometime in January 1983, he was approached by his friend, Rudy
Campos, who told him that he was a partner of Pio Tio, the branch manager of private respondent in
Cagayan de Oro City, in the falcata logs operation business. Campos also intimated to him that Rene C.
Naybe was interested in the business and would contribute a chainsaw to the venture. He added that,
although Naybe had no money to buy the equipment, Pio Tio had assured Naybe of the approval of a
loan he would make with private respondent. Campos then persuaded petitioner to act as a co-maker
in the said loan. Petitioner allegedly acceded but with the understanding that he would only be a comaker for the loan of P5,000.00.

Petitioner alleged further that five (5) copies of a blank promissory note were brought to him by Campos
at his office. He affixed his signature thereto but in one copy, he indicated that he bound himself only
for the amount of P5,000.00. Thus, it was by trickery, fraud and misrepresentation that he was made
liable for the amount of P50,000.00.
In the aforementioned decision of the lower court, it noted that the typewritten figure 50,000
clearly appears directly below the admitted signature of the petitioner in the promissory note.3 Hence,
the latters uncorroborated testi__________________

3 Exh. A.
583

VOL. 257, JUNE 26, 1996


583
Inciong, Jr. vs. Court of Appeals
mony on his limited liability cannot prevail over the presumed regularity and fairness of the transaction,
under Sec. 5 (q) of Rule 131. The lower court added that it was rather odd for petitioner to have
indicated in a copy and not in the original, of the promissory note, his supposed obligation in the
amount of P5,000.00 only. Finally, the lower court held that, even granting that said limited amount had
actually been agreed upon, the same would have been merely collateral between him and Naybe and,
therefore, not binding upon the private respondent as creditor-bank.
The lower court also noted that petitioner was a holder of a Bachelor of Laws degree and a labor
consultant who was supposed to take due care of his concerns, and that, on the witness stand, Pio Tio
denied having participated in the alleged business venture although he knew for a fact that the falcata
logs operation was encouraged by the bank for its export potential.
Petitioner appealed the said decision to the Court of Appeals which, in its decision of August 31, 1990,
affirmed that of the lower court. His motion for reconsideration of the said decision having been denied,
he filed the instant petition for review on certiorari.
On February 6, 1991, the Court denied the petition for failure of petitioner to comply with the Rules of
Court and paragraph 2 of Circular No. 1-88, and to sufficiently show that respondent court had
committed any reversible error in its questioned decision.4 His motion for the reconsideration of the
denial of his petition was likewise denied with finality in the Resolution of April 24, 1991.5 Thereafter,
petitioner filed a motion for leave to file a second motion for reconsideration which, in the Resolution of

May 27, 1991, the Court denied. In the same Resolution, the Court ordered the entry of judgment in this
case.6
Unfazed, petitioner filed a motion for leave to file a motion
_________________

4 Rollo, p. 30.
5 Ibid., p. 37.
6 Ibid., p. 46.
584

584
SUPREME COURT REPORTS ANNOTATED
Inciong, Jr. vs. Court of Appeals
for clarification. In the latter motion, he asserted that he had attached Registry Receipt No. 3268 to page
14 of the petition in compliance with Circular No. 1-88. Thus, on August 7, 1991, the Court granted his
prayer that his petition be given due course and reinstated the same.7
Nonetheless, we find the petition unmeritorious.
Annexed to the petition is a copy of an affidavit executed on May 3, 1988, or after the rendition of the
decision of the lower court, by Gregorio Pantanosas, Jr., an MTCC judge and petitioners co-maker in the
promissory note. It supports petitioners allegation that they were induced to sign the promissory note
on the belief that it was only for P5,000.00, adding that it was Campos who caused the amount of the
loan to be increased to P50,000.00.
The affidavit is clearly intended to buttress petitioners contention in the instant petition that the Court
of Appeals should have declared the promissory note null and void on the following grounds: (a) the
promissory note was signed in the office of Judge Pantanosas, outside the premises of the bank; (b) the
loan was incurred for the purpose of buying a secondhand chainsaw which cost only P5,000.00; (c) even
a new chainsaw would cost only P27,500.00; (d) the loan was not approved by the board or credit
committee which was the practice, as it exceeded P5,000.00; (e) the loan had no collateral; (f) petitioner
and Judge Pantanosas were not present at the time the loan was released in contravention of the bank
practice, and (g) notices of default are sent simultaneously and separately but no notice was validly sent
to him.8 Finally, petitioner contends that in signing the promissory note, his consent was vitiated by

fraud as, contrary to their agreement that the loan was only for the amount of P5,000.00, the
promissory note stated the amount of P50,000.00.
The above-stated points are clearly factual. Petitioner is to be reminded of the basic rule that this Court
is not a trier of
________________

7 Ibid., p. 50.
8 Petition, pp. 6-7.
585

VOL. 257, JUNE 26, 1996


585
Inciong, Jr. vs. Court of Appeals
facts. Having lost the chance to fully ventilate his factual claims below, petitioner may no longer be
accorded the same opportunity in the absence of grave abuse of discretion on the part of the court
below. Had he presented Judge Pantanosas affidavit before the lower court, it would have
strengthened his claim that the promissory note did not reflect the correct amount of the loan.
Nor is there merit in petitioners assertion that since the promissory note is not a public deed with the
formalities prescribed by law but x x x a mere commercial paper which does not bear the signature of x x
x attesting witnesses, parol evidence may overcome the contents of the promissory note.9 The first
paragraph of the parol evidence rule10 states:
When the terms of an agreement have been reduced to writing, it is considered as containing all the
terms agreed upon and there can be, between the parties and their successors in interest, no evidence
of such terms other than the contents of the written agreement.
Clearly, the rule does not specify that the written agreement be a public document.
What is required is that the agreement be in writing as the rule is in fact founded on long experience
that written evidence is so much more certain and accurate than that which rests in fleeting memory
only, that it would be unsafe, when parties have expressed the terms of their contract in writing, to
admit weaker evidence to control and vary the stronger and to show that the parties intended a
different contract from that expressed in the writing signed by them.11 Thus, for the parol evidence
rule to apply, a written contract need not be in any particular form, or be signed by both parties.12 As a
general rule, bills, notes and other instruments

__________________

9 Petition, p. 9; Rollo, p. 14.


10 Sec. 9, Rule 130, Rules of Court.
11 FRANCISCO, THE RULES OF COURT OF THE PHILIPPINES, Vol. VII, Part I, 1990 ed., p. 179.
12 32A C.J.S. 269.
586

586
SUPREME COURT REPORTS ANNOTATED
Inciong, Jr. vs. Court of Appeals
of a similar nature are not subject to be varied or contradicted by parol or extrinsic evidence.13
By alleging fraud in his answer,14 petitioner was actually in the right direction towards proving that he
and his co-makers agreed to a loan of P5,000.00 only considering that, where a parol contemporaneous
agreement was the inducing and moving cause of the written contract, it may be shown by parol
evidence.15 However, fraud must be established by clear and convincing evidence, mere preponderance
of evidence, not even being adequate.16 Petitioners attempt to prove fraud must, therefore, fail as it
was evidenced only by his own uncorroborated and, expectedly, self-serving testimony.
Petitioner also argues that the dismissal of the complaint against Naybe, the principal debtor, and
against Pantanosas, his co-maker, constituted a release of his obligation, especially because the
dismissal of the case against Pantanosas was upon the motion of private respondent itself. He cites as
basis for his argument, Article 2080 of the Civil Code which provides that:
The guarantors, even though they be solidary, are released from their obligation whenever by some act
of the creditor, they cannot be subrogated to the rights, mortgages, and preferences of the latter.
It is to be noted, however, that petitioner signed the promissory note as a solidary co-maker and not as
a guarantor. This is patent even from the first sentence of the promissory note which states as follows:
Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY promise to pay to the
PHILIPPINE
___________________

13 Ibid., at p. 251.
14 Record, p. 38.
15 FRANCISCO, supra, p. 193.
16 Cu v. Court of Appeals, G.R. No. 75504, April 2, 1991, 195 SCRA 647, 657 citing Carenan v. Court of
Appeals, G.R. No. 84358, May 31, 1989 and Centenera v. Garcia Palicio, 29 Phil. 470 (1915).
587

VOL. 257, JUNE 26, 1996


587
Inciong, Jr. vs. Court of Appeals
BANK OF COMMUNICATIONS at its office in the City of Cagayan de Oro, Philippines the sum of FIFTY
THOUSAND ONLY (P50,000.00) Pesos, Philippine Currency, together with interest x x x at the rate of
SIXTEEN (16) per cent per annum until fully paid.
A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation,
and each creditor is entitled to demand the whole obligation.17 On the other hand, Article 2047 of the
Civil Code states:
By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I
of this Book shall be observed. In such a case the contract is called a suretyship. (Italics supplied.)
While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is
different from that of a solidary debtor. Thus, Tolentino explains:
A guarantor who binds himself in solidum with the principal debtor under the provisions of the second
paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference
between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he
assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the
other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary codebtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the
Civil Code.18
Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several obligations.
Under Art.

___________________

17 TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol. IV, 1991 ed., p. 217.
18 Supra, Vol. V, 1992 ed., p. 502.
588

588
SUPREME COURT REPORTS ANNOTATED
Inciong, Jr. vs. Court of Appeals
1207 thereof, when there are two or more debtors in one and the same obligation, the presumption is
that the obligation is joint so that each of the debtors is liable only for a proportionate part of the debt.
There is a solidary liability only when the obligation expressly so states, when the law so provides or
when the nature of the obligation so requires.19
Because the promissory note involved in this case expressly states that the three signatories therein are
jointly and severally liable, any one, some or all of them may be proceeded against for the entire
obligation.20 The choice is left to the solidary creditor to determine against whom he will enforce
collection.21 Consequently, the dismissal of the case against Judge Pantanosas may not be deemed as
having discharged petitioner from liability as well. As regards Naybe, suffice it to say that the court never
acquired jurisdiction over him. Petitioner, therefore, may only have recourse against his co-makers, as
provided by law.
WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned decision
of the Court of Appeals is AFFIRMED. Costs against petitioner.
SO ORDERED.
Regalado (Chairman), Puno, Mendoza and Torres, Jr., JJ., concur.
Petition denied, judgment affirmed.
___________________

19 Sesbreo v. Court of Appeals, G.R. No. 89252, May 24, 1993, 222 SCRA 466, 481.
20 Art. 1216, Civil Code; Ouano Arrastre Service, Inc. v. Aleonar, G.R. No. 97664, October 10, 1991, 202
SCRA 619, 625.

21 Dimayuga v. Phil. Commercial & Industrial Bank, G.R. No. 42542, August 5, 1991, 200 SCRA 143, 148
citing PNB v. Independent Planters Association, Inc., L-28046, May 16, 1983, 122 SCRA 113.
589

VOL. 257, JUNE 26, 1996


589
Vda. de Nazareno vs. Court of Appeals
Notes.Even when a document appears on its face to be a sale with pacto de retro the owner of the
property may prove that the contract is really a loan with mortgage by raising as an issue the fact that
the document does not express the true intent and agreement of the parties, and parol evidence then
becomes competent and admissible to prove that the instrument was given merely as a security for the
repayment of the loan. (Olea vs. Court of Appeals, 247 SCRA 274 [1995])
Explanatory evidence may be received to show the circumstances under which a document has been
made and to what debt it relates; A party, by failing to object to the parol evidence presented, waives
the protection of the parol evidence rule. (Willex Plastic Industries Corporation vs. Court of Appeals, 256
SCRA 478 [1996])
o0o

Copyright 2014 Central Book Supply, Inc. All rights reserved. [Inciong, Jr. vs. Court of Appeals, 257
SCRA 578(1996)]

G.R. No. 170325. September 26, 2008.*


PHILIPPINE NATIONAL BANK, petitioner, vs. ERLANDO T. RODRIGUEZ and NORMA RODRIGUEZ,
respondents.
Courts; Judgments; Amendment of decisions is more acceptable than an erroneous judgment attaining
finality to the prejudice of innocent parties; The Court does not sanction careless disposition of cases by
courts of justicethe highest degree of diligence must go into the study of every controversy submitted
for decision by litigants.
_______________

** Justice Teresita J. Leonardo de Castro was designated to sit as additional member, replacing Justice
Antonio Eduardo B. Nachura per Raffle dated 23 May 2008.
* THIRD DIVISION.
514

514
SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Rodriguez
Prefatorily, amendment of decisions is more acceptable than an erroneous judgment attaining finality to
the prejudice of innocent parties. A court discovering an erroneous judgment before it becomes final
may, motu proprio or upon motion of the parties, correct its judgment with the singular objective of
achieving justice for the litigants. However, a word of caution to lower courts, the CA in Cebu in this
particular case, is in order. The Court does not sanction careless disposition of cases by courts of justice.
The highest degree of diligence must go into the study of every controversy submitted for decision by
litigants. Every issue and factual detail must be closely scrutinized and analyzed, and all the applicable
laws judiciously studied, before the promulgation of every judgment by the court. Only in this manner
will errors in judgments be avoided.
Negotiable Instruments Law; Checks; Fictitious Payee Rule; As a rule, when the payee is fictitious or not
intended to be the true recipient of the proceeds, the check is considered as a bearer instrument.As a
rule, when the payee is fictitious or not intended to be the true recipient of the proceeds, the check is
considered as a bearer instrument. A check is a bill of exchange drawn on a bank payable on demand.
It is either an order or a bearer instrument.
Same; Same; Same; Bearer and Order Instruments; Words and Phrases; An order instrument
requires an indorsement from the payee or holder before it may be validly negotiated while a bearer
instrument is negotiable by mere delivery.The distinction between bearer and order instruments lies
in their manner of negotiation. Under Section 30 of the NIL, an order instrument requires an
indorsement from the payee or holder before it may be validly negotiated. A bearer instrument, on the
other hand, does not require an indorsement to be validly negotiated. It is negotiable by mere delivery.
The provision reads: SEC. 30. What constitutes negotiation.An instrument is negotiated when it is
transferred from one person to another in such manner as to constitute the transferee the holder
thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the
indorsement of the holder completed by delivery.
Same; Same; Same; Same; Under Section 9(c) of the Negotiable Instruments Law (NIL), a check payable
to a specified payee may nevertheless be considered as a bearer instrument if it is payable to

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Philippine National Bank vs. Rodriguez
the order of a fictitious or non-existing person, and such fact is known to the person making it so
payable.A check that is payable to a specified payee is an order instrument. However, under Section
9(c) of the NIL, a check payable to a specified payee may nevertheless be considered as a bearer
instrument if it is payable to the order of a fictitious or non-existing person, and such fact is known to
the person making it so payable. Thus, checks issued to Prinsipe Abante or Si Malakas at si Maganda,
who are well-known characters in Philippine mythology, are bearer instruments because the named
payees are fictitious and non-existent.
Same; Same; Same; Same; Words and Phrases; Legal Research; In discussing the broader meaning of the
term fictitious as used in the Negotiable Instruments Law (NIL), court rulings in the United States are a
logical starting point since our law on negotiable instruments was directly lifted from the Uniform
Negotiable Instruments Law of the United States; A review of US jurisprudence yields that an actual,
existing, and living payee may also be fictitious if the maker of the check did not intend for the payee
to in fact receive the proceeds of the checkif the payee is not the intended recipient of the proceeds
of the check, the payee is considered a fictitious payee and the check is a bearer instrument; In a
fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears the loss, the
underlying theory being that one cannot expect a fictitious payee to negotiate the check by placing his
indorsement thereon.We have yet to discuss a broader meaning of the term fictitious as used in the
NIL. It is for this reason that We look elsewhere for guidance. Court rulings in the United States are a
logical starting point since our law on negotiable instruments was directly lifted from the Uniform
Negotiable Instruments Law of the United States. A review of US jurisprudence yields that an actual,
existing, and living payee may also be fictitious if the maker of the check did not intend for the payee
to in fact receive the proceeds of the check. This usually occurs when the maker places a name of an
existing payee on the check for convenience or to cover up an illegal activity. Thus, a check made
expressly payable to a non-fictitious and existing person is not necessarily an order instrument. If the
payee is not the intended recipient of the proceeds of the check, the payee is considered a fictitious
payee and the check is a bearer instrument. In a fictitious-payee situation, the drawee bank is absolved
from liability and the drawer bears the loss. When faced with a
516

516

SUPREME COURT REPORTS ANNOTATED


Philippine National Bank vs. Rodriguez
check payable to a fictitious payee, it is treated as a bearer instrument that can be negotiated by
delivery. The underlying theory is that one cannot expect a fictitious payee to negotiate the check by
placing his indorsement thereon. And since the maker knew this limitation, he must have intended for
the instrument to be negotiated by mere delivery. Thus, in case of controversy, the drawer of the check
will bear the loss. This rule is justified for otherwise, it will be most convenient for the maker who
desires to escape payment of the check to always deny the validity of the indorsement. This despite the
fact that the fictitious payee was purposely named without any intention that the payee should receive
the proceeds of the check.
Same; Same; Same; Under the commercial bad faith exception to the fictitious-payee rule, a showing of
commercial bad faith on the part of the drawee bank, or any transferee of the check for that matter, will
work to strip it of this defense.There is a commercial bad faith exception to the fictitious-payee rule. A
showing of commercial bad faith on the part of the drawee bank, or any transferee of the check for that
matter, will work to strip it of this defense. The exception will cause it to bear the loss. Commercial bad
faith is present if the transferee of the check acts dishonestly, and is a party to the fraudulent scheme.
Said the US Supreme Court in Getty: Consequently, a transferees lapse of wary vigilance, disregard of
suspicious circumstances which might have well induced a prudent banker to investigate and other
permutations of negligence are not relevant considerations under Section 3-405 x x x. Rather, there is a
commercial bad faith exception to UCC 3-405, applicable when the transferee acts dishonestly
where it has actual knowledge of facts and circumstances that amount to bad faith, thus itself becoming
a participant in a fraudulent scheme. x x x Such a test finds support in the text of the Code, which omits
a standard of care requirement from UCC 3-405 but imposes on all parties an obligation to act with
honesty in fact. x x x
Same; Same; Same; For the fictitious-payee rule to be available as a defense, the bank must show that
the maker did not intend for the named payees to be part of the transaction involving the checksmere
lack of knowledge on the part of the payees of the existence of the checks is not tantamount to a lack of
intention on the part of maker that the payees would not receive the checks proceeds; It is a requisite
condition of a fictitious-payee situation that the maker of the check intended for the payee to have no
interest in the transaction.For the
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Philippine National Bank vs. Rodriguez

fictitious-payee rule to be available as a defense, PNB must show that the makers did not intend for the
named payees to be part of the transaction involving the checks. At most, the banks thesis shows that
the payees did not have knowledge of the existence of the checks. This lack of knowledge on the part of
the payees, however, was not tantamount to a lack of intention on the part of respondents-spouses that
the payees would not receive the checks proceeds. Considering that respondents-spouses were
transacting with PEMSLA and not the individual payees, it is understandable that they relied on the
information given by the officers of PEMSLA that the payees would be receiving the checks. Verily, the
subject checks are presumed order instruments. This is because, as found by both lower courts, PNB
failed to present sufficient evidence to defeat the claim of respondents-spouses that the named payees
were the intended recipients of the checks proceeds. The bank failed to satisfy a requisite condition of a
fictitious-payee situationthat the maker of the check intended for the payee to have no interest in the
transaction. Because of a failure to show that the payees were fictitious in its broader sense, the
fictitious-payee rule does not apply. Thus, the checks are to be deemed payable to order. Consequently,
the drawee bank bears the loss.
Same; Same; Same; Banks and Banking; A bank that regularly processes checks that are neither payable
to the customer nor duly indorsed by the payee is apparently grossly negligent in its operations.PNB
was remiss in its duty as the drawee bank. It does not dispute the fact that its teller or tellers accepted
the 69 checks for deposit to the PEMSLA account even without any indorsement from the named
payees. It bears stressing that order instruments can only be negotiated with a valid indorsement. A
bank that regularly processes checks that are neither payable to the customer nor duly indorsed by the
payee is apparently grossly negligent in its operations. This Court has recognized the unique public
interest possessed by the banking industry and the need for the people to have full trust and confidence
in their banks. For this reason, banks are minded to treat their customers accounts with utmost care,
confidence, and honesty.
Same; Same; Same; Same; In a checking transaction, the drawee bank has the duty to verify the
genuineness of the signature of the drawer and to pay the check strictly in accordance with the
518

518
SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Rodriguez
drawers instructions, i.e., to the named payee in the check.In a checking transaction, the drawee
bank has the duty to verify the genuineness of the signature of the drawer and to pay the check strictly
in accordance with the drawers instructions, i.e., to the named payee in the check. It should charge to
the drawers accounts only the payables authorized by the latter. Otherwise, the drawee will be

violating the instructions of the drawer and it shall be liable for the amount charged to the drawers
account.
Banks and Banking; The trustworthiness of bank employees is indispensable to maintain the stability of
the banking industrybanks are enjoined to be extra vigilant in the management and supervision of
their employees.PNB was negligent in the selection and supervision of its employees. The
trustworthiness of bank employees is indispensable to maintain the stability of the banking industry.
Thus, banks are enjoined to be extra vigilant in the management and supervision of their employees. In
Bank of the Philippine Islands v. Court of Appeals, 216 SCRA 51 (1992), this Court cautioned thus: Banks
handle daily transactions involving millions of pesos. By the very nature of their work the degree of
responsibility, care and trustworthiness expected of their employees and officials is far greater than
those of ordinary clerks and employees. For obvious reasons, the banks are expected to exercise the
highest degree of diligence in the selection and supervision of their employees.
Actions; Default; Failure to file an answer is a ground for a declaration that defendant is in default.We
note that the RTC failed to thresh out the merits of PNBs cross-claim against its co-defendants PEMSLA
and MPC. The records are bereft of any pleading filed by these two defendants in answer to the
complaint of respondents-spouses and cross-claim of PNB. The Rules expressly provide that failure to
file an answer is a ground for a declaration that defendant is in default. Yet, the RTC failed to sanction
the failure of both PEMSLA and MPC to file responsive pleadings. Verily, the RTC dismissal of PNBs
cross-claim has no basis. Thus, this judgment shall be without prejudice to whatever action the bank
might take against its co-defendants in the trial court.
PETITION for review on certiorari of an amended decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
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Philippine National Bank vs. Rodriguez
Kenneth A. Alovera for petitioner.
Joel G. Dojillo for respondents.
REYES, R.T., J.:
WHEN the payee of the check is not intended to be the true recipient of its proceeds, is it payable to
order or bearer? What is the fictitious-payee rule and who is liable under it? Is there any exception?

These questions seek answers in this petition for review on certiorari of the Amended Decision1 of the
Court of Appeals (CA) which affirmed with modification that of the Regional Trial Court (RTC).2
The Facts
The facts as borne by the records are as follows:
Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner Philippine National Bank
(PNB), Amelia Avenue Branch, Cebu City. They maintained savings and demand/checking accounts,
namely, PNBig Demand Deposits (Checking/Current Account No. 810624-6 under the account name
Erlando and/or Norma Rodriguez), and PNBig Demand Deposit (Checking/Current Account No. 810480-4
under the account name Erlando T. Rodriguez).
The spouses were engaged in the informal lending business. In line with their business, they had a
discounting3
_______________

1 CA-G.R. CV No. 76645 dated October 11, 2005. Penned by Associate Justice Isaias P. Dicdican, with
Associate Justices Pampio A. Abarintos and Ramon M. Bato, Jr., concurring; Rollo, pp. 29-42.
2 Civil Case No. 99-10892, Regional Trial Court in Negros Occidental, Branch 51, Bacolod City, dated May
10, 2002; CA Rollo, pp. 63-72.
3 A financing scheme where a postdated check is exchanged for a current check with a discounted face
value.
520

520
SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Rodriguez
arrangement with the Philnabank Employees Savings and Loan Association (PEMSLA), an association of
PNB employees. Naturally, PEMSLA was likewise a client of PNB Amelia Avenue Branch. The association
maintained current and savings accounts with petitioner bank.
PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the postdated
checks issued to members whenever the association was short of funds. As was customary, the spouses
would replace the postdated checks with their own checks issued in the name of the members.

It was PEMSLAs policy not to approve applications for loans of members with outstanding debts. To
subvert this policy, some PEMSLA officers devised a scheme to obtain additional loans despite their
outstanding loan accounts. They took out loans in the names of unknowing members, without the
knowledge or consent of the latter. The PEMSLA checks issued for these loans were then given to the
spouses for rediscounting. The officers carried this out by forging the indorsement of the named payees
in the checks.
In return, the spouses issued their personal checks (Rodriguez checks) in the name of the members and
delivered the checks to an officer of PEMSLA. The PEMSLA checks, on the other hand, were deposited by
the spouses to their account.
Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings account without any
indorsement from the named payees. This was an irregular procedure made possible through the
facilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB Branch. It appears
that this became the usual practice for the parties.
For the period November 1998 to February 1999, the spouses issued sixty-nine (69) checks, in the total
amount of
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521
Philippine National Bank vs. Rodriguez
P2,345,804.00. These were payable to forty-seven (47) individual payees who were all members of
PEMSLA.4
_______________

4 Current Account No. 810480-4 in the name of Erlando T. Rodriguez


Name of Payees

Check No.

Date Issued

Amount

01. Simon Carmelo B. Libo-on

0001110

11.27.98

40,934.00

02. Simon Carmelo Libo-on

0000011589

02.01.99

29,877.00

03. Simon Libo-on

0000011567

01.25.99

50,350.00

04. Pacifico Castillo

0000011565

01.22.99

39,995.00

05. Jose Bago-od

0000011587

02.01.99

38,000.00

06. Dioleto Delcano

0000011594

02.02.99

28,500.00

07. Antonio Maravilla

0000011593

02.02.99

37,715.00

08. Josel Juguan0000011595

02.02.99

45,002.00

09. Domingo Roa, Jr.

0000011591

02.01.99

35,373.00

10. Antonio Maravilla

0001657

02.05.99

39,900.00

11. Christy Mae Berden 0001655

02.05.99

28,595.00

12. Nelson Guadalupe 0000011588

02.01.99

34,819.00

13. Antonio Londres

0000011596

02.05.99

32,851.00

14. Arnel Navarosa

0000011597

02.05.99

28,785.00

15. Estrella Alunan

0000011600

02.05.99

32,509.00

16. Dennis Montemayor

0000011598

02.05.99

43,691.00

17. Mickle Argusar

0000011599

02.05.99

31,498.00

18. Perlita Gallego

0000011564

01.21.99

38,000.00

19. Sheila Arcobillas

0000011563

01.19.99

38,000.00

20. Danilo Villarosa

0001656

02.05.99

32,006.00

21. Almie Borce 0000011583


22. Ronie Aragon

02.01.99

0000011566

01.20.99

Total: 775,337.00

522

522
SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Rodriguez

20,093.00
28,844.00

Petitioner PNB eventually found out about these fraudulent acts. To put a stop to this scheme, PNB
closed the current
_______________

Current Account No. 810624-6 in the name of Erlando and/or Norma Rodriguez
Name of Payees

Check No.

Date Issued

Amount

01. Elma Bacarro

0001944

01.15.99

37,449.00

02. Delfin Recarder

0001927

01.14.99

30,020.00

03. Elma Bacarro

0001926

01.14.99

34,884.00

04. Perlita Gallego

0001924

01.14.99

35,502.00

05. Jose Weber 0001932

01.14.99

38,323.00

06. Rogelio Alfonso

0001922

01.14.99

43,852.00

07. Gianni Amantillo

0001928

01.14.99

32,414.00

08. Eddie Bago-od

0001929

01.14.99

38,361.00

09. Manuel Longero

0001933

01.14.99

38,285.00

10. Anavic Lorenzo

0001923

01.14.99

29,982.00

11. Corazon Salva

0001945

01.15.99

37,449.00

12. Arlene Diamante

0001951

01.18.99

39,995.00

13. Joselin Laurilla

0001955

01.18.99

37,221.00

14. Andy Javellana

0001960

01.22.99

30,923.00

15. Erdelinda Porras

0001958

01.22.99

40,679.00

16. Nelson Guadalupe 0001956

01.18.99

24,700.00

17. Barnard Escano

0001969

01/22/99

38,304.00

18. Buena Coscolluela 0001968

01/22/99

37,706.00

19. Erdelinda Porras

02/01/99

36,727.00

0002021

20. Neda Algara 0002023

02/01/99

38,000.00

21. Eddie Bago-od

0002030

02/02/99

26,600.00

22. Gianni Amantillo

0002032

02/02/99

19,000.00

23. Alfredo Llena

0002020

02/01/99

32,282.00

24. Emmanuel Fermo

0001972

01/22/99

36,376.00

25. Yvonne Ano-os

0001967

01/22/99

36,566.00

26. Joel Abibuag

0002022

02/01/99

37,981.00

523

VOL. 566, SEPTEMBER 26, 2008


523
Philippine National Bank vs. Rodriguez
account of PEMSLA. As a result, the PEMSLA checks deposited by the spouses were returned or
dishonored for the reason Account Closed. The corresponding Rodriguez checks, however, were
deposited as usual to the PEMSLA savings account. The amounts were duly debited from the Rodriguez
account. Thus, because the PEMSLA checks given as payment were returned, spouses Rodriguez
incurred losses from the rediscounting transactions.

_______________

27. Ma. Corazon Salva 0002029

02/02/99

25,270.00

28. Jose Bago-od

0001957

01/18/99

34,656.00

29. Avelino Brion

0001965

01/22/99

31,882.00

30. Mickle Algusar

0001962

01/22/99

25,004.00

31. Jose Weber 0001959

01/22/99

37,001.00

32. Joel Velasco 0002028

02/02/99

9,500.00

33. Elma Bacarro

0002031

02/02/99

23,750.00

34. Grace Tambis

0001952

01/18/99

39,995.00

35. Proceso Mailim

0001980

01/21/99

37,193.00

36. Ronnie Aragon

0001983

01/22/99

30,324.00

37. Danilo Villarosa

0001931

01/14/99

31,008.00

38. Joel Abibuag

0001954

01/18/99

26,600.00

39. Danilo Villarosa

0001984

01/22/99

26,790.00

40. Reynard Guia

0001985

01/22/99

42,959.00

41. Estrella Alunan

0001925

01/14/99

39,596.00

42. Eddie Bago-od

0001982

01/22/99

31,018.00

43. Jose Bago-od

0001982

01/22/99

37,240.00

44. Nicandro Aguilar

0001964

01/22/99

52,250.00

45. Guandencia Banaston

0001963

01/22/99

38,000.00

46. Dennis Montemayor

0001961

01/22/99

26,600.00

47. Eduardo Buglosa

0002027

01/02/99

14,250.00

Total ................. 1,570,467.00


Grand Total ........ 2,345,804.00
524

524
SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Rodriguez
RTC Disposition
Alarmed over the unexpected turn of events, the spouses Rodriguez filed a civil complaint for damages
against PEMSLA, the Multi-Purpose Cooperative of Philnabankers (MCP), and petitioner PNB. They
sought to recover the value of their checks that were deposited to the PEMSLA savings account
amounting to P2,345,804.00. The spouses contended that because PNB credited the checks to the
PEMSLA account even without indorsements, PNB violated its contractual obligation to them as
depositors. PNB paid the wrong payees, hence, it should bear the loss.

PNB moved to dismiss the complaint on the ground of lack of cause of action. PNB argued that the claim
for damages should come from the payees of the checks, and not from spouses Rodriguez. Since there
was no demand from the said payees, the obligation should be considered as discharged.
In an Order dated January 12, 2000, the RTC denied PNBs motion to dismiss.
In its Answer,5 PNB claimed it is not liable for the checks which it paid to the PEMSLA account without
any indorsement from the payees. The bank contended that spouses Rodriguez, the makers, actually did
not intend for the named payees to receive the proceeds of the checks. Consequently, the payees were
considered as fictitious payees as defined under the Negotiable Instruments Law (NIL). Being checks
made to fictitious payees which are bearer instruments, the checks were negotiable by mere delivery.
PNBs Answer included its cross-claim against its co-defendants PEMSLA and the MCP, praying that in
the event that judgment is rendered against the bank, the cross-defendants should be ordered to
reimburse PNB the amount it shall pay.
_______________

5 Rollo, pp. 64-69.


525

VOL. 566, SEPTEMBER 26, 2008


525
Philippine National Bank vs. Rodriguez
After trial, the RTC rendered judgment in favor of spouses Rodriguez (plaintiffs). It ruled that PNB
(defendant) is liable to return the value of the checks. All counterclaims and cross-claims were
dismissed. The dispositive portion of the RTC decision reads:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment, as follows:
1. Defendant is hereby ordered to pay the plaintiffs the total amount of P2,345,804.00 or reinstate or
restore the amount of P775,337.00 in the PNBig Demand Deposit Checking/Current Account No.
810480-4 of Erlando T. Rodriguez, and the amount of P1,570,467.00 in the PNBig Demand Deposit,
Checking/Current Account No. 810624-6 of Erlando T. Rodriguez and/or Norma Rodriguez, plus legal
rate of interest thereon to be computed from the filing of this complaint until fully paid;
2. The defendant PNB is hereby ordered to pay the plaintiffs the following reasonable amount of
damages suffered by them taking into consideration the standing of the plaintiffs being sugarcane
planters, realtors, residential subdivision owners, and other businesses:

(a) Consequential damages, unearned income in the amount of P4,000,000.00, as a result of their
having incurred great dificulty (sic) especially in the residential subdivision business, which was not
pushed through and the contractor even threatened to file a case against the plaintiffs;
(b) Moral damages in the amount of P1,000,000.00;
(c) Exemplary damages in the amount of P500,000.00;
(d) Attorneys fees in the amount of P150,000.00 considering that this case does not involve very
complicated issues; and for the
(e) Costs of suit.
526

526
SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Rodriguez
3. Other claims and counterclaims are hereby dismissed.6
CA Disposition

PNB appealed the decision of the trial court to the CA on the principal ground that the disputed checks
should be considered as payable to bearer and not to order.
In a Decision7 dated July 22, 2004, the CA reversed and set aside the RTC disposition. The CA concluded
that the checks were obviously meant by the spouses to be really paid to PEMSLA. The court a quo
declared:
We are not swayed by the contention of the plaintiffs-appellees (Spouses Rodriguez) that their cause of
action arose from the alleged breach of contract by the defendant-appellant (PNB) when it paid the
value of the checks to PEMSLA despite the checks being payable to order. Rather, we are more
convinced by the strong and credible evidence for the defendant-appellant with regard to the plaintiffsappellees and PEMSLAs business arrangementthat the value of the rediscounted checks of the
plaintiffs-appellees would be deposited in PEMSLAs account for payment of the loans it has approved in
exchange for PEMSLAs checks with the full value of the said loans. This is the only obvious explanation
as to why all the disputed sixty-nine (69) checks were in the possession of PEMSLAs errand boy for
presentment to the defendant-appellant that led to this present controversy. It also appears that the
teller who accepted the said checks was PEMSLAs officer, and that such was a regular practice by the
parties until the defendant-appellant discovered the scam. The logical conclusion, therefore, is that the

checks were never meant to be paid to order, but instead, to PEMSLA. We thus find no breach of
contract on the part of the defendant-appellant.
According to plaintiff-appellee Erlando Rodriguez testimony, PEMSLA allegedly issued post-dated
checks to its qualified members who had applied for loans. However, because of PEMSLAs insuffi_______________

6 CA Rollo, pp. 71-72.


7 Rollo, pp. 44-49. Penned by Associate Justice Isaias P. Dicdican, with Associate Justices Elvi John S.
Asuncion and Ramon M. Bato, Jr., concurring.
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VOL. 566, SEPTEMBER 26, 2008


527
Philippine National Bank vs. Rodriguez
ciency of funds, PEMSLA approached the plaintiffs-appellees for the latter to issue rediscounted checks
in favor of said applicant members. Based on the investigation of the defendant-appellant, meanwhile,
this arrangement allowed the plaintiffs-appellees to make a profit by issuing rediscounted checks, while
the officers of PEMSLA and other members would be able to claim their loans, despite the fact that they
were disqualified for one reason or another. They were able to achieve this conspiracy by using other
members who had loaned lesser amounts of money or had not applied at all. x x x.8 (Emphasis added)
The CA found that the checks were bearer instruments, thus they do not require indorsement for
negotiation; and that spouses Rodriguez and PEMSLA conspired with each other to accomplish this
money-making scheme. The payees in the checks were fictitious payees because they were not the
intended payees at all.
The spouses Rodriguez moved for reconsideration. They argued, inter alia, that the checks on their faces
were unquestionably payable to order; and that PNB committed a breach of contract when it paid the
value of the checks to PEMSLA without indorsement from the payees. They also argued that their cause
of action is not only against PEMSLA but also against PNB to recover the value of the checks.
On October 11, 2005, the CA reversed itself via an Amended Decision, the last paragraph and fallo of
which read:
In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-appellees Sps. Rodriguez for
the following:

1. Actual damages in the amount of P2,345,804 with interest at 6% per annum from 14 May 1999 until
fully paid;
2. Moral damages in the amount of P200,000;
3. Attorneys fees in the amount of P100,000; and
4. Costs of suit.
_______________

8 Id., at p. 47.
528

528
SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Rodriguez
WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by Us AFFIRMING WITH
MODIFICATION the assailed decision rendered in Civil Case No. 99-10892, as set forth in the immediately
next preceding paragraph hereof, and SETTING ASIDE Our original decision promulgated in this case on
22 July 2004.
SO ORDERED.9
The CA ruled that the checks were payable to order. According to the appellate court, PNB failed to
present sufficient proof to defeat the claim of the spouses Rodriguez that they really intended the
checks to be received by the specified payees. Thus, PNB is liable for the value of the checks which it
paid to PEMSLA without indorsements from the named payees. The award for damages was deemed
appropriate in view of the failure of PNB to treat the Rodriguez account with the highest degree of care
considering the fiduciary nature of their relationship, which constrained respondents to seek legal
action.
Hence, the present recourse under Rule 45.
Issues

The issues may be compressed to whether the subject checks are payable to order or to bearer and who
bears the loss?

PNB argues anew that when the spouses Rodriguez issued the disputed checks, they did not intend for
the named payees to receive the proceeds. Thus, they are bearer instruments that could be validly
negotiated by mere delivery. Further, testimonial and documentary evidence presented during trial
amply proved that spouses Rodriguez and the officers of PEMSLA conspired with each other to defraud
the bank.
_______________

9 Id., at p. 41.
529

VOL. 566, SEPTEMBER 26, 2008


529
Philippine National Bank vs. Rodriguez
Our Ruling
Prefatorily, amendment of decisions is more acceptable than an erroneous judgment attaining finality to
the prejudice of innocent parties. A court discovering an erroneous judgment before it becomes final
may, motu proprio or upon motion of the parties, correct its judgment with the singular objective of
achieving justice for the litigants.10
However, a word of caution to lower courts, the CA in Cebu in this particular case, is in order. The Court
does not sanction careless disposition of cases by courts of justice. The highest degree of diligence must
go into the study of every controversy submitted for decision by litigants. Every issue and factual detail
must be closely scrutinized and analyzed, and all the applicable laws judiciously studied, before the
promulgation of every judgment by the court. Only in this manner will errors in judgments be avoided.
Now to the core of the petition.
As a rule, when the payee is fictitious or not intended to be the true recipient of the proceeds, the check
is considered as a bearer instrument. A check is a bill of exchange drawn on a bank payable on
demand.11 It is either an order or a bearer instrument. Sections 8 and 9 of the NIL states:
_______________

10 Veluz v. Justice of the Peace of Sariaga, 42 Phil. 557 (1921).

11 Negotiable Instruments Law, Sec. 185. Check defined.A check is a bill of exchange drawn on a bank
payable on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of
exchange payable on demand apply to a check.
Section 126. Bill of exchange defined.A bill of exchange is an unconditional order in writing
addressed by one person to another, signed by the person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order
or to bearer.
530

530
SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Rodriguez
SEC. 8. When payable to order.The instrument is payable to order where it is drawn payable to the
order of a specified person or to him or his order. It may be drawn payable to the order of
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named or otherwise indicated therein
with reasonable certainty.
SEC. 9. When payable to bearer.The instrument is payable to bearer
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; or
(c) When it is payable to the order of a fictitious or non-existing person, and such fact is known to the
person making it so payable; or
(d) When the name of the payee does not purport to be the name of any person; or
(e) Where the only or last indorsement is an indorsement in blank.12 (Italics supplied)

The distinction between bearer and order instruments lies in their manner of negotiation. Under Section
30 of the NIL, an order instrument requires an indorsement from the payee or holder before it may be
validly negotiated. A bearer instrument, on the other hand, does not require an indorsement to be
validly negotiated. It is negotiable by mere delivery. The provision reads:
SEC. 30. What constitutes negotiation.An instrument is negotiated when it is transferred from one
person to another in such
_______________

12 Id.
531

VOL. 566, SEPTEMBER 26, 2008


531
Philippine National Bank vs. Rodriguez
manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by
delivery; if payable to order, it is negotiated by the indorsement of the holder completed by delivery.
A check that is payable to a specified payee is an order instrument. However, under Section 9(c) of the
NIL, a check payable to a specified payee may nevertheless be considered as a bearer instrument if it is
payable to the order of a fictitious or non-existing person, and such fact is known to the person making
it so payable. Thus, checks issued to Prinsipe Abante or Si Malakas at si Maganda, who are wellknown characters in Philippine mythology, are bearer instruments because the named payees are
fictitious and non-existent.
We have yet to discuss a broader meaning of the term fictitious as used in the NIL. It is for this reason
that We look elsewhere for guidance. Court rulings in the United States are a logical starting point since
our law on negotiable instruments was directly lifted from the Uniform Negotiable Instruments Law of
the United States.13
A review of US jurisprudence yields that an actual, existing, and living payee may also be fictitious if
the maker of the check did not intend for the payee to in fact receive the proceeds of the check. This
usually occurs when the maker places a name of an existing payee on the check for convenience or to
cover up an illegal activity.14 Thus, a check made expressly payable to a non-fictitious and existing
person is not necessarily an order instrument. If the payee is not the intended recipient of the proceeds
of the check, the payee is considered a fictitious payee and the check is a bearer instrument.
_______________

13 Campos, J.C., Jr. and Lopez-Campos, M.C., Notes and Selected Cases on Negotiable Instruments Law
(1994), 5th ed., pp. 8-9.
14 Bourne v. Maryland Casualty, 192 SE 605 (1937); Norton v. City Bank & Trust Co., 294 F. 839 (1923);
United States v. Chase Nat. Bank, 250 F. 105 (1918).
532

532
SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Rodriguez
In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears the loss.
When faced with a check payable to a fictitious payee, it is treated as a bearer instrument that can be
negotiated by delivery. The underlying theory is that one cannot expect a fictitious payee to negotiate
the check by placing his indorsement thereon. And since the maker knew this limitation, he must have
intended for the instrument to be negotiated by mere delivery. Thus, in case of controversy, the drawer
of the check will bear the loss. This rule is justified for otherwise, it will be most convenient for the
maker who desires to escape payment of the check to always deny the validity of the indorsement. This
despite the fact that the fictitious payee was purposely named without any intention that the payee
should receive the proceeds of the check.15
The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty Insurance Bank.16 In the said
case, the corporation Mueller & Martin was defrauded by George L. Martin, one of its authorized
signatories. Martin drew seven checks payable to the German Savings Fund Company Building
Association (GSFCBA) amounting to $2,972.50 against the account of the corporation without authority
from the latter. Martin was also an officer of the GSFCBA but did not have signing authority. At the back
of the checks, Martin placed the rubber stamp of the GSFCBA and signed his own name as indorsement.
He then successfully drew the funds from Liberty Insurance Bank for his own personal profit. When the
corporation filed an action against the bank to recover the amount of the checks, the claim was denied.
The US Supreme Court held in Mueller that when the person making the check so payable did not intend
for the specified payee to have any part in the transactions, the payee is
_______________

15 Mueller & Martin v. Liberty Insurance Bank, 187 Ky. 44, 218 SW 465 (1920).
16 Id.

533

VOL. 566, SEPTEMBER 26, 2008


533
Philippine National Bank vs. Rodriguez
considered as a fictitious payee. The check is then considered as a bearer instrument to be validly
negotiated by mere delivery. Thus, the US Supreme Court held that Liberty Insurance Bank, as drawee,
was authorized to make payment to the bearer of the check, regardless of whether prior indorsements
were genuine or not.17
The more recent Getty Petroleum Corp. v. American Express Travel Related Services Company, Inc.18
upheld the fictitious-payee rule. The rule protects the depositary bank and assigns the loss to the drawer
of the check who was in a better position to prevent the loss in the first place. Due care is not even
required from the drawee or depositary bank in accepting and paying the checks. The effect is that a
showing of negligence on the part of the depositary bank will not defeat the protection that is derived
from this rule.
However, there is a commercial bad faith exception to the fictitious-payee rule. A showing of
commercial bad faith on the part of the drawee bank, or any transferee of the check for that matter, will
work to strip it of this defense. The exception will cause it to bear the loss. Commercial bad faith is
present if the transferee of the check acts dishonestly, and is a party to the fraudulent scheme. Said the
US Supreme Court in Getty:
Consequently, a transferees lapse of wary vigilance, disregard of suspicious circumstances which might
have well induced a prudent banker to investigate and other permutations of negligence are not
relevant considerations under Section 3-405 x x x. Rather, there is a commercial bad faith exception to
UCC 3-405, applicable when the transferee acts dishonestlywhere it has actual knowledge of facts
and circumstances that amount to bad faith, thus itself becoming a participant in a fraudulent scheme.
x x x Such a test finds support in the text of the Code, which omits a standard of care re_______________

17 Mueller & Martin v. Liberty Insurance Bank, id.


18 90 NY 2d 322 (1997), citing the Uniform Commercial Code, Sec. 3-405.
534

534
SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Rodriguez
quirement from UCC 3-405 but imposes on all parties an obligation to act with honesty in fact. x x x19
(Emphasis added)
Getty also laid the principle that the fictitious-payee rule extends protection even to non-bank
transferees of the checks.
In the case under review, the Rodriguez checks were payable to specified payees. It is unrefuted that the
69 checks were payable to specific persons. Likewise, it is uncontroverted that the payees were actual,
existing, and living persons who were members of PEMSLA that had a rediscounting arrangement with
spouses Rodriguez.
What remains to be determined is if the payees, though existing persons, were fictitious in its broader
context.
For the fictitious-payee rule to be available as a defense, PNB must show that the makers did not intend
for the named payees to be part of the transaction involving the checks. At most, the banks thesis
shows that the payees did not have knowledge of the existence of the checks. This lack of knowledge on
the part of the payees, however, was not tantamount to a lack of intention on the part of respondentsspouses that the payees would not receive the checks proceeds. Considering that respondents-spouses
were transacting with PEMSLA and not the individual payees, it is understandable that they relied on the
information given by the officers of PEMSLA that the payees would be receiving the checks.
Verily, the subject checks are presumed order instruments. This is because, as found by both lower
courts, PNB failed to present sufficient evidence to defeat the claim of respondents_______________

19 Getty Petroleum Corp. v. American Express Travel Related Services Company, Inc., id., citing Peck v.
Chase Manhattan Bank, 190 AD 2d 547, 548-549 (1993); Touro Coll. v. Bank Leumi Trust Co., 186 AD 2d
425, 427 (1992); Prudential-Bache Sec. v. Citibank, N.A., 73 NY 2d 276 (1989); Merrill Lynch, Pierce,
Fenner & Smith v. Chemical Bank, 57 NY 2d 447 (1982).
535

VOL. 566, SEPTEMBER 26, 2008


535

Philippine National Bank vs. Rodriguez


spouses that the named payees were the intended recipients of the checks proceeds. The bank failed to
satisfy a requisite condition of a fictitious-payee situationthat the maker of the check intended for the
payee to have no interest in the transaction.
Because of a failure to show that the payees were fictitious in its broader sense, the fictitious-payee
rule does not apply. Thus, the checks are to be deemed payable to order. Consequently, the drawee
bank bears the loss.20
PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its teller or tellers
accepted the 69 checks for deposit to the PEMSLA account even without any indorsement from the
named payees. It bears stressing that order instruments can only be negotiated with a valid
indorsement.
A bank that regularly processes checks that are neither payable to the customer nor duly indorsed by
the payee is apparently grossly negligent in its operations.21 This Court has recognized the unique
public interest possessed by the banking industry and the need for the people to have full trust and
confidence in their banks.22 For this reason, banks are minded to treat their customers accounts with
utmost care, confidence, and honesty.23
In a checking transaction, the drawee bank has the duty to verify the genuineness of the signature of the
drawer and to pay the check strictly in accordance with the drawers instructions, i.e., to the named
payee in the check. It should charge
_______________

20 See Traders Royal Bank v. Radio Philippines Network, Inc., G.R. No. 138510, October 10, 2002, 390
SCRA 608.
21 Id.
22 Metropolitan Bank and Trust Company v. Cabilzo, G.R. No. 154469, December 6, 2006, 510 SCRA 259.
23 Citytrust Banking Corporation v. Intermediate Appellate Court, G.R. No. 84281, May 27, 1994, 232
SCRA 559; Bank of the Philippine Islands v. Intermediate Appellate Court, G.R. No. 69162, February 21,
1992, 206 SCRA 408.
536

536
SUPREME COURT REPORTS ANNOTATED

Philippine National Bank vs. Rodriguez


to the drawers accounts only the payables authorized by the latter. Otherwise, the drawee will be
violating the instructions of the drawer and it shall be liable for the amount charged to the drawers
account.24
In the case at bar, respondents-spouses were the banks depositors. The checks were drawn against
respondents-spouses accounts. PNB, as the drawee bank, had the responsibility to ascertain the
regularity of the indorsements, and the genuineness of the signatures on the checks before accepting
them for deposit. Lastly, PNB was obligated to pay the checks in strict accordance with the instructions
of the drawers. Petitioner miserably failed to discharge this burden.
The checks were presented to PNB for deposit by a representative of PEMSLA absent any type of
indorsement, forged or otherwise. The facts clearly show that the bank did not pay the checks in strict
accordance with the instructions of the drawers, respondents-spouses. Instead, it paid the values of the
checks not to the named payees or their order, but to PEMSLA, a third party to the transaction between
the drawers and the payees.
Moreover, PNB was negligent in the selection and supervision of its employees. The trustworthiness of
bank employees is indispensable to maintain the stability of the banking industry. Thus, banks are
enjoined to be extra vigilant in the management and supervision of their employees. In Bank of the
Philippine Islands v. Court of Appeals,25 this Court cautioned thus:
Banks handle daily transactions involving millions of pesos. By the very nature of their work the degree
of responsibility, care and trustworthiness expected of their employees and officials is far greater than
those of ordinary clerks and employees. For obvious
_______________

24 Associated Bank v. Court of Appeals, G.R. Nos. 107382 & 107612, January 31, 1996, 252 SCRA 620,
631.
25 G.R. No. 102383, November 26, 1992, 216 SCRA 51.
537

VOL. 566, SEPTEMBER 26, 2008


537
Philippine National Bank vs. Rodriguez

reasons, the banks are expected to exercise the highest degree of diligence in the selection and
supervision of their employees.26
PNBs tellers and officers, in violation of banking rules of procedure, permitted the invalid deposits of
checks to the PEMSLA account. Indeed, when it is the gross negligence of the bank employees that
caused the loss, the bank should be held liable.27
PNBs argument that there is no loss to compensate since no demand for payment has been made by
the payees must also fail. Damage was caused to respondents-spouses when the PEMSLA checks they
deposited were returned for the reason Account Closed. These PEMSLA checks were the
corresponding payments to the Rodriguez checks. Since they could not encash the PEMSLA checks,
respondents-spouses were unable to collect payments for the amounts they had advanced.
A bank that has been remiss in its duty must suffer the consequences of its negligence. Being issued to
named payees, PNB was duty-bound by law and by banking rules and procedure to require that the
checks be properly indorsed before accepting them for deposit and payment. In fine, PNB should be
held liable for the amounts of the checks.
One Last Note

We note that the RTC failed to thresh out the merits of PNBs cross-claim against its co-defendants
PEMSLA and MPC. The records are bereft of any pleading filed by these two defendants in answer to the
complaint of respondents-spouses and cross-claim of PNB. The Rules expressly provide that failure to
file an answer is a ground for a declaration
_______________

26 Bank of the Philippine Islands v. Court of Appeals, id., at p. 71.


27 Id., at p. 77.
538

538
SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Rodriguez
that defendant is in default.28 Yet, the RTC failed to sanction the failure of both PEMSLA and MPC to file
responsive pleadings. Verily, the RTC dismissal of PNBs cross-claim has no basis. Thus, this judgment

shall be without prejudice to whatever action the bank might take against its co-defendants in the trial
court.
To PNBs credit, it became involved in the controversial transaction not of its own volition but due to the
actions of some of its employees. Considering that moral damages must be understood to be in concept
of grants, not punitive or corrective in nature, We resolve to reduce the award of moral damages to
P50,000.00.29
WHEREFORE, the appealed Amended Decision is AFFIRMED with the MODIFICATION that the award for
moral damages is reduced to P50,000.00, and that this is without prejudice to whatever civil, criminal, or
administrative action PNB might take against PEMSLA, MPC, and the employees involved.
SO ORDERED.
Ynares-Santiago (Chairperson), Austria-Martinez, Chico-Nazario and Nachura, JJ., concur.
Amended decision affirmed with modification.
_______________

28 Rules of Civil Procedure, Rule 9, Sec. 3. Default: declaration of.If the defending party fails to answer
within the time allowed therefor, the court shall, upon motion of the claiming party with notice to the
defending party, and proof of such failure, declare the defending party in default. Thereupon, the court
shall proceed to render judgment granting the claimant such relief as his pleading may warrant, unless
the court in its discretion requires the claimant to submit evidence. Such reception of evidence may be
delegated to the clerk of court.
29 Morales v. Court of Appeals, G.R. No. 117228, June 19, 1997, 274 SCRA 282.

Copyright 2014 Central Book Supply, Inc. All rights reserved. [Philippine National Bank vs. Rodriguez,
566 SCRA 513(2008)]

G.R. No. 167567. September 22, 2010.*


SAN MIGUEL CORPORATION, petitioner, vs. BARTOLOME PUZON, JR., respondent.
Criminal Procedure; Preliminary Investigation; Probable Cause; The determination of the existence or
absence of probable cause lies within the discretion of the prosecuting officers after conducting a
preliminary investigation upon complaint of an offended party.Probable cause is defined as such
facts and circumstances that will engender a well-founded belief that a crime has been committed and
that the respondent is probably guilty thereof and should be held for trial. On the fine points of the

determination of probable cause, Reyes v. Pearlbank Securities, Inc. (560 SCRA 518 [2008])
comprehensively elaborated that: The determination of [the existence or absence of probable cause]
lies within the discretion of the prosecuting officers after conducting a preliminary investigation upon
complaint of an offended party. Thus, the decision whether to dismiss a complaint or not is dependent
upon the sound discretion of the prosecuting fiscal. He may dismiss the complaint forthwith, if he finds
the charge insufficient in form or substance or without any ground. Or he may proceed with the
investigation if the complaint in his view is sufficient and in proper form. To emphasize, the
determination of probable cause for the filing of information in court is an executive function, one that
properly pertains at the first instance to the public prosecutor and, ultimately, to the Secretary of
Justice, who may direct the filing of the corresponding information or move for the dismissal of the case.
Ultimately, whether or not a complaint will be dismissed is dependent on the sound discretion of the
Secretary of Justice. And unless made with grave abuse of discretion, findings of the Secretary of Justice
are not subject to review. For this reason, the Court considers it sound judicial policy to refrain from
interfering in the conduct of preliminary investigations and to leave the Department of Justice ample
latitude of discretion in the determination of what constitutes sufficient evidence to establish probable
cause for the prosecution of supposed offenders. Consistent with this policy, courts do not reverse the
Secretary of Justices findings
_______________

* FIRST DIVISION.
49

VOL. 631, SEPTEMBER 22, 2010


49
San Miguel Corporation vs. Puzon, Jr.
and conclusions on the matter of probable cause except in clear cases of grave abuse of discretion.
Criminal Law; Theft; Elements.*T+he essential elements of the crime of theft are the following: (1)
that there be a taking of personal property; (2) that said property belongs to another; (3) that the taking
be done with intent to gain; (4) that the taking be done without the consent of the owner; and (5) that
the taking be accomplished without the use of violence or intimidation against persons or force upon
things.
Same; Same; Negotiable Instruments Law; Checks; Words and Phrases; Delivery as the term is used in
Section 12 of the Negotiable Instruments Law means that the party delivering did so for the purpose of
giving effect thereto.Considering that the second element is that the thing taken belongs to another,

it is relevant to determine whether ownership of the subject check was transferred to petitioner. On this
point the Negotiable Instruments Law provides: Sec. 12. Antedated and postdated.The instrument is
not invalid for the reason only that it is antedated or postdated, provided this is not done for an illegal
or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title
thereto as of the date of delivery. (Underscoring supplied.) Note however that delivery as the term is
used in the aforementioned provision means that the party delivering did so for the purpose of giving
effect thereto. Otherwise, it cannot be said that there has been delivery of the negotiable instrument.
Once there is delivery, the person to whom the instrument is delivered gets the title to the instrument
completely and irrevocably. If the subject check was given by Puzon to SMC in payment of the
obligation, the purpose of giving effect to the instrument is evident thus title to or ownership of the
check was transferred upon delivery. However, if the check was not given as payment, there being no
intent to give effect to the instrument, then ownership of the check was not transferred to SMC.
PETITION for review on certiorari of the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Castell & Bermejo for petitioner.
50

50
SUPREME COURT REPORTS ANNOTATED
San Miguel Corporation vs. Puzon, Jr.
Alexandre J. Andrada Villanueva for respondent.
DEL CASTILLO, J.:
This petition for review assails the December 21, 2004 Decision1 and March 28, 2005 Resolution2 of the
Court of Appeals (CA) in CA-G.R. SP No. 83905, which dismissed the petition before it and denied
reconsideration, respectively.
Factual Antecedents
Respondent Bartolome V. Puzon, Jr., (Puzon) owner of Bartenmyk Enterprises, was a dealer of beer
products of petitioner San Miguel Corporation (SMC) for Paraaque City. Puzon purchased SMC
products on credit. To ensure payment and as a business practice, SMC required him to issue postdated
checks equivalent to the value of the products purchased on credit before the same were released to
him. Said checks were returned to Puzon when the transactions covered by these checks were paid or
settled in full.

On December 31, 2000, Puzon purchased products on credit amounting to P11,820,327 for which he
issued, and gave to SMC, Bank of the Philippine Islands (BPI) Check Nos. 27904 (for P309,500.00) and
27903 (for P11,510,827.00) to cover the said transaction.
On January 23, 2001, Puzon, together with his accountant, visited the SMC Sales Office in Paraaque
City to reconcile his account with SMC. During that visit Puzon allegedly requested to see BPI Check No.
17657. However, when he got hold of BPI Check No. 27903 which was attached to a bond paper
together with BPI Check No. 17657 he allegedly imme_______________

1 Rollo, pp. 32-42; penned by Associate Justice Perlita J. Tria-Tirona and concurred in by Associate
Justices Ruben T. Reyes and Jose C. Reyes, Jr.
2 Id., at pp. 43-45.
51

VOL. 631, SEPTEMBER 22, 2010


51
San Miguel Corporation vs. Puzon, Jr.
diately left the office with his accountant, bringing the checks with them.
SMC sent a letter to Puzon on March 6, 2001 demanding the return of the said checks. Puzon ignored
the demand hence SMC filed a complaint against him for theft with the City Prosecutors Office of
Paraaque City.
Rulings of the Prosecutor and the Secretary
of Department of Justice (DOJ)
The investigating prosecutor, Elizabeth Yu Guray found that the relationship between *SMC+ and
[Puzon] appears to be one of credit or creditor-debtor relationship. The problem lies in the
reconciliation of accounts and the non-payment of beer empties which cannot give rise to a criminal
prosecution for theft.3 Thus, in her July 31, 2001 Resolution,4 she recommended the dismissal of the
case for lack of evidence. SMC appealed.
On June 4, 2003, the DOJ issued its resolution5 affirming the prosecutors Resolution dismissing the
case. Its motion for reconsideration having been denied in the April 23, 2004 DOJ Resolution,6 SMC filed
a petition for certiorari with the CA.

Ruling of the Court of Appeals


The CA found that the postdated checks were issued by Puzon merely as a security for the payment of
his purchases and that these were not intended to be encashed. It thus concluded that SMC did not
acquire ownership of the checks as it was duty bound to return the same checks to Puzon after the
transactions covering them were settled. The CA agreed with the prosecutor that there was no theft,
considering that a
_______________

3 Id., at p. 141.
4 Id., at pp. 140-142.
5 CA Rollo, pp. 24-27.
6 Id., at pp. 22-23.
52

52
SUPREME COURT REPORTS ANNOTATED
San Miguel Corporation vs. Puzon, Jr.
person cannot be charged with theft for taking personal property that belongs to himself. It disposed of
the appeal as follows:
WHEREFORE, finding no grave abuse of discretion committed by public respondent, the instant petition
is hereby DISMISSED. The assailed Resolutions of public respondent, dated 04 June 2003 and 23 April
2004, are AFFIRMED. No costs at this instance.
SO ORDERED.7
The motion for reconsideration of SMC was denied. Hence, the present petition.
Issues
Petitioner now raises the following issues:
I

WHETHER X X X PUZON HAD STOLEN FROM SMC ON JANUARY 23, 2001, AMONG OTHERS BPI CHECK
NO. 27903 DATED MARCH 30, 2001 IN THE AMOUNT OF PESOS: ELEVEN MILLION FIVE HUNDRED TEN
THOUSAND EIGHT HUNDRED TWENTY SEVEN (Php11,510,827.00)
II
WHETHER X X X THE POSTDATED CHECKS ISSUED BY PUZON, PARTICULARLY BPI CHECK NO. 27903
DATED MARCH 30, 2001 IN THE AMOUNT OF PESOS: ELEVEN MILLION FIVE HUNDRED TEN THOUSAND
EIGHT HUNDRED TWENTY SEVEN (Php11,510,827.00), WERE ISSUED IN PAYMENT OF HIS BEER
PURCHASES OR WERE USED MERELY AS SECURITY TO ENSURE PAYMENT OF PUZONS OBLIGATION.
III
WHETHER X X X THE PRACTICE OF SMC IN RETURNING THE POSTDATED CHECKS ISSUED IN PAYMENT OF
BEER PRODUCTS PURCHASED ON CREDIT SHOULD THE TRANSACTIONS
_______________

7 Rollo, p. 41.
53

VOL. 631, SEPTEMBER 22, 2010


53
San Miguel Corporation vs. Puzon, Jr.
COVERED BY THESE CHECKS [BE] SETTLED ON [THE] MATURITY DATES THEREOF COULD BE LIKENED TO A
CONTRACT OF PLEDGE.
IV
WHETHER X X X SMC HAD ESTABLISHED PROBABLE CAUSE TO JUSTIFY THE INDICTMENT OF PUZON FOR
THE CRIME OF THEFT PURSUANT TO ART. 308 OF THE REVISED PENAL CODE.8
Petitioners Arguments
SMC contends that Puzon was positively identified by its employees to have taken the subject postdated
checks. It also contends that ownership of the checks was transferred to it because these were issued,
not merely as security but were, in payment of Puzons purchases. SMC points out that it has established
more than sufficient probable cause to justify the indictment of Puzon for the crime of Theft.
Respondents Arguments

On the other hand, Puzon contends that SMC raises questions of fact that are beyond the province of an
appeal on certiorari. He also insists that there is no probable cause to charge him with theft because the
subject checks were issued only as security and he therefore retained ownership of the same.
Our Ruling

The petition has no merit.


Preliminary Matters
At the outset we find that as pointed out by Puzon, SMC raises questions of fact. The resolution of the
first issue raised
_______________

8 Id., at p. 305.
54

54
SUPREME COURT REPORTS ANNOTATED
San Miguel Corporation vs. Puzon, Jr.
by SMC of whether respondent stole the subject check, which calls for the Court to determine whether
respondent is guilty of a felony, first requires that the facts be duly established in the proper forum and
in accord with the proper procedure. This issue cannot be resolved based on mere allegations of facts
and affidavits. The same is true with the second issue raised by petitioner, to wit: whether the checks
issued by Puzon were payments for his purchases or were intended merely as security to ensure
payment. These issues cannot be properly resolved in the present petition for review on certiorari which
is rooted merely on the resolution of the prosecutor finding no probable cause for the filing of an
information for theft.
The third issue raised by petitioner, on the other hand, would entail venturing into constitutional
matters for a complete resolution. This route is unnecessary in the present case considering that the
main matter for resolution here only concerns grave abuse of discretion and the existence of probable
cause for theft, which at this point is more properly resolved through another more clear cut route.
Probable Cause for Theft

Probable cause is defined as such facts and circumstances that will engender a well-founded belief that
a crime has been committed and that the respondent is probably guilty thereof and should be held for
trial.9 On the fine points of the determination of probable cause, Reyes v. Pearlbank Securities, Inc.10
comprehensively elaborated that:
The determination of *the existence or absence of probable cause] lies within the discretion of the
prosecuting officers after conducting
_______________

9 Sanrio Company Limited v. Lim, G.R. No. 168662, February 19, 2008, 546 SCRA 303, 312-313.
10 G.R. No. 171435, July 30, 2008, 560 SCRA 518, 535-536, citing Public Utilitites Department v. Hon.
Guingona, Jr., 417 Phil. 798, 804; 365 SCRA 467, 473 (2001).
55

VOL. 631, SEPTEMBER 22, 2010


55
San Miguel Corporation vs. Puzon, Jr.
a preliminary investigation upon complaint of an offended party. Thus, the decision whether to dismiss a
complaint or not is dependent upon the sound discretion of the prosecuting fiscal. He may dismiss the
complaint forthwith, if he finds the charge insufficient in form or substance or without any ground. Or
he may proceed with the investigation if the complaint in his view is sufficient and in proper form. To
emphasize, the determination of probable cause for the filing of information in court is an executive
function, one that properly pertains at the first instance to the public prosecutor and, ultimately, to the
Secretary of Justice, who may direct the filing of the corresponding information or move for the
dismissal of the case. Ultimately, whether or not a complaint will be dismissed is dependent on the
sound discretion of the Secretary of Justice. And unless made with grave abuse of discretion, findings of
the Secretary of Justice are not subject to review.
For this reason, the Court considers it sound judicial policy to refrain from interfering in the conduct of
preliminary investigations and to leave the Department of Justice ample latitude of discretion in the
determination of what constitutes sufficient evidence to establish probable cause for the prosecution of
supposed offenders. Consistent with this policy, courts do not reverse the Secretary of Justices findings
and conclusions on the matter of probable cause except in clear cases of grave abuse of discretion.
In the present case, we are also not sufficiently convinced to deviate from the general rule of noninterference. Indeed the CA did not err in dismissing the petition for certiorari before it, absent grave

abuse of discretion on the part of the DOJ Secretary in not finding probable cause against Puzon for
theft.
The Revised Penal Code provides:
Art. 308. Who are liable for theft.Theft is committed by any person who, with intent to gain but
without violence against, or intimidation of persons nor force upon things, shall take personal property
of another without the latters consent.
x x x x
56

56
SUPREME COURT REPORTS ANNOTATED
San Miguel Corporation vs. Puzon, Jr.
*T+he essential elements of the crime of theft are the following: (1) that there be a taking of personal
property; (2) that said property belongs to another; (3) that the taking be done with intent to gain; (4)
that the taking be done without the consent of the owner; and (5) that the taking be accomplished
without the use of violence or intimidation against persons or force upon things.11
Considering that the second element is that the thing taken belongs to another, it is relevant to
determine whether ownership of the subject check was transferred to petitioner. On this point the
Negotiable Instruments Law provides:
Sec. 12. Antedated and postdated.The instrument is not invalid for the reason only that it is
antedated or postdated, provided this is not done for an illegal or fraudulent purpose. The person to
whom an instrument so dated is delivered acquires the title thereto as of the date of delivery.
(Underscoring supplied.)
Note however that delivery as the term is used in the aforementioned provision means that the party
delivering did so for the purpose of giving effect thereto.12 Otherwise, it cannot be said that there has
been delivery of the negotiable instrument. Once there is delivery, the person to whom the instrument
is delivered gets the title to the instrument completely and irrevocably.
If the subject check was given by Puzon to SMC in payment of the obligation, the purpose of giving
effect to the instrument is evident thus title to or ownership of the check was transferred upon delivery.
However, if the check was not given as payment, there being no intent to give effect to the instrument,
then ownership of the check was not transferred to SMC.
_______________

11 Aoas v. People, G.R. No. 155339, March 3, 2008, 547 SCRA 311, 317-318; People v. Puig, G.R. Nos.
173654-765, August 28, 2008, 563 SCRA 564, 570; Cruz v. People, G.R. No. 176504, September 3, 2008,
564 SCRA 99, 110.
12 Sec. 16 of the Negotiable Instruments Law.
57

VOL. 631, SEPTEMBER 22, 2010


57
San Miguel Corporation vs. Puzon, Jr.
The evidence of SMC failed to establish that the check was given in payment of the obligation of Puzon.
There was no provisional receipt or official receipt issued for the amount of the check. What was issued
was a receipt for the document, a POSTDATED CHECK SLIP.13
Furthermore, the petitioners demand letter sent to respondent states As per company policies on
receivables, all issuances are to be covered by post-dated checks. However, you have deviated from this
policy by forcibly taking away the check you have issued to us to cover the December issuance.14
Notably, the term payment was not used instead the terms covered and cover were used.
Although the petitioners witness, Gregorio L. Joven III, states in paragraph 6 of his affidavit that the
check was given in payment of the obligation of Puzon, the same is contradicted by his statements in
paragraph 4, where he states that As a standard company operating procedure, all beer purchases by
dealers on credit shall be covered by postdated checks equivalent to the value of the beer products
purchased; in paragraph 9 where he states that the transaction covered by the said check had not yet
been paid for, and in paragraph 8 which clearly shows that partial payment is expected to be made by
the return of beer empties, and not by the deposit or encashment of the check. Clearly the term cover
was not meant to be used interchangeably with payment.
When taken in conjunction with the counter-affidavit of Puzonwhere he states that As the *liquid
beer] contents are paid for, SMC return[s] to me the corresponding PDCs or request[s] me to replace
them with whatever was the unpaid balance.15it becomes clear that both parties did not intend for
the check to pay for the beer products. The evidence proves that the check was accepted, not as
payment, but in accor_______________

13 Rollo, p. 76.

14 Demand letter. Id., at p. 79.


15 Id., at p. 113.
58

58
SUPREME COURT REPORTS ANNOTATED
San Miguel Corporation vs. Puzon, Jr.
dance with the long-standing policy of SMC to require its dealers to issue postdated checks to cover its
receivables. The check was only meant to cover the transaction and in the meantime Puzon was to pay
for the transaction by some other means other than the check. This being so, title to the check did not
transfer to SMC; it remained with Puzon. The second element of the felony of theft was therefore not
established. Petitioner was not able to show that Puzon took a check that belonged to another. Hence,
the prosecutor and the DOJ were correct in finding no probable cause for theft.
Consequently, the CA did not err in finding no grave abuse of discretion committed by the DOJ in
sustaining the dismissal of the case for theft for lack of probable cause.
WHEREFORE, the petition is DENIED. The December 21, 2004 Decision and March 28, 2005 Resolution of
the Court of Appeals in CA-G.R. SP. No. 83905 are AFFIRMED.
SO ORDERED.
Corona (C.J., Chairperson), Carpio-Morales,** Velasco, Jr. and Perez, JJ., concur.
Petition denied, judgment and resolution affirmed.
Note.The phrase without receiving value therefor used in Sec. 29 of the Negotiable Instruments Law
(NIL) means without receiving value by virtue of the instrument and not as it is apparently supposed
to mean, without receiving payment for lending his namewhen a third person advances the face
value of the note to the accommodated party at the time of its creation, the consideration for the note
as regards its maker is the money advanced to the accommodated party. (Ang vs. Associated Bank, 532
SCRA 244 [2007])
o0o
_______________

** In lieu of Associate Justice Teresita J. Leonardo-De Castro per Special Order No. 884 dated
September 1, 2010.

Copyright 2014 Central Book Supply, Inc. All rights reserved. [San Miguel Corporation vs. Puzon, Jr.,
631 SCRA 48(2010)]

EME COURT REPORTS ANNOTATED


De la Victoria vs. Burgos
G.R. No. 111190. June 27, 1995.*
LORETO D. DE LA VICTORIA, as City Fiscal of Mandaue City and in his personal capacity as garnishee,
petitioner, vs. HON. JOSE P. BURGOS, Presiding Judge, RTC, Br. XVII, Cebu City, and RAUL H. SESBREO,
respondents.
Judgments; Garnishment; Words and Phrases; Garnishment is considered as a species of attachment for
reaching credits belonging to the judgment debtor owing to him from a stranger to the litigation.
Garnishment is considered as a species of attachment for reaching credits belonging to the judgment
debtor owing to him from a stranger to the litigation. Emphasis is laid on the phrase belonging to the
judgment debtor since it is the focal point in resolving the issues raised.
Same; Same; Same; Administrative Law; Public Officers; Negotiable Instruments Law; As ordinarily
understood, delivery means the transfer of the possession of the instrument by the maker or drawer
with intent to transfer title to the payee and recognize him as the holder thereof.As Assistant City
Fiscal, the source of the salary of Mabanto, Jr., is public funds. He receives his compensation in the form
of checks from the Department of Justice through petitioner as City Fiscal of Mandaue City and head of
office. Under Sec. 16 of the Negotiable Instruments Law, every contract on a negotiable instrument is
incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As
ordinarily understood, delivery means the transfer of the possession of the instrument by the maker or
drawer with intent to transfer title to the payee and recognize him as the holder thereof.
Same; Same; Same; Same; Same; Same; Where checks due a government employee have not yet been
delivered to him, they do not belong to him and still have the character of public funds.According to
the trial court, the checks of Mabanto, Jr., were already released by the Department of Justice duly
signed by the officer concerned through petitioner and upon service of the writ of garnishment by the
sheriff petitioner was under obligation to hold them for the judgment creditor. It recognized the role of
petitioner as custodian of the checks. At the same time however it considered the checks as no longer
government
_______________

* FIRST DIVISION.
375

VOL. 245, JUNE 27, 1995


375
De la Victoria vs. Burgos
funds and presumed delivered to the payee based on the last sentence of Sec. 16 of the Negotiable
Instruments Law which states: 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. Yet, the
presumption is not conclusive because the last portion of the provision says until the contrary is
proved. However this phrase was deleted by the trial court for no apparent reason. Proof to the
contrary is its own finding that the checks were in the custody of petitioner. Inasmuch as said checks
had not yet been delivered to Mabanto, Jr., they did not belong to him and still had the character of
public funds. In Tiro v. Hontanosas we ruled thatThe salary check of a government officer or employee
such as a teacher does not belong to him before it is physically delivered to him. Until that time the
check belongs to the government. Accordingly, before there is actual delivery of the check, the payee
has no power over it; he cannot assign it without the consent of the Government.
Same; Same; Same; Same; Same; Same; Checks due a government employee may not be garnished to
satisfy a judgment.As a necessary consequence of being public fund, the checks may not be garnished
to satisfy the judgment. The rationale behind this doctrine is obvious consideration of public policy. The
Court succinctly stated in Commissioner of Public Highways v. San Diego thatThe functions and public
services rendered by the State cannot be allowed to be paralyzed or disrupted by the diversion of public
funds from their legitimate and specific objects, as appropriated by law.
Same; Same; Same; Same; Same; Same; It is incumbent upon the garnishee to inquire into the validity of
the notice of garnishment where he has actual knowledge of the non-entitlement of garnisher to the
checks in his possession.In the case at bench, it was incumbent upon petitioner to inquire into the
validity of the notice of garnishment as he had actual knowledge of the non-entitlement of private
respondent to the checks in question. Consequently, we find no difficulty concluding that the trial court
exceeded its jurisdiction in issuing the notice of garnishment concerning the salary checks of Mabanto,
Jr., in the possession of petitioner.
DAVIDE, JR., J., Separate opinion:

Judgments; Garnishment; Administrative Law; Public Officers; If the salary and RATA checks correspond
to a payroll period and to a month which had already lapsed at the time the notice of garnishment is
served, the garnishment would be valid, as the checks would then cease
376

376
SUPREME COURT REPORTS ANNOTATED
De la Victoria vs. Burgos
to be property of the Government and would become the property of the employee.I respectfully
submit that if these salary and RATA checks corresponded, respectively, to a payroll period and to a
month which had already lapsed at the time the notice of garnishment was served, the garnishment
would be valid, as the checks would then cease to be property of the Government and would become
property of Mabanto. Upon the expiration of such period and month, the sums indicated therein were
deemed automatically segregated from the budgetary allocations for the Department of Justice under
the General Appropriations Act.
PETITION for review of a decision of the Regional Trial Court of Cebu City, Br. 18.

The facts are stated in the opinion of the Court.


BELLOSILLO, J.:

RAUL H. SESBREO filed a complaint for damages against Assistant City Fiscals Bienvenido N. Mabanto,
Jr., and Dario D. Rama, Jr., before the Regional Trial Court of Cebu City. After trial judgment was
rendered ordering the defendants to pay P11,000.00 to the plaintiff, private respondent herein. The
decision having become final and executory, on motion of the latter, the trial court ordered its
execution. This order was questioned by the defendants before the Court of Appeals. However, on 15
January 1992 a writ of execution was issued.
On 4 February 1992 a notice of garnishment was served on petitioner Loreto D. de la Victoria as City
Fiscal of Mandaue City where defendant Mabanto, Jr., was then detailed. The notice directed petitioner
not to disburse, transfer, release or convey to any other person except to the deputy sheriff concerned
the salary checks or other checks, monies, or cash due or belonging to Mabanto, Jr., under penalty of
law.1 On 10 March 1992 private respondent filed a motion before the trial court for examination of the
garnishees.
On 25 May 1992 the petition pending before the Court of Appeals was dismissed. Thus the trial court,
finding no more legal obstacle to act on the motion for examination of the garnish_______________

1 Rollo, p. 12.
377

VOL. 245, JUNE 27, 1995


377
De la Victoria vs. Burgos
ees, directed petitioner on 4 November 1992 to submit his report showing the amount of the garnished
salaries of Mabanto, Jr., within fifteen (15) days from receipt2 taking into consideration the provisions of
Sec. 12, pars. (f) and (i), Rule 39 of the Rules of Court.
On 24 November 1992 private respondent filed a motion to require petitioner to explain why he should
not be cited in contempt of court for failing to comply with the order of 4 November 1992.
On the other hand, on 19 January 1993 petitioner moved to quash the notice of garnishment claiming
that he was not in possession of any money, funds, credit, property or anything of value belonging to
Mabanto, Jr., except his salary and RATA checks, but that said checks were not yet properties of
Mabanto, Jr., until delivered to him. He further claimed that, as such, they were still public funds which
could not be subject to garnishment.
On 9 March 1993 the trial court denied both motions and ordered petitioner to immediately comply
with its order of 4 November 1992.3 It opined that the checks of Mabanto, Jr., had already been
released through petitioner by the Department of Justice duly signed by the officer concerned. Upon
service of the writ of garnishment, petitioner as custodian of the checks was under obligation to hold
them for the judgment creditor. Petitioner became a virtual party to, or a forced intervenor in, the case
and the trial court thereby acquired jurisdiction to bind him to its orders and processes with a view to
the complete satisfaction of the judgment. Additionally, there was no sufficient reason for petitioner to
hold the checks because they were no longer government funds and presumably delivered to the payee,
conformably with the last sentence of Sec. 16 of the Negotiable Instruments Law.
With regard to the contempt charge, the trial court was not morally convinced of petitioners guilt. For,
while his explanation suffered from procedural infirmities nevertheless he took pains in enlightening the
court by sending a written explanation dated
_______________

2 Id., p. 18.
3 Id., p. 115.

378

378
SUPREME COURT REPORTS ANNOTATED
De la Victoria vs. Burgos
22 July 1992 requesting for the lifting of the notice of garnishment on the ground that the notice should
have been sent to the Finance Officer of the Department of Justice. Petitioner insists that he had no
authority to segregate a portion of the salary of Mabanto, Jr.. The explanation however was not
submitted to the trial court for action since the stenographic reporter failed to attach it to the record.4
On 20 April 1993 the motion for reconsideration was denied. The trial court explained that it was not the
duty of the garnishee to inquire or judge for himself whether the issuance of the order of execution, writ
of execution and notice of garnishment was justified. His only duty was to turn over the garnished
checks to the trial court which issued the order of execution.5
Petitioner raises the following relevant issues: (1) whether a check still in the hands of the maker or its
duly authorized representative is owned by the payee before physical delivery to the latter; and, (2)
whether the salary check of a government official or employee funded with public funds can be subject
to garnishment.
Petitioner reiterates his position that the salary checks were not owned by Mabanto, Jr., because they
were not yet delivered to him, and that petitioner as garnishee has no legal obligation to hold and
deliver them to the trial court to be applied to Mabanto, Jr.s judgment debt. The thesis of petitioner is
that the salary checks still formed part of public funds and therefore beyond the reach of garnishment
proceedings.
Petitioner has well argued his case.
Garnishment is considered as a species of attachment for reaching credits belonging to the judgment
debtor owing to him from a stranger to the litigation.6 Emphasis is laid on the phrase belonging to the
judgment debtor since it is the focal point in resolving the issues raised.
_______________

4 Id., p. 114.
5 Id., p. 129.

6 Engineering Construction, Inc. v. National Power Corporation, No. L-34589, 29 June 1988, 163 SCRA 9;
Rizal Commercial Banking Corporation v. de Castro, No. L-34548, 29 November 1988, 168 SCRA 49; Sec.
8, Rule 57 of the Rules of Court.
379

VOL. 245, JUNE 27, 1995


379
De la Victoria vs. Burgos
As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public funds. He receives his
compensation in the form of checks from the Department of Justice through petitioner as City Fiscal of
Mandaue City and head of office. Under Sec. 16 of the Negotiable Instruments Law, every contract on a
negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of
giving effect thereto. As ordinarily understood, delivery means the transfer of the possession of the
instrument by the maker or drawer with intent to transfer title to the payee and recognize him as the
holder thereof.7
According to the trial court, the checks of Mabanto, Jr., were already released by the Department of
Justice duly signed by the officer concerned through petitioner and upon service of the writ of
garnishment by the sheriff petitioner was under obligation to hold them for the judgment creditor. It
recognized the role of petitioner as custodian of the checks. At the same time however it considered the
checks as no longer government funds and presumed delivered to the payee based on the last sentence
of Sec. 16 of the Negotiable Instruments Law which states: 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. Yet, the presumption is not conclusive because the last portion of the provision says until
the contrary is proved. However this phrase was deleted by the trial court for no apparent reason.
Proof to the contrary is its own finding that the checks were in the custody of petitioner. Inasmuch as
said checks had not yet been delivered to Mabanto, Jr., they did not belong to him and still had the
character of public funds. In Tiro v. Hontanosas 8 we ruled that
The salary check of a government officer or employee such as a teacher does not belong to him before it
is physically delivered to him. Until that time the check belongs to the government. Accordingly, before
there is actual delivery of the check, the payee has no power over it; he cannot assign it without the
consent of the Government.
_______________

7 Hector S. de Leon, The Law on Negotiable Instruments, 1989 Ed., p. 48; People v. Yabut, Jr., No. L42902, 29 April 1977, 76 SCRA 624.
8 No. L-32312, 25 November 1983, 125 SCRA 697.
380

380
SUPREME COURT REPORTS ANNOTATED
De la Victoria vs. Burgos
As a necessary consequence of being public fund, the checks may not be garnished to satisfy the
judgment.9 The rationale behind this doctrine is obvious consideration of public policy. The Court
succinctly stated in Commissioner of Public Highways v. San Diego 10 that
The functions and public services rendered by the State cannot be allowed to be paralyzed or disrupted
by the diversion of public funds from their legitimate and specific objects, as appropriated by law.
In denying petitioners motion for reconsideration, the trial court expressed the additional ratiocination
that it was not the duty of the garnishee to inquire or judge for himself whether the issuance of the
order of execution, the writ of execution, and the notice of garnishment was justified, citing our ruling in
Philippine Commercial Industrial Bank v. Court of Appeals.11 Our precise ruling in that case was that *I+t
is not incumbent upon the garnishee to inquire or to judge for itself whether or not the order for the
advance execution of a judgment is valid. But that is invoking only the general rule. We have also
established therein the compelling reasons, as exceptions thereto, which were not taken into account by
the trial court, e.g., a defect on the face of the writ or actual knowledge by the garnishee of lack of
entitlement on the part of the garnisher. It is worth to note that the ruling referred to the validity of
advance execution of judgments, but a careful scrutiny of that case and similar cases reveals that it was
applicable to a notice of garnishment as well. In the case at bench, it was incumbent upon petitioner to
inquire into the validity of the notice of garnishment as he had actual knowledge of the non-entitlement
of private respondent to the checks in question. Consequently, we find no difficulty concluding that the
trial court exceeded its jurisdiction in issuing the notice of garnishment concerning the salary checks of
Mabanto,
_______________

9 Republic v. Palacio, No. L-20322, 29 May 1968, 23 SCRA 899; Director of the Bureau of Commerce and
Industry v. Concepcion, 43 Phil. 384 (1922); Traders Royal Bank v. IAC, G.R. No. 68514, 17 December
1990, 192 SCRA 305.

10 No. L-30098, 18 February 1970, 31 SCRA 616.


11 G.R. No. 84526, 28 January 1991, 193 SCRA 452.
381

VOL. 245, JUNE 27, 1995


381
De la Victoria vs. Burgos
Jr., in the possession of petitioner.
WHEREFORE, the petition is GRANTED. The orders of 9 March 1993 and 20 April 1993 of the Regional
Trial Court of Cebu City, Br. 17, subject of the petition are SET ASIDE. The notice of garnishment served
on petitioner dated 3 February 1992 is ordered DISCHARGED.
SO ORDERED.
Quiason and Kapunan, JJ., concur.
Padilla, (J., Chairman), I join Mr. Justice Davide, Jr. in his separate opinion.
Davide, Jr., J., Please see separate opinion.
SEPARATE OPINION
DAVIDE, JR., J.:

This Court may take judicial notice of the fact that checks for salaries of employees of various
Departments all over the country are prepared in Manila not at the end of the payroll period, but days
before it to ensure that they reach the employees concerned not later than the end of the payroll
period. As to the employees in the provinces or cities, the checks are sent through the heads of the
corresponding offices of the Departments. Thus, in the case of Prosecutors and Assistant Prosecutors of
the Department of Justice, the checks are sent through the Provincial Prosecutors or City Prosecutors, as
the case may be, who shall then deliver the checks to the payees.
Involved in the instant case are the salary and RATA checks of then Assistant City Fiscal Bienvenido
Mabanto, Jr., who was detailed in the Office of the City Fiscal (now Prosecutor) of Mandaue City.
Conformably with the aforesaid practice, these checks were sent to Mabanto thru the petitioner who
was then the City Fiscal of Mandaue City.

The ponencia failed to indicate the payroll period covered by the salary check and the month to which
the RATA check corresponds.
I respectfully submit that if these salary and RATA checks corresponded, respectively, to a payroll period
and to a month
382

382
SUPREME COURT REPORTS ANNOTATED
De la Victoria vs. Burgos
which had already lapsed at the time the notice of garnishment was served, the garnishment would be
valid, as the checks would then cease to be property of the Government and would become property of
Mabanto. Upon the expiration of such period and month, the sums indicated therein were deemed
automatically segregated from the budgetary allocations for the Department of Justice under the
General Appropriations Act.
It must be recalled that the public policy against execution, attachment, or garnishment is directed to
public funds.
Thus, in the case of Director of the Bureau of Commerce and Industry vs. Concepcion,1 where the core
issue was whether or not the salary due from the Government to a public officer or employee can, by
garnishment, be seized before being paid to him and appropriated to the payment of his judgment
debts, this Court held:
A rule, which has never been seriously questioned, is that money in the hands of public officers,
although it may be due government employees, is not liable to the creditors of these employees in the
process of garnishment. One reason is, that the State, by virtue of its sovereignty, may not be sued in its
own courts except by express authorization by the Legislature, and to subject its officers to garnishment
would be to permit indirectly what is prohibited directly. Another reason is that moneys sought to be
garnished, as long as they remain in the hands of the disbursing officer of the Government, belong to
the latter, although the defendant in garnishment may be entitled to a specific portion thereof. And still
another reason which covers both of the foregoing is that every consideration of public policy forbids it.
The United States Supreme Court, in the leading case of Buchanan vs. Alexander ([1846], 4 How., 19), in
speaking of the right of creditors of seamen, by process of attachment, to divert the public money from
its legitimate and appropriate object, said:
To state such a principle is to refute it. No government can sanction it. At all times it would be found
embarrassing, and under some circumstances it might be fatal to the public service. *** So long as
money remains in the hands of a disbursing officer, it is as much the money of the United States, as if it

had not been drawn from the treasury. Until paid over by the agent of the government to the person
entitled to it, the fund cannot, in any
_______________

1 43 Phil. 384 [1922].


383

VOL. 245, JUNE 27, 1995


383
De la Victoria vs. Burgos
legal sense, be considered a part of his effects. (See, further, 12 R.C.L., p. 841; Keene vs. Smith *1904+,
44 Ore., 525; Wild vs. Ferguson [1871], 23 La. Ann., 752; Bank of Tennessee vs. Dibrell [1855], 3 Sneed
[Tenn.], 379). (emphasis supplied)
The authorities cited in the ponencia are inapplicable. Garnished or levied on therein were public funds,
to wit: (a) the pump irrigation trust fund deposited with the Philippine National Bank (PNB) in the
account of the Irrigation Service Unit in Republic vs. Palacio;2 (b) the deposits of the National Media
Production Center in Traders Royal Bank vs. Intermediate Appellate Court;3 and (c) the deposits of the
Bureau of Public Highways with the PNB under a current account, which may be expended only for their
legitimate object as authorized by the corresponding legislative appropriation in Commissioner of Public
Highways vs. Diego.4
Neither is Tiro vs. Hontanosas 5 squarely in point. The said case involved the validity of Circular No. 21,
series of 1969, issued by the Director of Public Schools which directed that henceforth no cashier or
disbursing officer shall pay to attorneys-in-fact or other persons who may be authorized under a power
of attorney or other forms of authority to collect the salary of an employee, except when the persons so
designated and authorized is an immediate member of the family of the employee concerned, and in all
other cases except upon proper authorization of the Assistant Executive Secretary for Legal and
Administrative Matters, with the recommendation of the Financial Assistant. Private respondent Zafra
Financing Enterprise, which had extended loans to public school teachers in Cebu City and obtained
from the latter promissory notes and special powers of attorney authorizing it to take and collect their
salary checks from the Division Office in Cebu City of the Bureau of Public Schools, sought, inter alia, to
nullify the Circular. It is clear that the teachers had in fact assigned to or waived in favor of Zafra
_______________

2 23 SCRA 899 [1968].


3 192 SCRA 305 [1990].
4 31 SCRA 616 [1970].
5 125 SCRA 697 [1983].
384

384
SUPREME COURT REPORTS ANNOTATED
Greenhills Airconditioning and Services, Inc. vs. National Labor Relations Commission
their future salaries which were still public funds. That assignment or waiver was contrary to public
policy.
I would therefore vote to grant the petition only if the salary and RATA checks garnished corresponds to
an unexpired payroll period and RATA month, respectively.
Petition granted.
Notes.In legal contemplation, garnishment is a forced novation by the substitution of creditors. The
judgment debtor, who is the original creditor of the garnishee is, through service of the writ of
garnishment, substituted by the judgment creditor who thereby becomes creditor of the garnishee.
(Perla Compania de Seguros, Inc. vs. Ramolete, 203 SCRA 487 [1991])
The delivery of checks in payment of an obligation does not constitute payment unless they are cashed
or their value is impaired through the fault of the creditor. (Development Bank of Rizal vs. Sima Wei, 219
SCRA 736 [1993])
o0o

Copyright 2014 Central Book Supply, Inc. All rights reserved. [De la Victoria vs. Burgos, 245 SCRA
374(1995)]

Astro Electronics Corp. vs. Philippine Export and Foreign Loan Guarantee Corporation
G.R. No. 136729. September 23, 2003.*

ASTRO ELECTRONICS CORP. and PETER ROXAS, petitioners, vs. PHILIPPINE EXPORT AND FOREIGN LOAN
GUARANTEE CORPORATION, respondent.
Negotiable Instruments Law; Promissory Note; Parties; Maker; Persons writing their names on face of
promissory notes are makers.Under the Negotiable Instruments Law, persons who write their names
on the face of promissory notes are makers, promising that they will pay to the order of the payee or
any holder according to its tenor.
Civil Law; Obligations; Subrogation; Legal Subrogation; Legal subrogation is that which takes place by
operation of law.Subrogation is the transfer of all the rights of the creditor to a third person, who
substitutes him in all his rights. It may either be legal or conventional. Legal subrogation is that which
takes place without agreement but by operation of law because of certain acts. Instances of legal
subrogation are those provided in Article 1302 of the Civil Code. Conventional subrogation, on the other
hand, is that which takes place by agreement of the parties.
Same; Same; Same; Same; Knowledge of debtor not necessary.Roxas acquiescence is not necessary
for subrogation to take place because the instant case is one of legal subrogation that occurs by
operation of law, and without need of the debtors knowledge.
PETITION for review on certiorari of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.


Manuel Q. Molina for petitioners.
Office of the Government Corporate Counsel for respondent.
Isabelo G. Gumaru collaborating counsel for respondent TID-CORP.
AUSTRIA-MARTINEZ, J.:

Assailed in this petition for review on certiorari under Rule 45 of the Rules of Court is the decision of the
Court of Appeals in CA_______________

* SECOND DIVISION.
463

VOL. 411, SEPTEMBER 23, 2003


463
Astro Electronics Corp. vs. Philippine Export and Foreign Loan Guarantee Corporation
G.R. CV No. 41274,1 affirming the decision of the Regional TrialCourt (Branch 147) of Makati, then
Metro Manila, whereby petitioners Peter Roxas and Astro Electronics Corp. (Astro for brevity)were
ordered to pay respondent Philippine Export and ForeignLoan Guarantee Corporation (Philguarantee),
jointly and severally, the amount of P3,621,187.52 with interests and costs.
The antecedent facts are undisputed.
Astro was granted several loans by the Philippine Trust Company (Philtrust) amounting to P3,000,000.00
with interest and secured by three promissory notes: PN No. PFX-254 dated December 14, 1981 for
P600,000.00, PN No. PFX-258 also dated Decem-ber 14, 1981 for P400,000.00 and PN No. 15477 dated
August 27, 1981 for P2,000,000.00 In each of these promissory notes, it appears that petitioner Roxas
signed twice, as President of Astro and in his personal capacity.2 Roxas also signed a Continuing
Suretyship Agreement in favor of Philtrust Bank, as President of Astro and as surety.3
Thereafter, Philguarantee, with the consent of Astro, guaranteed in favor of Philtrust the payment of
70% of Astros loan,4 subject to the condition that upon payment by Philguarantee of said amount, it
shall be proportionally subrogated to the rights of Philtrust against Astro.5
As a result of Astros failure to pay its loan obligations, despite demands, Philguarantee paid 70% of the
guaranteed loan to Philtrust. Subsequently, Philguarantee filed against Astro and Roxas a complaint for
sum of money with the RTC of Makati.
In his Answer, Roxas disclaims any liability on the instruments, alleging, inter alia, that he merely signed
the same in blank and the phrases in his personal capacity and in his official capacity were
fraudulently inserted without his knowledge.6
After trial, the RTC rendered its decision in favor of Philguarantee with the following dispositve portion:
_______________

1 Justice Portia Alio-Hormachuelos, ponente; JJ. Presbitero J. Velasco, Jr. and Buenaventura J.
Guerrero, concurring.
2 Original Records, pp. 6-8, Exhibits 3, 4 and 5.
3 Id., pp. 10-13, Exhibit D.
4 Id., pp. 14-19, Exhibits F and E.

5 Id., p. 18.
6 Id., pp. 62-64.
464

464
SUPREME COURT REPORTS ANNOTATED
Astro Electronics Corp. vs. Philippine Export and Foreign Loan Guarantee Corporation
WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in favor or (sic) the
plaintiff and against the defendants Astro Electronics Corporation and Peter T. Roxas, ordering the then
(sic) to pay, jointly and severally, the plaintiff the sum of P3,621,187.52 representing the total obligation
of defendants in favor of plaintiff Philgurantee as of December 31, 1984 with interest at the stipulated
rate of 16% per annum and stipulated penalty charges of 16% per annum computed from January 1,
1985 until the amount is fully paid. With costs.
SO ORDERED.7
The trial court observed that if Roxas really intended to sign the instruments merely in his capacity as
President of Astro, then he should have signed only once in the promissory note.8
On appeal, the Court of Appeals affirmed the RTC decision agreeing with the trial court that Roxas failed
to explain satisfactorily why he had to sign twice in the contract and therefore the presumption that
private transactions have been fair and regular must be sustained.9
In the present petition, the principal issue to be resolved is whether or not Roxas should be jointly and
severally liable (solidary) with Astro for the sum awarded by the RTC.
The answer is in the affirmative.
Astros loan with Philtrust Bank is secured by three promissory notes. These promissory notes are valid
and binding against Astro and Roxas. As it appears on the notes, Roxas signed twice: first, as president of
Astro and second, in his personal capacity. In signing his name aside from being the President of Astro,
Roxas became a co-maker of the promissory notes and cannot escape any liability arising from it. Under
the Negotiable Instruments Law, persons who write their names on the face of promissory notes are
makers,10 promising that they will pay to the order of the payee or any holder according to its tenor.11
Thus, even without the phrase personal capacity, Roxas will still be primarily liable as a joint and
several debtor under the notes considering that his intention to be liable as such is manifested by the
fact that he affixed his signa_______________

7 Id., p. 217; RTC Decision dated July 20, 1989, p. 4.


8 Ibid.
9 Rollo, p. 25; CA Decision, p. 7.
10 Negotiable Instrument Law (Act No. 2031), Section 184.
11 Id., Section 60.
465

VOL. 411, SEPTEMBER 23, 2003


465
Astro Electronics Corp. vs. Philippine Export and Foreign Loan Guarantee Corporation
ture on each of the promissory notes twice which necessarily would imply that he is undertaking the
obligation in two different capacities, official and personal.
Unnoticed by both the trial court and the Court of Appeals, a closer examination of the signatures
affixed by Roxas on the promissory notes, Exhibits A-4 and 3-A and B-4 and 4-A readily reveals
that portions of his signatures covered portions of the typewritten words personal capacity indicating
with certainty that the typewritten words were already existing at the time Roxas affixed his signatures
thus demolishing his claim that the typewritten words were just inserted after he signed the promissory
notes. If what he claims is true, then portions of the typewritten words would have covered portions of
his signatures, and not vice versa.
As to the third promissory note, Exhibit C-4 and 5-A, the copy submitted is not clear so that this
Court could not discern the same observations on the notes, Exhibits A-4 and 3-A and B-4 and 4A.
Nevertheless, the following discussions equally apply to all three promissory notes.
The three promissory notes uniformly provide: FOR VALUE RECEIVED, I/We jointly, severally and
solidarily, promise to pay to PHILTRUST BANK or order . . .12 An instrument which begins with I,
We, or Either of us promise to pay, when signed by two or more persons, makes them solidarily
liable.13 Also, the phrase joint and several binds the makers jointly and individually to the payee so
that all may be sued together for its enforcement, or the creditor may select one or more as the object
of the suit.14 Having signed under such terms, Roxas assumed the solidary liability of a debtor and
Philtrust Bank may choose to enforce the notes against him alone or jointly with Astro.

Roxas claim that the phrases in his personal capacity and in his official capacity were inserted on
the notes without his knowledge was correctly disregarded by the RTC and the Court of Appeals. It is not
disputed that Roxas does not deny that he signed
_______________

12 Supra, Note 2.
13 Republic Planters Bank vs. Court of Appeals, G.R. No. 93073, December 21, 1992, 216 SCRA 738, 744.
14 Ibid.
466

466
SUPREME COURT REPORTS ANNOTATED
Astro Electronics Corp. vs. Philippine Export and Foreign Loan Guarantee Corporation
the notes twice. As aptly found by both the trial and appellate court, Roxas did not offer any explanation
why he did so. It devolves upon him to overcome the presumptions that private transactions are
presumed to be fair and regular15 and that a person takes ordinary care of his concerns.16 Aside from
his self-serving allegations, Roxas failed to prove the truth of such allegations. Thus, said presumptions
prevail over his claims. Bare allegations, when unsubstantiated by evidence, documentary or otherwise,
are not equivalent to proof under our Rules of Court.17
Roxas is the President of Astro and reasonably, a businessman who is presumed to take ordinary care of
his concerns. Absent any countervailing evidence, it cannot be gainsaid that he will not sign a document
without first informing himself of its contents and consequences. Clearly, he knew the nature of the
transactions and documents involved as he not only executed these notes on two different dates but he
also executed, and again, signed twice, a Continuing Suretyship Agreement notarized on July 31, 1981,
wherein he guaranteed, jointly and severally with Astro the repayment of P3,000,000.00 due to
Philtrust. Such continuing suretyship agreement even re-enforced his solidary liability to Philtrust
because as a surety, he bound himself jointly and severally with Astros obligation.18 Roxas cannot now
avoid liability by hiding under the convenient excuse that he merely signed the notes in blank and the
phrases in his personal capacity and in his official capacity were fraudulently inserted without his
knowledge.
Lastly, Philguarantee has all the right to proceed against petitioner. It is subrogated to the rights of
Philtrust to demand for and collect payment from both Roxas and Astro since it already paid the value of

70% of Roxas and Astro Electronics Corp.s loan obligation, in compliance with its contract of
Guarantee in favor of Philtrust.
_______________

15 Section 3 (p), Rule 131, Rules of Court; Mendoza vs. Court of Appeals, G.R. No. 116710, June 25,
2001, 412 Phil. 14, 30; 359 SCRA 438.
16 Section 3 (d), Rule 131, Rules of Court.
17 Coronel vs. Constantino, G.R. No. 121069, February 7, 2003, 397 SCRA 128; Manzano vs. Perez, Sr.,
G.R. No. 112485, August 9, 2001, 362 SCRA 430, 439; Cuizon vs. Court of Appeals, G.R. No. 102096,
August 22, 1996, 260 SCRA 645, 669.
18 E. Zobel, Inc. vs. Court of Appeals, G.R. No. 113931, May 6, 1998, 290 SCRA 1, 8.
467

VOL. 411, SEPTEMBER 23, 2003


467
Astro Electronics Corp. vs. Philippine Export and Foreign Loan Guarantee Corporation
Subrogation is the transfer of all the rights of the creditor to a third person, who substitutes him in all
his rights.19 It may either be legal or conventional. Legal subrogation is that which takes place without
agreement but by operation of law because of certain acts.20 Instances of legal subrogation are those
provided in Article 1302 of the Civil Code. Conventional subrogation, on the other hand, is that which
takes place by agreement of the parties.21
Roxas acquiescence is not necessary for subrogation to take place because the instant case is one of
legal subrogation that occurs by operation of law, and without need of the debtors knowledge.22
Further, Philguarantee, as guarantor, became the transferee of all the rights of Philtrust as against Roxas
and Astro because the guarantor who pays is subrogated by virtue thereof to all the rights which the
creditor had against the debtor.23
WHEREFORE, finding no error with the decision of the Court of Appeals dated December 10, 1998, the
same is hereby AFFIRMED in toto.
SO ORDERED.
Bellosillo (Chairman), Callejo, Sr. and Tinga, JJ., concur.
Quisumbing, J., In the result.

Judgment affirmed in toto.


Note.The right of subrogation has its roots in equityit is designed to promote and to accomplish
justice and is the mode which equity adopts to compel the ultimate payment of a debt by one who in
justice and in good conscience ought to pay. (Delsan Transport Lines, Inc. vs. Court of Appeals, 369 SCRA
24)
o0o

_______________

19 Philippine National Bank vs. Court of Appeals, G.R. No. 128661, August 8, 2000, 337 SCRA 381, 404.
20 Chemphil Import & Export Corp. vs. Court of Appeals, G.R. Nos. 112438-39, December 12, 1995, 251
SCRA 257, 279.
21 Ibid.
22 Article 1302, paragraph 3, Civil Code.
23 Article 2067, Civil Code.
468

Copyright 2014 Central Book Supply, Inc. All rights reserved. [Astro Electronics Corp. vs. Philippine
Export and Foreign Loan Guarantee Corporation, 411 SCRA 462(2003)]

SUPREME COURT REPORTS ANNOTATED


Development Bank of Rizal vs. Sima Wei
G.R. No. 85419. March 9, 1993.*
DEVELOPMENT BANK OF RIZAL, plaintiff-petitioner, vs. SIMA WEI and/or LEE KIAN HUAT, MARY CHENG
UY, SAMSON TUNG, ASIAN INDUSTRIAL PLASTIC CORPORATION and PRODUCERS BANK OF THE
PHILIPPINES, defendants-respondents.
Remedial Law; Action; Definition and essential elements of a cause of action.A cause of action is
defined as an act or omission of one party in violation of the legal right or rights of another. The

essential elements are: (1) legal right of the plaintiff; (2) correlative obligation of the defendant; and (3)
an act or omission of the defendant in violation of said legal right.
Commercial Law; Negotiable Instruments Law; A negotiable instrument of which a check is, is not only a
written evidence of a contract right but is also a species of property.Courts have long recognized the
business custom of using printed checks where blanks are provided for the date of issuance, the name
of the payee, the amount payable and the drawer's signature. All the drawer has to do when he wishes
to issue a check is to properly fill up the blanks and sign it. However, the mere fact that he has done
these does not give rise to any liability on his part, until and unless the check is delivered to the payee or
his representative. A negotiable instrument, of which a check is, is not only a written evidence of a
contract right but is also a species of property. Just as a deed to a piece of land must be delivered in
order to convey title to the grantee, so must a negotiable instrument be delivered to the payee in order
to evidence its existence as a binding contract.
__________________

* SECOND DIVISION.
737

VOL. 219, MARCH 9, 1993


737
Development Bank of Rizal vs. Sima Wei
Same; Same; Same; The payee of a negotiable instrument acquires no interest with respect thereto until
its delivery to him.Thus, the payee of a negotiable instrument acquires no interest with respect
thereto until its delivery to him. Delivery of an instrument means transfer of possession, actual or
constructive, from one person to another. Without the initial delivery of the instrument from the drawer
to the payee, there can be no liability on the instrument. Moreover, such delivery must be intended to
give effect to the instrument.
Same; Same; Same; Same; The delivery of checks in payment of an obligation does not constitute
payment unless they are cashed or their value is impaired through the fault of the creditor.
Notwithstanding the above, it does not necessarily follow that the drawer Sima Wei is freed from
liability to petitioner Bank under the loan evidenced by the promissory note agreed to by her. Her
allegation that she has paid the balance of her loan with the two checks payable to petitioner Bank has
no merit for, as We have earlier explained, these checks were never delivered to petitioner Bank. And
even granting, without admitting, that there was delivery to petitioner Bank, the delivery of checks in

payment of an obligation does not constitute payment unless they are cashed or their value is impaired
through the fault of the creditor. None of these exceptions were alleged by respondent Sima Wei.
PETITION for review by certiorari of the decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Yngson & Associates for petitioner.
Henry A. Reyes & Associates for Samso Tung & Asian Industrial Plastic Corporation.
Eduardo G. Castelo for Sima Wei.
Monsod, Tamargo & Associates for Producers Bank.
Rafael S. Santayana for Mary Cheng Uy.
CAMPOS, JR., J.:

On July 6, 1986, the Development Bank of Rizal (petitioner Bank for brevity) filed a complaint for a sum
of money against respondents Sima Wei and/or Lee Kian Huat, Mary Cheng
738

738
SUPREME COURT REPORTS ANNOTATED
Development Bank of Rizal vs. Sima Wei
Uy, Samson Tung, Asian Industrial Plastic Corporation (Plastic Corporation for short) and the Producers
Bank of the Philippines, on two causes of action:
(1) To enforce payment of the balance of P1,032,450.02 on a promissory note executed by respondent
Sima Wei on June 9, 1983; and
(2) To enforce payment of two checks executed by Sima Wei, payable to petitioner, and drawn against
the China Banking Corporation, to pay the balance due on the promissory note.
Except for Lee Kian Huat, defendants filed their separate Motions to Dismiss alleging a common ground
that the complaint states no cause of action. The trial court granted the defendants' Motions to Dismiss.
The Court of Appeals affirmed this decision,** to which the petitioner Bank, represented by its Legal
Liquidator, filed this Petition for Review by Certiorari, assigning the following as the alleged errors of the
Court of Appeals:1

(1) THE COURT OF APPEALS ERRED IN HOLDING THAT THE PLAINTIFF-PETITIONER HAS NO CAUSE OF
ACTION AGAINST DEFENDANTS-RESPONDENTS HEREIN.
(2) THE COURT OF APPEALS ERRED IN HOLDING THAT SECTION 13, RULE 3 OF THE REVISED RULES OF
COURT ON ALTERNATIVE DEFENDANTS IS NOT APPLICABLE TO HEREIN DEFENDANTS-RESPONDENTS.
The antecedents facts of this case are as follows:
In consideration for a loan extended by petitioner Bank to respondent Sima Wei, the latter executed and
delivered to the former a promissory note, engaging to pay the petitioner Bank or order the amount of
P1,820,000.00 on or before June 24, 1983 with interest at 32% per annum. Sima Wei made partial
payments on the note, leaving a balance of P1,032,450.02. On
_________________

** CA G.R. CV No. 11980 dated October 12, 1988. Penned by Associate Justice Venancio D. Aldecoa, Jr.
with Associate Justices Ricardo P. Tensuan and Luis L. Victor, concurring.
1 Petition, p. 7, Rollo, p. 20.
739

VOL. 219, MARCH 9, 1993


739
Development Bank of Rizal vs. Sima Wei
November 18, 1983, Sima Wei issued two crossed checks payable to petitioner Bank drawn against
China Banking Corporation, bearing respectively the serial numbers 384934, for the amount of
P550,000.00 and 384935, for the amount of P500,000.00. The said checks were allegedly issued in full
settlement of the drawer's account evidenced by the promissory note. These two checks were not
delivered to the petitioner-payee or to any of its authorized representatives. For reasons not shown,
these checks came into the possession of respondent Lee Kian Huat, who deposited the checks without
the petitioner-payee's indorsement (forged or otherwise) to the account of respondent Plastic
Corporation, at the Balintawak branch, Caloocan City, of the Producers Bank. Cheng Uy, Branch Manager
of the Balintawak branch of Producers Bank, relying on the assurance of respondent Samson Tung,
President of Plastic Corporation, that the transaction was legal and regular, instructed the cashier of
Producers Bank to accept the checks for deposit and to credit them to the account of said Plastic
Corporation, inspite of the fact that the checks were crossed and payable to petitioner Bank and bore no
indorsement of the latter. Hence, petitioner filed the complaint as aforestated.

The main issue before Us is whether petitioner Bank has a cause of action against any or all of the
defendants, in the alternative or otherwise.
A cause of action is defined as an act or omission of one party in violation of the legal right or rights of
another. The essential elements are: (1) legal right of the plaintiff; (2) correlative obligation of the
defendant; and (3) an act or omission of the defendant in violation of said legal right.2
The normal parties to a check are the drawer, the payee and the drawee bank. Courts have long
recognized the business custom of using printed checks where blanks are provided for the date of
issuance, the name of the payee, the amount payable and the drawer's signature. All the drawer has to
do when he wishes to issue a check is to properly fill up the
________________

2 Caseas vs. Rosales, et al., 19 SCRA 462 (1967); Remitere, et al. vs. Vda. de Yulo, et al., 16 SCRA 251
(1966).
740

740
SUPREME COURT REPORTS ANNOTATED
Development Bank of Rizal vs. Sima Wei
blanks and sign it. However, the mere fact that he has done these does not give rise to any liability on
his part, until and unless the check is delivered to the payee or his representative. A negotiable
instrument, of which a check is, is not only a written evidence of a contract right but is also a species of
property. Just as a deed to a piece of land must be delivered in order to convey title to the grantee, so
must a negotiable instrument be delivered to the payee in order to evidence its existence as a binding
contract. Section 16 of the Negotiable Instruments Law, which governs checks, provides in part:
"Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument
for the purpose of giving effect thereto. x x x."
Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its delivery to
him.3 Delivery of an instrument means transfer of possession, actual or constructive, from one person
to another.4 Without the initial delivery of the instrument from the drawer to the payee, there can be
no liability on the instrument. Moreover, such delivery must be intended to give effect to the
instrument.
The allegations of the petitioner in the original complaint show that the two (2) China Bank checks,
numbered 384934 and 384935, were not delivered to the payee, the petitioner herein. Without the

delivery of said checks to petitionerpayee, the former did not acquire any right or interest therein and
cannot therefore assert any cause of action, founded on said checks, whether against the drawer Sima
Wei or against the Producers Bank or any of the other respondents.
In the original complaint, petitioner Bank, as plaintiff, sued respondent Sima Wei on the promissory
note, and the alternative defendants, including Sima Wei, on the two checks. On appeal from the orders
of dismissal of the Regional Trial Court, petitioner Bank alleged that its cause of action was not based on
collecting the sum of money evidenced by the nego_________________

3 In re Martens' Estate, 226 lowa 162, 283 N.W. 885 (1939); Shriver vs. Danby, 113 A. 612 (1921).
4 Negotiable Instruments Law, Sec. 191, par. 6.
741

VOL. 219, MARCH 9, 1993


741
Development Bank of Rizal vs. Sima Wei
tiable instruments stated but on quasi-delicta claim for damages on the ground of fraudulent acts and
evident bad faith of the alternative respondents. This was clearly an attempt by the petitioner Bank to
change not only the theory of its case but the basis of his cause of action. It is well-settled that a party
cannot change his theory on appeal, as this would in effect deprive the other party of his day in court.5
Notwithstanding the above, it does not necessarily follow that the drawer Sima Wei is freed from
liability to petitioner Bank under the loan evidenced by the promissory note agreed to by her. Her
allegation that she has paid the balance of her loan with the two checks payable to petitioner Bank has
no merit for, as We have earlier explained, these checks were never delivered to petitioner Bank. And
even granting, without admitting, that there was delivery to petitioner Bank, the delivery of checks in
payment of an obligation does not constitute payment unless they are cashed or their value is impaired
through the fault of the creditor.6 None of these exceptions were alleged by respondent Sima Wei.
Therefore, unless respondent Sima Wei proves that she has been relieved from liability on the
promissory note by some other cause, petitioner Bank has a right of action against her for the balance
due thereon.
However, insofar as the other respondents are concerned, petitioner Bank has no privity with them.
Since petitioner Bank never received the checks on which it based its action against said respondents, it
never owned them (the checks) nor did it acquire any interest therein. Thus, anything which the

respondents may have done with respect to said checks could not have prejudiced petitioner Bank. It
had no right or interest in the checks which could have been violated by said respondents. Petitioner
Bank has therefore no cause of action against said respondents, in the alternative or otherwise. If at
__________________

5 Ganzon vs. Court of Appeals, 161 SCRA 646 (1988). See also 1 M MORAN COMMENTS ON THE RULES
OF COURT 715 (1957 ed ) citing San Agustin vs. Barrios, 68 Phil. 475 (1939), Toribio vs. Decasa, 55 Phil.
461 (1930), American Express Co. vs. Natividad, 46 Phil. 207 (1924), Agoncillo vs. Javier, 38 Phil. 424
(1918).
6 CIVIL CODE, Art. 1249, par. 2.
742

742
SUPREME COURT REPORTS ANNOTATED
Development Bank of Rizal vs. Sima Wei
all, it is Sima Wei, the drawer, who would have a cause of action against her co-respondents, if the
allegations in the complaint are found to be true.
With respect to the second assignment of error raised by petitioner Bank regarding the applicability of
Section 13, Rule 3 of the Rules of Court, We find it unnecessary to discuss the same in view of Our
finding that the petitioner Bank did not acquire any right or interest in the checks due to lack of delivery.
It therefore has no cause of action against the respondents, in the alternative or otherwise.
In the light of the foregoing, the judgment of the Court of Appeals dismissing the petitioner's complaint
is AFFIRMED insofar as the second cause of action is concerned. On the first cause of action, the case is
REMANDED to the trial court for a trial on the merits, consistent with this decision, in order to
determine whether respondent Sima Wei is liable to the Development Bank of Rizal for any amount
under the promissory note allegedly signed by her.
SO ORDERED.
Narvasa (C.J., Chairman), Padilla, Regalado and Nocon, JJ., concur.
Judgment affirmed as to the second cause of action and remanded to trial court as to the first cause of
action for trial on the merits.

Note.A check whether a manager's check or ordinary check is not a legal tender and an offer of a
check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee
or creditor (Roman Catholic Bishop of Malolos lnc. vs. Intermediate Appellate Court, 191 SCRA 411).
o0o

743

Copyright 2014 Central Book Supply, Inc. All rights reserved. [Development Bank of Rizal vs. Sima Wei,
219 SCRA 736(1993)]

G.R. No. 129015. August 13, 2004.*


SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., petitioner, vs. FAR EAST BANK AND TRUST
COMPANY AND COURT OF APPEALS, respondents.
Negotiable Instruments Law; Checks; A forged signature is wholly inoperative and payment made
through or under such signature is ineffectual or does not discharge the instrument.The general rule
is to the effect that a forged signature is wholly inoperative, and payment made through or under
such signature is ineffectual or does not discharge the instrument. If payment is made, the drawee
cannot charge it to the drawers account. The traditional justification for the result is that the drawee is
in a superior position to detect a forgery because he has the makers signature and is expected to know
and compare it. The rule has a healthy cautionary effect on banks by encouraging care in the
comparison of the signatures against those on the signature cards they have on file. Moreover, the very
opportunity of the drawee to insure and to distribute the cost among its customers who use checks
makes the drawee an ideal party to spread the risk to insurance.
_______________

* SECOND DIVISION.
403

VOL. 436, AUGUST 13, 2004


403
Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company

Same; Same; Forgery; Forgery is a real or absolute defense by the party whose signature is forged.
Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute defense by the party
whose signature is forged. On the premise that Jongs signature was indeed forged, FEBTC is liable for
the loss since it authorized the discharge of the forged check. Such liability attaches even if the bank
exerts due diligence and care in preventing such faulty discharge. Forgeries often deceive the eye of the
most cautious experts; and when a bank has been so deceived, it is a harsh rule which compels it to
suffer although no one has suffered by its being deceived. The forgery may be so near like the genuine
as to defy detection by the depositor himself, and yet the bank is liable to the depositor if it pays the
check.
Same; Same; Same; A document formally presented is presumed to be genuine until it is proved to be
fraudulent.Thus, the first matter of inquiry is into whether the check was indeed forged. A document
formally presented is presumed to be genuine until it is proved to be fraudulent. In a forgery trial, this
presumption must be overcome but this can only be done by convincing testimony and effective
illustrations.
Same; Same; Same; Bare fact that the forgery was committed by an employee of the party whose
signature was forged cannot necessarily imply that such partys negligence was the cause for the
forgery.The bare fact that the forgery was committed by an employee of the party whose signature
was forged cannot necessarily imply that such partys negligence was the cause for the forgery.
Employers do not possess the preternatural gift of cognition as to the evil that may lurk within the
hearts and minds of their employees.
Same; Same; Same; If a bank pays a forged check, it must be considered as paying out of its funds and
cannot charge the amount so paid to the account of the depositor.Still, even if the bank performed
with utmost diligence, the drawer whose signature was forged may still recover from the bank as long as
he or she is not precluded from setting up the defense of forgery. After all, Section 23 of the Negotiable
Instruments Law plainly states that no right to enforce the payment of a check can arise out of a forged
signature. Since the drawer, Samsung Construction, is not precluded by negligence from setting up the
forgery, the general rule should apply. Consequently, if a bank pays a forged check, it must be
considered as paying out of its funds and cannot charge the amount so paid to the account of the
depositor. A bank is liable, irrespective of its good faith, in paying a forged check.
Same; Same; Same; Negligence; The presumption remains that every person takes ordinary care of his
concerns, and that the ordinary course of business has been followed; Negligence is not presumed but
must be proven
404

404
SUPREME COURT REPORTS ANNOTATED

Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company
by him who alleges it.Still, in the absence of evidence to the contrary, we can conclude that there was
no negligence on Samsung Constructions part. The presumption remains that every person takes
ordinary care of his concerns, and that the ordinary course of business has been followed. Negligence is
not presumed, but must be proven by him who alleges it. While the complaint was lodged at the
instance of Samsung Construction, the matter it had to prove was the claim it had allegedwhether the
check was forged. It cannot be required as well to prove that it was not negligent, because the legal
presumption remains that ordinary care was employed.
PETITION for review on certiorari of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.


Alan A. Leynes for petitioner.
Angara, Abello, Concepcion, Regala & Cruz for respondent.
TINGA, J.:

Called to fore in the present petition is a classic textbook questionif a bank pays out on a forged check,
is it liable to reimburse the drawer from whose account the funds were paid out? The Court of Appeals,
in reversing a trial court decision adverse to the bank, invoked tenuous reasoning to acquit the bank of
liability. We reverse, applying time-honored principles of law.
The salient facts follow.
Plaintiff Samsung Construction Company Philippines, Inc. (Samsung Construction), while based in
Bian, Laguna, maintained a current account with defendant Far East Bank and Trust Company1
(FEBTC) at the latters Bel-Air, Makati branch.2 The sole signatory to Samsung Constructions account
was Jong Kyu Lee (Jong), its Project Manager,3 while the checks remained in the custody of the
companys accountant, Kyu Yong Lee (Kyu).4
_______________

1 Later acquired by or merged with the Bank of the Philippine Islands.


2 Rollo, p. 35.
3 Ibid.
4 Id., at p. 28.

405

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Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company
On 19 March 1992, a certain Roberto Gonzaga presented for payment FEBTC Check No. 432100 to the
banks branch in BelAir, Makati. The check, payable to cash and drawn against Samsung Constructions
current account, was in the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos
(P999,500.00). The bank teller, Cleofe Justiani, first checked the balance of Samsung Constructions
account. After ascertaining there were enough funds to cover the check,5 she compared the signature
appearing on the check with the specimen signature of Jong as contained in the specimen signature card
with the bank. After comparing the two signatures, Justiani was satisfied as to the authenticity of the
signature appearing on the check. She then asked Gonzaga to submit proof of his identity, and the latter
presented three (3) identification cards.6
At the same time, Justiani forwarded the check to the branch Senior Assistant Cashier Gemma Velez, as
it was bank policy that two bank branch officers approve checks exceeding One Hundred Thousand
Pesos, for payment or encashment. Velez likewise counterchecked the signature on the check as against
that on the signature card. He too concluded that the check was indeed signed by Jong. Velez then
forwarded the check and signature card to Shirley Syfu, another bank officer, for approval. Syfu then
noticed that Jose Sempio III (Sempio), the assistant accountant of Samsung Construction, was also in
the bank. Sempio was well-known to Syfu and the other bank officers, he being the assistant accountant
of Samsung Construction. Syfu showed the check to Sempio, who vouched for the genuineness of Jongs
signature. Confirming the identity of Gonzaga, Sempio said that the check was for the purchase of
equipment for Samsung Construction. Satisfied with the genuineness of the signature of Jong, Syfu
authorized the banks encashment of the check to Gonzaga.
The following day, the accountant of Samsung Construction, Kyu, examined the balance of the bank
account and discovered that a check in the amount of Nine Hundred Ninety Nine Thousand Five
Hundred Pesos (P999,500.00) had been encashed. Aware that he had not prepared such a check for
Jongs signature, Kyu perused the checkbook and found that the last blank check was
_______________

5 Ibid.
6 Ibid.
406

406
SUPREME COURT REPORTS ANNOTATED
Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company
missing.7 He reported the matter to Jong, who then proceeded to the bank. Jong learned of the
encashment of the check, and realized that his signature had been forged. The Bank Manager reputedly
told Jong that he would be reimbursed for the amount of the check.8 Jong proceeded to the police
station and consulted with his lawyers.9 Subsequently, a criminal case for qualified theft was filed
against Sempio before the Laguna court.10
In a letter dated 6 May 1992, Samsung Construction, through counsel, demanded that FEBTC credit to it
the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), with interest.11
In response, FEBTC said that it was still conducting an investigation on the matter. Unsatisfied, Samsung
Construction filed a Complaint on 10 June 1992 for violation of Section 23 of the Negotiable Instruments
Law, and prayed for the payment of the amount debited as a result of the questioned check plus
interest, and attorneys fees.12 The case was docketed as Civil Case No. 92-61506 before the Regional
Trial Court (RTC) of Manila, Branch 9.13
During the trial, both sides presented their respective expert witnesses to testify on the claim that Jongs
signature was forged. Samsung Corporation, which had referred the check for investigation to the NBI,
presented Senior NBI Document Examiner Roda B. Flores. She testified that based on her examination,
she concluded that Jongs signature had been forged on the check. On the other hand, FEBTC, which had
sought the assistance of the Philippine National Police (PNP),14 presented Rosario C. Perez, a document
examiner from the PNP Crime Laboratory. She testified that her findings showed that Jongs signature
on the check was genuine.15
_______________

7 Rollo, p. 35.
8 See TSN dated 25 June 1993, p. 10.
9 Id., at p. 9.
10 See TSN dated 15 June 1993, p. 26.
11 Ibid.
12 Act No. 2031.
13 Presided by Judge E.G. Sandoval, now Justice of the Sandiganbayan.

14 TSN dated 8 October 1993, p. 8.


15 Rollo, p. 24.
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Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company
Confronted with conflicting expert testimony, the RTC chose to believe the findings of the NBI expert. In
a Decision dated 25 April 1994, the RTC held that Jongs signature on the check was forged and
accordingly directed the bank to pay or credit back to Samsung Constructions account the amount of
Nine Hundred Ninety Nine Thousand Five Hundred Pesos (P999,500.00), together with interest tolled
from the time the complaint was filed, and attorneys fees in the amount of Fifteen Thousand Pesos
(P15,000.00). FEBTC timely appealed to the Court of Appeals. On 28 November 1996, the Special
Fourteenth Division of the Court of Appeals rendered a Decision,16 reversing the RTC Decision and
absolving
FEBTC from any liability. The Court of Appeals held that the contradictory findings of the NBI and the
PNP created doubt as to whether there was forgery.17 Moreover, the appellate court also held that
assuming there was forgery, it occurred due to the negligence of Samsung Construction, imputing blame
on the accountant Kyu for lack of care and prudence in keeping the checks, which if observed would
have prevented Sempio from gaining access thereto.18 The Court of Appeals invoked the ruling in PNB
v. National City Bank of New York19 that, if a loss, which must be borne by one or two innocent persons,
can be traced to the neglect or fault of either, such loss would be borne by the negligent party, even if
innocent of intentional fraud.20
Samsung Construction now argues that the Court of Appeals had seriously misapprehended the facts
when it overturned the RTCs finding of forgery. It also contends that the appellate court erred in finding
that it had been negligent in safekeeping the check, and in applying the equity principle enunciated in
PNB v. National City Bank of New York.
Since the trial court and the Court of Appeals arrived at contrary findings on questions of fact, the Court
is obliged to examine the record to draw out the correct conclusions. Upon examination of the record,
and based on the applicable laws and jurisprudence, we reverse the Court of Appeals.
_______________

16 Penned by Justice S. Montoya, concurred in by Justices G. Jacinto and A. Tuquero.

17 Rollo, p. 38.
18 Ibid.
19 63 Phil. 711 (1936).
20 Rollo, p. 38.
408

408
SUPREME COURT REPORTS ANNOTATED
Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company
Section 23 of the Negotiable Instruments Law states:
When a signature is forged or made without the authority of the person whose signature it purports to
be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to
enforce payment thereof against any party thereto, can be acquired through or under such signature,
unless the party against whom it is sought to enforce such right is precluded from setting up the forgery
or want of authority. (Emphasis supplied)
The general rule is to the effect that a forged signature is wholly inoperative, and payment made
through or under such signature is ineffectual or does not discharge the instrument.21 If payment is
made, the drawee cannot charge it to the drawers account. The traditional justification for the result is
that the drawee is in a superior position to detect a forgery because he has the makers signature and is
expected to know and compare it.22 The rule has a healthy cautionary effect on banks by encouraging
care in the comparison of the signatures against those on the signature cards they have on file.
Moreover, the very opportunity of the drawee to insure and to distribute the cost among its customers
who use checks makes the drawee an ideal party to spread the risk to insurance.23
Brady, in his treatise The Law of Forged and Altered Checks, elucidates:
When a person deposits money in a general account in a bank, against which he has the privilege of
drawing checks in the ordinary course of business, the relationship between the bank and the depositor
is that of debtor and creditor. So far as the legal relationship between the two is concerned, the
situation is the same as though the bank had borrowed money from the depositor, agreeing to repay it
on demand, or had bought goods from the depositor, agreeing to pay for them on demand. The bank
owes the depositor money in the same sense that any debtor owes money to his creditor. Added to this,
in the case of bank and depositor, there is, of course, the banks obligation to pay checks drawn by the
depositor in proper form and presented in due course. When the bank re_______________

21 Bank of Philippine Islands v. Court of Appeals, G.R. No. 102383, 26 November 1992, 216 SCRA 51, 65.
22 FARNSWORTH, E.A., NEGOTIABLE INSTRUMENTS: Cases and Materials, 2nd ed. (1959), at p. 173.
23 Id., at p. 174.
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Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company
ceives the deposit, it impliedly agrees to pay only upon the depositors order. When the bank pays a
check, on which the depositors signature is a forgery, it has failed to comply with its contract in this
respect. Therefore, the bank is held liable.
The fact that the forgery is a clever one is immaterial. The forged signature may so closely resemble the
genuine as to defy detection by the depositor himself. And yet, if a bank pays the check, it is paying out
its own money and not the depositors.
The forgery may be committed by a trusted employee or confidential agent. The bank still must bear the
loss. Even in a case where the forged check was drawn by the depositors partner, the loss was placed
upon the bank. The case referred to is Robinson v. Security Bank, Ark., 216 S. W. Rep. 717. In this case,
the plaintiff brought suit against the defendant bank for money which had been deposited to the
plaintiffs credit and which the bank had paid out on checks bearing forgeries of the plaintiffs signature.
xxx
It was held that the bank was liable. It was further held that the fact that the plaintiff waited eight or
nine months after discovering the forgery, before notifying the bank, did not, as a matter of law,
constitute a ratification of the payment, so as to preclude the plaintiff from holding the bank liable. x x x
This rule of liability can be stated briefly in these words: A bank is bound to know its depositors
signature. The rule is variously expressed in the many decisions in which the question has been
considered. But they all sum up to the proposition that a bank must know the signatures of those whose
general deposits it carries.24
By no means is the principle rendered obsolete with the advent of modern commercial transactions.
Contemporary texts still affirm this well-entrenched standard. Nickles, in his book Negotiable
Instruments and Other Related Commercial Paper wrote, thus:

The deposit contract between a payor bank and its customer determines who can draw against the
customers account by specifying whose signature is necessary on checks that are chargeable against the
customers account. Therefore, a check drawn against the account of an individual customer that is
signed by someone other than the customer, and without authority from her, is not properly payable
and is not chargeable to the customers account, inasmuch as any unauthorized signature on an
_______________

24 Brady, J.E., The Law of Forged and Altered Checks (1925), at pp. 6-7. Case citations omitted.
410

410
SUPREME COURT REPORTS ANNOTATED
Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company
instrument is ineffective as the signature of the person whose name is signed.25
Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute defense by the party
whose signature is forged.26 On the premise that Jongs signature was indeed forged, FEBTC is liable for
the loss since it authorized the discharge of the forged check. Such liability attaches even if the bank
exerts due diligence and care in preventing such faulty discharge. Forgeries often deceive the eye of the
most cautious experts; and when a bank has been so deceived, it is a harsh rule which compels it to
suffer although no one has suffered by its being deceived.27 The forgery may be so near like the
genuine as to defy detection by the depositor himself, and yet the bank is liable to the depositor if it
pays the check.28
Thus, the first matter of inquiry is into whether the check was indeed forged. A document formally
presented is presumed to be genuine until it is proved to be fraudulent. In a forgery trial, this
presumption must be overcome but this can only be done by convincing testimony and effective
illustrations.29
In ruling that forgery was not duly proven, the Court of Appeals held:
[There] is ground to doubt the findings of the trial court sustaining the alleged forgery in view of the
conflicting conclusions made by handwriting experts from the NBI and the PNP, both agencies of the
government.
xxx

These contradictory findings create doubt on whether there was indeed a forgery. In the case of TenioObsequio v. Court of Appeals, 230
_______________

25 Nickles, S.H., Negotiable Instruments and Other Related Commercial Paper, 2nd ed. (1993), at p. 415.
26 Gempesaw v. Court of Appeals, G.R. No. 92244, 9 February 1993, 218 SCRA 682, 689.
27 Philippine National Bank v. National City Bank of New York, 63 Phil. 711, 743-744 (1936); citing 17 A.
L. R., 891; 5 R. C. L., 559.
28 BRADY, H.J., BRADY ON BANK CHECKS, 3rd ed. (1962), at p. 475; citing Hardy v. Chesapeake Bank
(1879) 51Md. 562, 34 Am. Rep. 325.
29 OSBORN, A., QUESTIONED DOCUMENT PROBLEMS, 2nd ed. (1946), at pp. 181-182.
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Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company
SCRA 550, the Supreme Court held that forgery cannot be presumed; it must be proved by clear, positive
and convincing evidence.
This reasoning is pure sophistry. Any litigator worth his or her salt would never allow an opponents
expert witness to stand uncontradicted, thus the spectacle of competing expert witnesses is not
unusual. The trier of fact will have to decide which version to believe, and explain why or why not such
version is more credible than the other. Reliance therefore cannot be placed merely on the fact that
there are colliding opinions of two experts, both clothed with the presumption of official duty, in order
to draw a conclusion, especially one which is extremely crucial. Doing so is tantamount to a
jurisprudential cop-out.
Much is expected from the Court of Appeals as it occupies the penultimate tier in the judicial hierarchy.
This Court has long deferred to the appellate court as to its findings of fact in the understanding that it
has the appropriate skill and competence to plough through the minutiae that scatters the factual field.
In failing to thoroughly evaluate the evidence before it, and relying instead on presumptions
haphazardly drawn, the Court of Appeals was sadly remiss. Of course, courts, like humans, are fallible,
and not every error deserves a stern rebuke. Yet, the appellate courts error in this case warrants special
attention, as it is absurd and even dangerous as a precedent. If this rationale were adopted as a

governing standard by every court in the land, barely any actionable claim would prosper, defeated as it
would be by the mere invocation of the existence of a contrary expert opinion.
On the other hand, the RTC did adjudge the testimony of the NBI expert as more credible than that of
the PNP, and explained its reason behind the conclusion:
After subjecting the evidence of both parties to a crucible of analysis, the court arrived at the conclusion
that the testimony of the NBI document examiner is more credible because the testimony of the PNP
Crime Laboratory Services document examiner reveals that there are a lot of differences in the
questioned signature as compared to the standard specimen signature. Furthermore, as testified to by
Ms. Rhoda Flores, NBI expert, the manner of execution of the standard signatures used reveals that it is
a free rapid continuous execution or stroke as shown by the tampering terminal stroke of the signatures
whereas the questioned signature is a hesitating slow drawn execution stroke. Clearly, the person who
exe412

412
SUPREME COURT REPORTS ANNOTATED
Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company
cuted the questioned signature was hesitant when the signature was made.30
During the testimony of PNP expert Rosario Perez, the RTC bluntly noted that apparently, there *are+
differences on that questioned signature and the standard signatures.31 This Court, in examining the
signatures, makes a similar finding. The PNP expert excused the noted differences by asserting that
they were mere variations, which are normal deviations found in writing.32 Yet the RTC, which had
the opportunity to examine the relevant documents and to personally observe the expert witness,
clearly disbelieved the PNP expert. The Court similarly finds the testimony of the PNP expert as
unconvincing. During the trial, she was confronted several times with apparent differences between
strokes in the questioned signature and the genuine samples. Each time, she would just blandly assert
that these differences were just variations,33 as if the mere conjuration of the word would sufficiently
disquiet whatever doubts about the deviations. Such conclusion, standing alone, would be of little or no
value unless supported by sufficiently cogent reasons which might amount almost to a
demonstration.34
The most telling difference between the questioned and genuine signatures examined by the PNP is in
the final upward stroke in the signature, or the point to the short stroke of the terminal in the capital
letter L, as referred to by the PNP examiner who had marked it in her comparison chart as point no.
6. To the plain eye, such upward final stroke consists of a vertical line which forms a ninety degree (90)
angle with the previous stroke. Of the twenty one (21) other genuine samples examined by the PNP, at

least nine (9) ended with an upward stroke.35 However, unlike the questioned signature, the upward
strokes of eight (8) of these signatures are looped, while the upward stroke of the seventh36
_______________

30 Rollo, p. 31.
31 TSN dated 8 October 1993, p. 15.
32 Id., at pp. 15 and 19.
33 See TSN dated 8 October 1993, pp. 15, 17, 19, 34, 36 and 38.
34 Venuto v. Lizzo, 148 App. Div. 164, 132 N.Y. Supp. 1066 (1911), as cited in A. Osborn, supra, note 29.
35 Defendants Exhibits Nos. S-1, S-7, S-8, S-9, S-10, S-12, S-14, S-15, and S-16.
36 Defendants Exhibit No. S-9.
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Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company
forms a severe forty-five degree (45) with the previous stroke. The difference is glaring, and indeed, the
PNP examiner was confronted with the inconsistency in point no. 6.
Q:
Now, in this questioned document point no. 6, the s stroke is directly upwards.
A:
Yes, sir.
Q:
Now, can you look at all these standard signature (sic) were (sic) point 6 is repeated or the last stroke s
is pointing directly upwards?
A:
There is none in the standard signature, sir.37

Again, the PNP examiner downplayed the uniqueness of the final stroke in the questioned signature as a
mere variation,38 the same excuse she proffered for the other marked differences noted by the Court
and the counsel for petitioner.39
There is no reason to doubt why the RTC gave credence to the testimony of the NBI examiner, and not
the PNP experts. The NBI expert, Rhoda Flores, clearly qualifies as an expert witness. A document
examiner for fifteen years, she had been promoted to the rank of Senior Document Examiner with the
NBI, and had held that rank for twelve years prior to her testimony. She had placed among the top five
examinees in the Competitive Seminar in Question Document Examination, conducted by the NBI
Academy, which qualified her as a document examiner.40 She had trained with the Royal Hongkong
Police Laboratory and is a member of the International Association for Identification.41 As of the time
she testified, she had examined more than fifty to fifty-five thousand questioned documents, on an
average of fifteen to twenty documents a day.42 In comparison, PNP document examiner Perez
admitted to having examined only around five hundred documents as of her testimony.43
_______________

37 TSN dated 8 October 1993, p. 35.


38 Id., at pp. 19 and 36.
39 Supra, note 26.
40 TSN dated 27 April 1993, p. 5.
41 Id., at p. 7.
42 Id., at pp. 7-8.
43 TSN dated 8 October 1993, p. 4.
414

414
SUPREME COURT REPORTS ANNOTATED
Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company
In analyzing the signatures, NBI Examiner Flores utilized the scientific comparative examination method
consisting of analysis, recognition, comparison and evaluation of the writing habits with the use of
instruments such as a magnifying lense, a stereoscopic microscope, and varied lighting substances. She
also prepared enlarged photographs of the signatures in order to facilitate the necessary

comparisons.44 She compared the questioned signature as against ten (10) other sample signatures of
Jong. Five of these signatures were executed on checks previously issued by Jong, while the other five
contained in business letters Jong had signed.45 The NBI found that there were significant differences in
the handwriting characteristics existing between the questioned and the sample signatures, as to
manner of execution, link/connecting strokes, proportion characteristics, and other identifying
details.46
The RTC was sufficiently convinced by the NBI examiners testimony, and explained her reasons in its
Decisions. While the Court of Appeals disagreed and upheld the findings of the PNP, it failed to
convincingly demonstrate why such findings were more credible than those of the NBI expert. As a
throwaway, the assailed Decision noted that the PNP, not the NBI, had the opportunity to examine the
specimen signature card signed by Jong, which was relied upon by the employees of FEBTC in
authenticating Jongs signature. The distinction is irrelevant in establishing forgery. Forgery can be
established comparing the contested signatures as against those of any sample signature duly
established as that of the persons whose signature was forged.
FEBTC lays undue emphasis on the fact that the PNP examiner did compare the questioned signature
against the bank signature cards. The crucial fact in question is whether or not the check was forged, not
whether the bank could have detected the forgery. The latter issue becomes relevant only if there is
need to weigh the comparative negligence between the bank and the party whose signature was forged.
_______________

44 TSN dated 27 April 1993, pp. 18-19.


45 Id., at p. 14.
46 Per NBI Questioned Documents Report No. 244-492, Plaintiffs Exhibit D.
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Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company
At the same time, the Court of Appeals failed to assess the effect of Jongs testimony that the signature
on the check was not his.47 The assertion may seem self-serving at first blush, yet it cannot be ignored
that Jong was in the best position to know whether or not the signature on the check was his. While his
claim should not be taken at face value, any averments he would have on the matter, if adjudged as
truthful, deserve primacy in consideration. Jongs testimony is supported by the findings of the NBI

examiner. They are also backed by factual circumstances that support the conclusion that the assailed
check was indeed forged. Judicial notice can be taken that is highly unusual in practice for a business
establishment to draw a check for close to a million pesos and make it payable to cash or bearer, and
not to order. Jong immediately reported the forgery upon its discovery. He filed the appropriate criminal
charges against Sempio, the putative forger.48
Now for determination is whether Samsung Construction was precluded from setting up the defense of
forgery under Section 23 of the Negotiable Instruments Law. The Court of Appeals concluded that
Samsung Construction was negligent, and invoked the doctrines that where a loss must be borne by
one of two innocent person, can be traced to the neglect or fault of either, it is reasonable that it would
be borne by him, even if innocent of any intentional fraud, through whose means it has succeeded49 or
who put into the power of the third person to perpetuate the wrong.50 Applying these rules, the Court
of Appeals determined that it was the negligence of Samsung Construction that allowed the encashment
of the forged check.
In the case at bar, the forgery appears to have been made possible through the acts of one Jose Sempio
III, an assistant accountant employed by the plaintiff Samsung [Construction] Co. Philippines, Inc. who
suppos_______________

47 See TSN dated 25 January 1993, p. 7.


48 See note 10.
49 Rollo, p. 38, citing PNB v. National City Bank of New York, 63 Phil. 711, 733 (1936), which in turn cites
Gloucester Bank v. Salem Bank, 17 Mass., 33; First Nat. Bank of Danvers vs. First National Bank of Salem,
151 Mass., 280; and B.B. Ford & Co. v. Peoples Bank of Orangeburg, 74 S.C., 180.
50 Ibid., citing PNB v. Court of Appeals, 134 Phil. 829, 834; 25 SCRA 693, 699 (1968), which in turn cites
Blondeau v. Nano, 61 Phil. 625, 631, 632 (1935).
416

416
SUPREME COURT REPORTS ANNOTATED
Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company
edly stole the blank check and who presumably is responsible for its encashment through a forged
signature of Jong Kyu Lee. Sempio was assistant to the Korean accountant who was in possession of the
blank checks and who through negligence, enabled Sempio to have access to the same. Had the Korean

accountant been more careful and prudent in keeping the blank checks Sempio would not have had the
chance to steal a page thereof and to effect the forgery. Besides, Sempio was an employee who appears
to have had dealings with the defendant Bank in behalf of the plaintiff corporation and on the date the
check was encashed, he was there to certify that it was a genuine check issued to purchase equipment
for the company.51
We recognize that Section 23 of the Negotiable Instruments Law bars a party from setting up the
defense of forgery if it is guilty of negligence.52 Yet, we are unable to conclude that Samsung
Construction was guilty of negligence in this case. The appellate court failed to explain precisely how the
Korean accountant was negligent or how more care and prudence on his part would have prevented the
forgery. We cannot sustain this tar and feathering resorted to without any basis.
The bare fact that the forgery was committed by an employee of the party whose signature was forged
cannot necessarily imply that such partys negligence was the cause for the forgery. Employers do not
possess the preternatural gift of cognition as to the evil that may lurk within the hearts and minds of
their employees. The Courts pronouncement in PCI Bank v. Court of Appeals53 applies in this case, to
wit:
[T]he mere fact that the forgery was committed by a drawer-payors confidential employee or agent,
who by virtue of his position had unusual facilities for perpetrating the fraud and imposing the forged
paper upon the bank, does not entitle the bank to shift the loss to the drawer-payor, in the absence of
some circumstance raising estoppel against the drawer.54
Admittedly, the record does not clearly establish what measures Samsung Construction employed to
safeguard its blank checks.
_______________

51 Rollo, p. 38.
52 MWSS v. Court of Appeals, G.R. No. L-62943, 14 July 1986, 143 SCRA 20, 31.
53 G.R. Nos. 121413, 121479 and 128604, 29 January 2001, 350 SCRA 446.
54 Ibid., at p. 465.
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Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company

Jong did testify that his accountant, Kyu, kept the checks inside a safety box,55 and no contrary
version was presented by FEBTC. However, such testimony cannot prove that the checks were indeed
kept in a safety box, as Jongs testimony on that point is hearsay, since Kyu, and not Jong, would have
the personal knowledge as to how the checks were kept.
Still, in the absence of evidence to the contrary, we can conclude that there was no negligence on
Samsung Constructions part. The presumption remains that every person takes ordinary care of his
concerns,56 and that the ordinary course of business has been followed.57 Negligence is not presumed,
but must be proven by him who alleges it.58 While the complaint was lodged at the instance of
Samsung Construction, the matter it had to prove was the claim it had allegedwhether the check was
forged. It cannot be required as well to prove that it was not negligent, because the legal presumption
remains that ordinary care was employed.
Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact that Samsung Construction
was negligent. While the payee, as in this case, may not have the personal knowledge as to the standard
procedures observed by the drawer, it well has the means of disputing the presumption of regularity.
Proving a negative fact may be a difficult office,59 but necessarily so, as it seeks to overcome a
presumption in law. FEBTC was unable to dispute the presumption of ordinary care exercised by
Samsung Construction, hence we cannot agree with the Court of Appeals finding of negligence.
The assailed Decision replicated the extensive efforts which FEBTC devoted to establish that there was
no negligence on the part of the bank in its acceptance and payment of the forged check. However, the
degree of diligence exercised by the bank would be irrelevant if the drawer is not precluded from setting
up the defense of forgery under Section 23 by his own negligence. The rule of
_______________

55 TSN dated 25 January 1993, pp. 19, 31.


56 See Section 3(d), Rule 131, Rules of Court.
57 See Section 3(q), Rule 131, Rules of Court.
58 Taylor v. Manila Electric Railroad, 16 Phil. 8, 28 (1910), citing Scaevola, Jurisprudencia del Codigo
Civil, vol. 6, 551, 552.
59 US v. Tria, 17 Phil. 303, 307 (1910).
418

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SUPREME COURT REPORTS ANNOTATED

Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company
equity enunciated in PNB v. National City Bank of New York, 60 as relied upon by the Court of Appeals,
deserves careful examination.
The point in issue has sometimes been said to be that of negligence. The drawee who has paid upon the
forged signature is held to bear the loss, because he has been negligent in failing to recognize that the
handwriting is not that of his customer. But it follows obviously that if the payee, holder, or presenter of
the forged paper has himself been in default, if he has himself been guilty of a negligence prior to that of
the banker, or if by any act of his own he has at all contributed to induce the bankers negligence, then
he may lose his right to cast the loss upon the banker.61 (Emphasis supplied)
Quite palpably, the general rule remains that the drawee who has paid upon the forged signature bears
the loss. The exception to this rule arises only when negligence can be traced on the part of the drawer
whose signature was forged, and the need arises to weigh the comparative negligence between the
drawer and the drawee to determine who should bear the burden of loss. The Court finds no basis to
conclude that Samsung Construction was negligent in the safekeeping of its checks. For one, the settled
rule is that the mere fact that the depositor leaves his check book lying around does not constitute such
negligence as will free the bank from liability to him, where a clerk of the depositor or other persons,
taking advantage of the opportunity, abstract some of the check blanks, forges the depositors signature
and collect on the checks from the bank.62 And for another, in point of fact Samsung Construction was
not negligent at all since it reported the forgery almost immediately upon discovery.63
_______________

60 63 Phil. 711 (1936).


61 Id., at p. 740; citing 2 Morse on Banks and Banking, 5th ed., secs. 464 and 466, pp. 82-85 and 86, 87.
62 BRADY, J.E., THE LAW OF FORGED AND ALTERED CHECKS, supra, note 24, at 24-27; citing MacIntosh
v. Bank, 123 Mass. 393; East St. Louis Cotton Oil Co. v. Bank of Steele, Mo., 205 S.W. Rep. 96.
63 For his failure or negligence either to discover or to report promptly the fact of such forgery to the
drawee, the drawer loses his right against the drawee who has debited his account under the forged
indorse-ment. Gempesaw v. Court of Appeals, G.R. No. 92244, 9 February 1993, 218 SCRA 682, 690;
citing American jurisprudence. A bank may escape liability where the depositors negligence consists of
failure to properly examine his bank statements and cancelled checks and failure to notify
419

VOL. 436, AUGUST 13, 2004

419
Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company
It is also worth noting that the forged signatures in PNB v. National City Bank of New York were not of
the drawer, but of indorsers. The same circumstance attends PNB v. Court of Appeals,64 which was also
cited by the Court of Appeals. It is accepted that a forged signature of the drawer differs in treatment
than a forged signature of the indorser.
The justification for the distinction between forgery of the signature of the drawer and forgery of an
indorsement is that the drawee is in a position to verify the drawers signature by comparison with one
in his hands, but has ordinarily no opportunity to verify an indorsement.65
Thus, a drawee bank is generally liable to its depositor in paying a check which bears either a forgery of
the drawers signature or a forged indorsement. But the bank may, as a general rule, recover back the
money which it has paid on a check bearing a forged indorsement, whereas it has not this right to the
same extent with reference to a check bearing a forgery of the drawers signature.66
The general rule imputing liability on the drawee who paid out on the forgery holds in this case.
Since FEBTC puts into issue the degree of care it exercised before paying out on the forged check, we
might as well comment on the banks performance of its duty. It might be so that the bank complied
with its own internal rules prior to paying out on the questionable check. Yet, there are several troubling
circumstances that lead us to believe that the bank itself was remiss in its duty.
The fact that the check was made out in the amount of nearly one million pesos is unusual enough to
require a higher degree of caution on the part of the bank. Indeed, FEBTC confirms this through its own
internal procedures. Checks below twenty-five thousand pesos require only the approval of the teller;
those between twenty-five thousand to one hundred thousand pesos necessitate the approval of one
bank officer; and should the amount exceed one hundred thousand pesos, the concurrence of two bank
officers is required.67
_______________

the bank of forgery within a reasonable time. H. Bailey, supra, note 28, at p. 477. But see note 24.
64 G.R. No. L-26001, 29 October 1968, 25 SCRA 693.
65 Farnsworth, E.A., supra note 22, at p. 173.
66 Brady, J.E., supra, note 24, at p. 5.
67 See TSN dated 12 July 1993, p. 8.
420

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SUPREME COURT REPORTS ANNOTATED
Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company
In this case, not only did the amount in the check nearly total one million pesos, it was also payable to
cash. That latter circumstance should have aroused the suspicion of the bank, as it is not ordinary
business practice for a check for such large amount to be made payable to cash or to bearer, instead of
to the order of a specified person.68 Moreover, the check was presented for payment by one Roberto
Gonzaga, who was not designated as the payee of the check, and who did not carry with him any written
proof that he was authorized by Samsung Construction to encash the check. Gonzaga, a stranger to
FEBTC, was not even an employee of Samsung Construction.69 These circumstances are already
suspicious if taken independently, much more so if they are evaluated in concurrence. Given the
shadiness attending Gonzagas presentment of the check, it was not sufficient for FEBTC to have merely
complied with its internal procedures, but mandatory that all earnest efforts be undertaken to ensure
the validity of the check, and of the authority of Gonzaga to collect payment therefor.
According to FEBTC Senior Assistant Cashier Gemma Velez, the bank tried, but failed, to contact Jong
over the phone to verify the check.70 She added that calling the issuer or drawer of the check to verify
the same was not part of the standard procedure of the bank, but an extra effort.71 Even assuming
that such personal verification is tantamount to extraordinary diligence, it cannot be denied that FEBTC
still paid out the check despite the absence of any proof of verification from the drawer. Instead, the
bank seems to have relied heavily on the say-so of Sempio, who was present at the bank at the time the
check was presented.
_______________

68 When the instrument is payable to order the payee must be named or otherwise indicated therein
with reasonable certainty. Sec. 8, Act No. 2031 (Negotiable Instruments Law). Worthy of note is the
fact that a check payable to bearer is more likely to be forged than one that is payable to order. The
unofficial essence of bearer check is that anyone who possesses or holds it can indorse or receive
payment for it which implies that payment is not limited to a particular person. See Nickles, S.H.,
Matheson, J.H., and Adams, E.S., Modern Commercial Paper: The New Law of Negotiable Instruments
and Related Commercial Paper (1994), at p. 61.
69 See TSN dated 26 July 1993, p. 18.
70 See TSN dated 12 July 1993, p. 11.
71 Ibid.

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Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company
FEBTC alleges that Sempio was well-known to the bank officers, as he had regularly transacted with the
bank in behalf of Samsung Construction. It was even claimed that everytime FEBTC would contact Jong
about problems with his account, Jong would hand the phone over to Sempio.72 However, the only
proof of such allegations is the testimony of Gemma Velez, who also testified that she did not know
Sempio personally,73 and had met Sempio for the first time only on the day the check was encashed.74
In fact, Velez had to inquire with the other officers of the bank as to whether Sempio was actually
known to the employees of the bank.75 Obviously, Velez had no personal knowledge as to the past
relationship between FEBTC and Sempio, and any averments of her to that effect should be deemed
hearsay evidence. Interestingly, FEBTC did not present as a witness any other employee of their Bel-Air
branch, including those who supposedly had transacted with Sempio before.
Even assuming that FEBTC had a standing habit of dealing with Sempio, acting in behalf of Samsung
Construction, the irregular circumstances attending the presentment of the forged check should have
put the bank on the highest degree of alert. The Court recently emphasized that the highest degree of
care and diligence is required of banks.
Banks are engaged in a business impressed with public interest, and it is their duty to protect in return
their many clients and depositors who transact business with them. 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.76
Given the circumstances, extraordinary diligence dictates that FEBTC should have ascertained from Jong
personally that the signature in the questionable check was his.
_______________

72 Id., at p. 17.
73 Id., at p. 18.
74 TSN dated 26 July 1993, p. 3.
75 Id., at p. 6.

76 Westmont Bank v. Ong, G.R. No. 132560, 30 January 2002, 375 SCRA 212, 220-221.
422

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SUPREME COURT REPORTS ANNOTATED
Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust Company
Still, even if the bank performed with utmost diligence, the drawer whose signature was forged may still
recover from the bank as long as he or she is not precluded from setting up the defense of forgery. After
all, Section 23 of the Negotiable Instruments Law plainly states that no right to enforce the payment of a
check can arise out of a forged signature. Since the drawer, Samsung Construction, is not precluded by
negligence from setting up the forgery, the general rule should apply. Consequently, if a bank pays a
forged check, it must be considered as paying out of its funds and cannot charge the amount so paid to
the account of the depositor.77 A bank is liable, irrespective of its good faith, in paying a forged
check.78
WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 28 November 1996 is
REVERSED, and the Decision of the Regional Trial Court of Manila, Branch 9, dated 25 April 1994 is
REINSTATED. Costs against respondent.
SO ORDERED.
Puno (Chairman), Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ., concur.
Petition granted, judgment reversed. That of the court a quo reinstated.
Note.Issue of whether a party is negligent is a question of fact. (Thermochem Incorporated vs. Naval,
344 SCRA 76 [2000])
o0o

_______________

77 Traders Royal Bank v. Radio Philippines Network, Inc., G.R. No. 138510, 10 October 2002, 390 SCRA
608, 614.
78 Bailey, H.J., supra, note 28 at p. 474.
423

Copyright 2014 Central Book Supply, Inc. All rights reserved. [Samsung Construction Company
Philippines, Inc. vs. Far East Bank and Trust Company, 436 SCRA 402(2004)]

G.R. No. 116320. November 29, 1999.*


ADALIA FRANCISCO, petitioner, vs. COURT OF APPEALS, HERBY COMMERCIAL & CONSTRUCTION
CORPORATION AND JAIME C. ONG, respondents.
Remedial Law; Evidence; Well-entrenched is the rule that findings of trial courts which are factual in
nature, especially when affirmed by the Court of Appeals, deserve to be respected and affirmed by the
Supreme Court, provided it is supported by substantial evidence on record.As regards the forgery, we
concur with the lower courts finding that Francisco forged the signature of Ong on the checks to make it
appear as if Ong had indorsed said checks and that, after indorsing the checks for a second time by
signing her name at the back of the checks, Francisco deposited said checks in her savings account with
IBAA. The forgery was satisfactorily established in the trial court upon the strength of the findings of the
NBI handwriting expert. Other than petitioners self-serving denials, there is nothing in the records to
rebut the NBIs findings. Well-entrenched is the rule that findings of trial courts which are factual in
nature, especially when affirmed by the Court of Appeals, deserve to be respected and affirmed by the
Supreme Court, provided it is supported by substantial evidence on record, as it is in the case at bench.
Negotiable Instruments Law; Indorsement; The Negotiable Instruments Law provides that where any
person is under obligation to indorse in a representative capacity, he may indorse in such terms as to
negative personal liability.Petitioner claims that she was, in any event, authorized to sign Ongs name
on the checks by virtue of the Certification executed by Ong in her favor giving her the authority to
collect all the receivables of HCCC from the GSIS, including the questioned checks. Petitioners
alternative defense must similarly fail. The Negotiable Instruments Law provides that where any person
is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative
personal liability. An agent, when so signing, should indicate that he is merely signing in behalf of the
principal and must disclose the name of his principal; otherwise he shall be held personally liable. Even
assuming that Francisco was authorized by HCCC to sign Ongs name, still, Fran______________

* THIRD DIVISION.
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VOL. 319, NOVEMBER 29, 1999

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Francisco vs. Court of Appeals
cisco did not indorse the instrument in accordance with law. Instead of signing Ongs name, Francisco
should have signed her own name and expressly indicated that she was signing as an agent of HCCC.
Thus, the Certification cannot be used by Francisco to validate her act of forgery.
Civil Law; Damages; Every person who, contrary to law, wilfully or negligently causes damage to
another, shall indemnify the latter for the same.Every person who, contrary to law, wilfully or
negligently causes damage to another, shall indemnify the latter for the same.Due to her forgery of
Ongs signature which enabled her to deposit the checks in her own account, Francisco deprived HCCC
of the money due it from the GSIS pursuant to the Land Development and Construction Contract. Thus,
we affirm respondent courts award of compensatory damages in the amount of P370,475.00, but with
a modification as to the interest rate which shall be six percent (6%) per annum, to be computed from
the date of the filing of the complaint since the amount of damages was alleged in the
complaint;however, the rate of interest shall be twelve percent (12%) per annum from the time the
judgment in this case becomes final and executory until its satisfaction and the basis for the
computation of this twelve percent (12%) rate of interest shall be the amount of P370,475.00.
Same; Same; Court sustains the award of exemplary damages in the amount of P50,000.00.We also
sustain the award of exemplary damages in the amount of P50,000.00. Under Article 2229 of the Civil
Code, exemplary damages are imposed by way of example or correction for the public good, in addition
to the moral, temperate, liquidated or compensatory damages. Considering petitioners fraudulent act,
we hold that an award of P50,000.00 would be adequate, fair and reasonable. The grant of exemplary
damages justifies the award of attorneys fees in the amount of P50,000.00, and the award of P5,000.00
for litigation expenses.
Same; Same; Appellate courts award of P50,000.00 in moral damages is warranted.The appellate
courts award of P50,000.00 in moral damages is warranted. Under Article 2217 of the Civil Code, moral
damages may be granted upon proof of physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation and similar injury. Ong
testitified that he suffered sleepless nights, embarrassment, humiliation and anxiety upon discovering
that the checks due
356

356
SUPREME COURT REPORTS ANNOTATED
Francisco vs. Court of Appeals

his company were forged by petitioner and that petitioner had filed baseless criminal complaints against
him before the fiscals office of Quezon City which disrupted HCCCs business operations.
PETITION for review on certiorari of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.


Enrique Agana & Associates for petitioner.
Nelson A. Loyola for private respondents.
Eliseo P. Vencer II for intervenors.
GONZAGA-REYES, J.:

Assailed in this petition for review on certiorari is the decision1 of the Court of Appeals affirming the
decision2 rendered by Branch 168 of the Regional Trial Court of Pasig in Civil Case No. 35231 in favor of
private respondents.
The controversy before this Court finds its origins in a Land Development and Construction Contract
which was entered into on June 23, 1977 by A. Francisco Realty & Development Corporation (AFRDC), of
which petitioner Adalia Francisco (Francisco) is the president, and private respondent Herby Commercial
& Construction Corporation (HCCC), represented by its President and General Manager private
respondent Jaime C. Ong (Ong), pursuant to a housing project of AFRDC at San Jose del Monte, Bulacan,
financed by the Government Service Insurance System (GSIS). Under the contract, HCCC agreed to
undertake the construction of 35 housing units and the development of 35 hectares of land. The
___________________

1 The case was docketed as CA-G.R. CV No. 18555 and the decision was promulgated on June 29, 1992
by the Special Seventeenth Division composed of Cancio C. Garcia (ponente), Serafin E. Camilon, and
Cezar D. Francisco.
2 The decision was penned by Benjamin V. Pelayo and promulgated on February 16, 1988.
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VOL. 319, NOVEMBER 29, 1999


357

Francisco vs. Court of Appeals


payment of HCCC for its services was on a turn-key basis, that is, HCCC was to be paid on the basis of the
completed houses and developed lands delivered to and accepted by AFRDC and the GSIS. To facilitate
payment, AFRDC executed a Deed of Assignment in favor of HCCC to enable the latter to collect
payments directly from the GSIS. Furthermore, the GSIS and AFRDC put up an Executive Committee
Account with the Insular Bank of Asia & America (IBAA) in the amount of P4,000,000.00 from which
checks would be issued and co-signed by petitioner Francisco and the GSIS Vice-President Armando Diaz
(Diaz).
On February 10, 1978, HCCC filed a complaint3 with the Regional Trial Court of Quezon City against
Francisco, AFRDC and the GSIS for the collection of the unpaid balance under the Land Development and
Construction Contract in the amount of P515,493.89 for completed and delivered housing units and land
development. However, the parties eventually arrived at an amicable settlement of their differences,
which was embodied in a Memorandum Agreement executed by HCCC and AFRDC on July 21, 1978.
Under the agreement, the parties stipulated that HCCC had turned over 83 housing units which have
been accepted and paid for by the GSIS. The GSIS acknowledged that it still owed HCCC P520,177.50
representing incomplete construction of housing units, incomplete land development and 5% retention,
which amount will be discharged when the defects and deficiencies are finally completed by HCCC. It
was also provided that HCCC was indebted to AFRDC in the amount of P180,234.91 which the former
agreed would be paid out of the proceeds from the 40 housing units still to be turned over by HCCC or
from any amount due to HCCC from the GSIS. Consequently, the trial court dismissed the case upon the
filing by the parties of a joint motion to dismiss.
Sometime in 1979, after an examination of the records of the GSIS, Ong discovered that Diaz and
Francisco had exe_________________

3 Docketed as Civil Case No. Q-24628.


358

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SUPREME COURT REPORTS ANNOTATED
Francisco vs. Court of Appeals
cuted and signed seven checks,4 of various dates and amounts, drawn against the IBAA and payable to
HCCC for completed and delivered work under the contract. Ong, however, claims that these checks
were never delivered to HCCC. Upon inquiry with Diaz, Ong learned that the GSIS gave Francisco custody

of the checks since she promised that she would deliver the same to HCCC. Instead, Francisco forged the
signature of Ong, without his knowledge or consent, at the dorsal portion of the said checks to make it
appear that HCCC had indorsed the checks; Francisco then indorsed the checks for a second time by
signing her name at the back of the checks and deposited the checks in her IBAA savings account. IBAA
credited Franciscos account with the amount of the checks and the latter withdrew the amount so
credited.
On June 7, 1979, Ong filed complaints with the office of the city fiscal of Quezon City, charging Francisco
with estafa thru falsification of commercial documents. Francisco denied having forged Ongs signature
on the checks, claiming that Ong himself indorsed the seven checks in behalf of HCCC and delivered the
same to Francisco in payment of the loans extended by Francisco to HCCC. According to Francisco, she
agreed to grant HCCC the loans in the total amount of P585,000.00 and covered by eighteen promissory
notes in order to obviate the risk of the non-completion of the project.
_________________

4 1. Check No. 0756055, dated October 20, 1977, for P61,800.00 (Exhibit C).
2. Check No. 0756067, dated October 27, 1977, for P67,100.00 (Exhibit C-1).
3. Check No. 0756061, dated October 25, 1977, for P51,475.00 (Exhibit C-2).
4. Check No. 0756081, dated November 5, 1977, for P32,050.00 (Exhibit C-3).
5. Check No. 0756066, dated October 27, 1977, for P36,250.00 (Exhibit C-4).
6. Check No. 0756062, dated October 25, 1977, for P56,700.00 (Exhibit C-5).
7. Check No. 0756082, dated November 5, 1977, for P65,100.00 (Exhibit C-6).
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Francisco vs. Court of Appeals
As a means of repayment, Ong allegedly issued a Certification authorizing Francisco to collect HCCCs
receivables from the GSIS. Assistant City Fiscal Ramon M. Gerona gave credence to Franciscos claims and
accordingly, dismissed the complaints, which dismissal was affirmed by the Minister of Justice in a
resolution issued on June 5, 1981.

The present case was brought by private respondents on November 19, 1979 against Francisco and IBAA
for the recovery of P370,475.00, representing the total value of the seven checks, and for damages,
attorneys fees, expenses of litigation and costs. After trial on the merits, the trial court rendered its
decision in favor of private respondents, the dispositive portion of which provides
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and against
the defendants INSULAR BANK OF ASIA & AMERICA and ATTY. ADALIA FRANCISCO, to jointly and
severally pay the plaintiffs the amount of P370.475.00 plus interest thereon at the rate of 12% per
annum from the date of the filing of the complaint until the full amount is paid; moral damages to
plaintiff Jaime Ong in the sum of P50,000.00; exemplary damages of P50,000.00; litigation expenses of
P5,000.00; and attorneys fees of P50,000.00.
With respect to the cross-claim of the defendant IBAA against its co-defendant Atty. Adalia Francisco,
the latter is ordered to reimburse the former for the sums that the Bank shall pay to the plaintiff on the
forged checks including the interests paid thereon. Further, the defendants are ordered to pay the costs.
Based upon the findings of handwriting experts from the National Bureau of Investigation (NBI), the trial
court held that Francisco had indeed forged the signature of Ong to make it appear that he had indorsed
the checks. Also, the court ruled that there were no loans extended, reasoning that it was unbelievable
that HCCC was experiencing financial difficulties so as to compel it to obtain the loans from AFRDC in
view of the fact that the GSIS had issued checks in favor of HCCC at about the same time that the alleged
advances were made. The trial court stated that it was plausible that Fran360

360
SUPREME COURT REPORTS ANNOTATED
Francisco vs. Court of Appeals
cisco concealed the fact of issuance of the checks from private respondents in order to make it appear
as if she were accommodating private respondents, when in truth she was lending HCCC its own money.
With regards to the Memorandum Agreement entered into between AFRDC and HCCC in Civil Case No.
Q-24628, the trial court held that the same did not make any mention of the forged checks since private
respondents were as of yet unaware of their existence, that fact having been effectively concealed by
Francisco, until private respondents acquired knowledge of Franciscos misdeeds in 1979.
IBAA was held liable to private respondents for having honored the checks despite such obvious
irregularities as the lack of initials to validate the alterations made on the check, the absence of the
signature of a co-signatory in the corporate checks of HCCC and the deposit of the checks on a second
indorsement in the savings account of Francisco. However, the trial court allowed IBAA recourse against

Francisco, who was ordered to reimburse the IBAA for any sums it shall have to pay to private
respondents.5
Both Francisco and IBAA appealed the trial courts decision, but the Court of Appeals dismissed IBAAs
appeal for its failure to file its brief within the 45-day extension granted by the appellate court. IBAAs
motion for reconsideration and petition for review on certiorari filed with this Court were also similarly
denied. On November 21, 1989, IBAA and HCCC entered into a Compromise Agreement which was
approved by the trial court, wherein HCCC acknowledged receipt of the amount of P370,475.00 in full
satisfaction of its claims against IBAA, without prejudice to the right of the latter to pursue its claims
against Francisco.
On June 29, 1992, the Court of Appeals affirmed the trial courts ruling, hence this petition for review on
certiorari filed by petitioner, assigning the following errors to the appealed decision
________________

5 RTC Records, 455-464.


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Francisco vs. Court of Appeals
1. The respondent Court of Appeals erred in concluding that private respondents did not owe Petitioner
the sum covered by the Promissory Notes Exh. 2-2-A-2-P (FRANCISCO). Such conclusion was based
mainly on conjectures, surmises and speculation contrary to the unrebutted pleadings and evidence
presented by petitioner.
2. The respondent Court of Appeals erred in holding that Petitioner falsified the signature of private
respondent ONG on the checks in question without any authority therefor which is patently
contradictory to the unrebutted pleading and evidence that petitioner was expressly authorized by
respondent HERBY thru ONG to collect all receivables of HERBY from GSIS to pay the loans extended to
them. (Exhibit 3).
3. That respondent Court of Appeals erred in holding that the seven checks in question were not taken
up in the liquidation and reconciliation of all outstanding account between AFRDC and HERBY as
acknowledged by the parties in Memorandum Agreement (Exh. 5) is a pure conjecture, surmise and
speculation contrary to the unrebutted evidence presented by petitioners. It is an inference made which
is manifestly mistaken.

4. The respondent Court of Appeals erred in affirming the decision of the lower court and dismissing the
appeal.6
The pivotal issue in this case is whether or not Francisco forged the signature of Ong on the seven
checks. In this connection, we uphold the lower courts finding that the subject matter of the present
case, specifically the seven checks, drawn by GSIS and AFRDC, dated between October to November
1977, in the total amount of P370,475.00 and payable to HCCC, was not included in the Memorandum
Agreement executed by HCCC and AFRDC in Civil Case No. Q-24628. As observed by the trial court, aside
from there being absolutely no mention of the checks in the said agreement, the amounts represented
by said checks could not have been included in the Memorandum Agreement executed in 1978 because
private respondents only discovered Franciscos acts of forgery in 1979. The lower courts found that
Francisco was able to easily conceal from private respondents even the fact of the issuance
_______________

6 Rollo, 19-20.
362

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SUPREME COURT REPORTS ANNOTATED
Francisco vs. Court of Appeals
of the checks since she was a co-signatory thereof.7 We also note that Francisco had custody of the
checks, as proven by the check vouchers bearing her uncontested signature,8 by which she, in effect,
acknowledged having received the checks intended for HCCC. This contradicts Franciscos claims that
the checks were issued to Ong who delivered them to Francisco already indorsed.9
As regards the forgery, we concur with the lower courts finding that Francisco forged the signature of
Ong on the checks to make it appear as if Ong had indorsed said checks and that, after indorsing the
checks for a second time by signing her name at the back of the checks, Francisco deposited said checks
in her savings account with IBAA. The forgery was satisfactorily established in the trial court upon the
strength of the findings of the NBI handwriting expert.10 Other than petitioners self-serving denials,
there is nothing in the records to rebut the NBIs findings. Well-entrenched is the rule that findings of
trial courts which are factual in nature, especially when affirmed by the Court of Appeals, deserve to be
respected and affirmed by the Supreme Court, provided it is supported by substantial evidence on
record,11 as it is in the case at bench.
Petitioner claims that she was, in any event, authorized to sign Ongs name on the checks by virtue of
the Certification executed by Ong in her favor giving her the authority to collect all the receivables of

HCCC from the GSIS, including the questioned checks.12 Petitioners alternative defense must similarly
fail. The Negotiable Instruments Law provides that where any person is under obligation to indorse in a
representative capacity, he may indorse in such terms as to negative
________________

7 RTC Decision, 7-8; CA Decision, 10.


8 Exhibits E-1 to E-7.
9 Rollo, 29.
10 Exhibits P-1, P-2.
11 Almeda vs. Court of Appeals, 269 SCRA 643 (1997); Fuentes vs. Court of Appeals, 268 SCRA 703
(1997); People vs. Magallano, 266 SCRA 305 (1997).
12 Rollo, 30-33.
363

VOL. 319, NOVEMBER 29, 1999


363
Francisco vs. Court of Appeals
personal liability.13 An agent, when so signing, should indicate that he is merely signing in behalf of the
principal and must disclose the name of his principal; otherwise he shall be held personally liable.14
Even assuming that Francisco was authorized by HCCC to sign Ongs name, still, Francisco did not
indorse the instrument in accordance with law. Instead of signing Ongs name, Francisco should have
signed her own name and expressly indicated that she was signing as an agent of HCCC. Thus, the
Certification cannot be used by Francisco to validate her act of forgery. Every person who, contrary to
law, wilfully or negligently causes damage to another, shall indemnify the latter for the same.15 Due to
her forgery of Ongs signature which enabled her to deposit the checks in her own account, Francisco
deprived HCCC of the money due it from the GSIS pursuant to the Land Development and Construction
Contract. Thus, we affirm respondent courts award of compensatory damages in the amount of
P370,475.00, but with a modification as to the interest rate which shall be six percent (6%) per annum,
to be computed from the date of the filing of the complaint since the amount of damages was alleged in
the complaint;16 however, the rate of interest shall be twelve percent (12%) per annum from the time
the judgment in this case becomes final and executory until its satisfaction and the basis for the
computation of this twelve percent (12%) rate of interest shall be the amount of P370,475.00. This is in
accordance with the doctrine enunciated in Eastern Shipping Lines, Inc. vs. Court of

_________________

13 Act No. 2031, sec. 44.


14 Id., sec. 20. Liability of person signing as agent, and so forth.Where the instrument contains or a
person adds to his signature words indicating that he signs for or on behalf of a principal or in a
representative capacity, he is not liable on the instrument if he was duly authorized; but the mere
addition of words describing him as an agent, or as filling a representative character, without disclosing
his principal, does not exempt him from personal liability; Philippine Bank of Commerce vs. Aruego, 102
SCRA 530 (1981).
15 Civil Code, art. 20.
16 RTC Records, 5.
364

364
SUPREME COURT REPORTS ANNOTATED
Francisco vs. Court of Appeals
Appeals, et al.,17 which was reiterated in Philippine National Bank vs. Court of Appeals,18 Philippine
Airlines, Inc. vs. Court of Appeals19 and in Keng Hua Paper Products Co., Inc. vs. Court of Appeals,20
which provides that
1. When an obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of six percent
(6%) per annum. No interest, however, shall be adjudged on unliquidated claims or damages except
when or until the demand can be established with reasonable certainty. Accordingly, where the demand
is established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have

been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be
on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be twelve percent
(12%) per annum from such
_________________

17 234 SCRA 78 (1994).


18 263 SCRA 766 (1996).
19 275 SCRA 621 (1997).
20 286 SCRA 257 (1998).
365

VOL. 319, NOVEMBER 29, 1999


365
Francisco vs. Court of Appeals
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.
We also sustain the award of exemplary damages in the amount of P50,000.00. Under Article 2229 of
the Civil Code, exemplary damages are imposed by way of example or correction for the public good, in
addition to the moral, temperate, liquidated or compensatory damages. Considering petitioners
fraudulent act, we hold that an award of P50,000.00 would be adequate, fair and reasonable. The grant
of exemplary damages justifies the award of attorneys fees in the amount of P50,000.00, and the award
of P5,000.00 for litigation expenses.21
The appellate courts award of P50,000.00 in moral damages is warranted. Under Article 2217 of the
Civil Code, moral damages may be granted upon proof of physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation and similar
injury.22 Ong testified that he suffered sleepless nights, embarrassment, humiliation and anxiety upon
discovering that the checks due his company were forged by petitioner and that petitioner had filed
baseless criminal complaints against him before, the fiscals office of Quezon City which disrupted
HCCCs business operations.23

WHEREFORE, we AFFIRM the respondent courts decision promulgated on June 29, 1992, upholding the
February 16, 1988 decision of the trial court in favor of private respondents, with the modification that
the interest upon the actual damages awarded shall be at six percent (6%) per annum, which interest
rate shall be computed from the time of the filing of the complaint on November 19, 1979. However,
the interest rate shall be twelve percent (12%) per annum from the time the judgment in this case
becomes final and executory and until such amount is fully paid. The basis for computation of
_______________

21 Civil Code, art. 2208 (1); Tan Kapos vs. Masa, 134 SCRA 231 (1985).
22 People vs. Teodoro, 280 SCRA 384 (1997).
23 TSN, November 14, 1980, 51-53; Complaint, 4.
366

366
SUPREME COURT REPORTS ANNOTATED
Fontanilla, Sr. vs. Court of Appeals
the six percent and twelve percent rates of interest shall be the amount of P370,475.00. No
pronouncement as to costs.
SO ORDERED.
Melo (Chairman), Vitug, Panganiban and Purisima, JJ., concur.
Reviewed decision affirmed with modification.
Note.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. (Go vs. Court of Appeals,
272 SCRA 752 [1997])
o0o

Copyright 2014 Central Book Supply, Inc. All rights reserved. [Francisco vs. Court of Appeals, 319 SCRA
354(1999)]

G.R. No. 107382. January 31, 1996.*


ASSOCIATED BANK, petitioner, vs. HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE
NATIONAL BANK, respondents.
G.R. No. 107612. January 31, 1996.*
PHILIPPINE NATIONAL BANK, petitioner, vs. HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC,
and ASSOCIATED BANK, respondents.
Commercial Law; Negotiable Instruments Law; Forgery; A person whose signature to an instrument was
forged was never a party and never consented to the contract which allegedly gave rise to such
instrument.A forged signature, whether it be that of the drawer or the payee, is wholly inoperative
and no one can gain title to the instrument through it. A person whose signature to an instrument was
forged was never a party and never consented to the contract which allegedly gave rise to such
instrument. Section 23 does not avoid the instrument but only the forged signature. Thus, a forged
indorsement does not operate as the payees indorsement.
Same; Same; Same; Parties who warrant or admit the genuineness of the signature in question and
those who, by their acts, silence or negligence are estopped from setting up the defense of forgery, are
precluded from using this defense.The exception to the general rule in Section 23 is where a party
against whom it is sought to enforce a right is precluded from setting up the forgery or want of
authority. Parties who warrant or admit the genuineness of the signature in question and those who,
by their acts, silence or negligence are estopped from setting up the defense of forgery, are precluded
from using this defense. Indorsers, persons negotiating by delivery and acceptors are warrantors of the
genuineness of the signatures on the instrument.
Same; Same; Same; When the indorsement is a forgery, only the person whose signature is forged can
raise the defense of forgery against a holder in due course.In bearer instruments, the signa____________________________

* SECOND DIVISION.
621

VOL. 252, JANUARY 31, 1996


621
Associated Bank vs. Court of Appeals

ture of the payee or holder is unnecessary to pass title to the instrument. Hence, when the indorsement
is a forgery, only the person whose signature is forged can raise the defense of forgery against a holder
in due course.
Same; Same; Same; When the holders indorsement is forged, all parties prior to the forgery may raise
the real defense of forgery against all parties subsequent thereto.Where the instrument is payable to
order at the time of the forgery, such as the checks in this case, the signature of its rightful holder (here,
the payee hospital) is essential to transfer title to the same instrument. When the holders indorsement
is forged, all parties prior to the forgery may raise the real defense of forgery against all parties
subsequent thereto.
Same; Same; Same; Indorser cannot interpose the defense that signatures prior to him are forged.An
indorser of an order instrument warrants that the instrument is genuine and in all respects what it
purports to be; that he has a good title to it; that all prior parties had capacity to contract; and that the
instrument is at the time of his indorsement valid and subsisting. He cannot interpose the defense that
signatures prior to him are forged.
Same; Same; Same; A collecting bank where a check is deposited and which indorses the check upon
presentment with the drawee bank is such an indorser.A collecting bank where a check is deposited
and which indorses the check upon presentment with the drawee bank, is such an indorser. So even if
the indorsement on the check deposited by the banks client is forged, the collecting bank is bound by
his warranties as an indorser and cannot set up the defense of forgery as against the drawee bank.
Same; Same; Same; Payment under a forged indorsement is not to the drawers order.The bank on
which a check is drawn, known as the drawee bank, is under strict liability to pay the check to the order
of the payee. The drawers instructions are reflected on the face and by the terms of the check. Payment
under a forged indorsement is not to the drawers order. When the drawee bank pays a person other
than the payee, it does not comply with the terms of the check and violates its duty to charge its
customers (the drawer) account only for properly payable items. Since the drawee bank did not pay a
holder or other person entitled to receive payment, it has no right to reimbursement from the drawer.
The general rule then is that the drawee bank may not debit the drawers account and is not
622

622
SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
entitled to indemnification from the drawer. The risk of loss must perforce fall on the drawee bank.

Same; Same; Same; Drawer is precluded from asserting forgery where the drawee bank can prove a
failure by the customer/drawer to exercise ordinary care that substantially contributed to the making of
the forged signature.However, if the drawee bank can prove a failure by the customer/drawer to
exercise ordinary care that substantially contributed to the making of the forged signature, the drawer is
precluded from asserting the forgery.
Same; Same; Same; Drawee bank can seek reimbursement or a return of the amount it paid from the
presentor bank or person.In cases involving checks with forged indorsements, such as the present
petition, the chain of liability does not end with the drawee bank. The drawee bank may not debit the
account of the drawer but may generally pass liability back through the collection chain to the party who
took from the forger and, of course, to the forger himself, if available. In other words, the drawee bank
can seek reimbursement or a return of the amount it paid from the presentor bank or person.
Theoretically, the latter can demand reimbursement from the person who indorsed the check to it and
so on. The loss falls on the party who took the check from the forger, or on the forger himself.
Same; Same; Same; A collecting bank which indorses a check bearing a forged indorsement and presents
it to the drawee bank guarantees all prior indorsements including the forged indorsement.More
importantly, by reason of the statutory warranty of a general indorser in Section 66 of the Negotiable
Instruments Law, a collecting bank which indorses a check bearing a forged indorsement and presents it
to the drawee bank guarantees all prior indorsements, including the forged indorsement. It warrants
that the instrument is genuine, and that it is valid and subsisting at the time of his indorsement. Because
the indorsement is a forgery, the collecting bank commits a breach of this warranty and will be
accountable to the drawee bank.
Same; Same; Same; Drawee banks not similarly situated as the collecting bank.The drawee bank is not
similarly situated as the collecting bank because the former makes no warranty as to the genuineness of
any indorsement. The drawee banks duty is but to
623

VOL. 252, JANUARY 31, 1996


623
Associated Bank vs. Court of Appeals
verify the genuineness of the drawers signature and not of the indorsement because the drawer is its
client.
Same; Same; Same; Drawee bank has the duty to promptly inform the presentor of the forgery upon
discovery.Hence, the drawee bank can recover the amount paid on the check bearing a forged
indorsement from the collecting bank. However, a drawee bank has the duty to promptly inform the
presentor of the forgery upon discovery. If the drawee bank delays in informing the presentor of the

forgery, thereby depriving said presentor of the right to recover from the forger, the former is deemed
negligent and can no longer recover from the presentor.
Same; Same; Same; Rule mandates that the checks be returned within twenty-four hours after discovery
of the forgery but in no event beyond the period fixed by law for filing a legal action.The rule
mandates that the checks be returned within twenty-four hours after discovery of the forgery but in no
event beyond the period fixed by law for filing a legal action. The rationale of the rule is to give the
collecting bank (which indorsed the check) adequate opportunity to proceed against the forger. If
prompt notice is not given, the collecting bank may be prejudiced and lose the opportunity to go after
its depositor.
PETITIONS for review of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.


Jose A. Soluta, Jr. and Associates for Associated Bank.
Santiago, Jr., Vidad, Corpus & Associates for Philippine National Bank.
ROMERO, J.:

Where thirty checks bearing forged endorsements are paid, who bears the loss, the drawer, the drawee
bank or the collecting bank?
This is the main issue in these consolidated petitions for review assailing the decision of the Court of
Appeals in Province of Tarlac v. Philippine National Bank v. Associated Bank v. Fausto Pangilinan, et al.
(CA-G.R. No. CV No.
624

624
SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
17962).1
The facts of the case are as follows:
The Province of Tarlac maintains a current account with the Philippine National Bank (PNB) Tarlac
Branch where the provincial funds are deposited. Checks issued by the Province are signed by the

Provincial Treasurer and countersigned by the Provincial Auditor or the Secretary of the Sangguniang
Bayan.
A portion of the funds of the province is allocated to the Concepcion Emergency Hospital.2 The
allotment checks for said government hospital are drawn to the order of Concepcion Emergency
Hospital, Concepcion, Tarlac or The Chief, Concepcion Emergency Hospital, Concepcion, Tarlac. The
checks are released by the Office of the Provincial Treasurer and received for the hospital by its
administrative officer and cashier.
In January 1981, the books of account of the Provincial Treasurer were post-audited by the Provincial
Auditor. It was
____________________________

1 Penned by Justice Asaali S. Isnani, with Associate Justices Arturo S. Buena and Ricardo P. Galvez,
concurring, dated September 30, 1992. Rollo, p. 22.
2 Provincial aid was given irregularly. Hospital staff would often call the provincial treasurers office to
inquire whether there was an allotment check for the hospital. The hospitals administrative officer and
cashier would then go to the provincial treasurers office to pick up the check.
Checks received by the hospital are deposited in the account of the National Treasury with the PNB. All
income of the hospital in excess of the amount which the National Government has directed it to raise,
is excess income. The latter is given back to the hospital after a supplemental budget is prepared. When
the latter is approved, an advice of allotment is made. Then the hospital requests a cash disbursement
ceiling. When approved, this is brought to the Ministry of Health. The regional office of said Ministry
then prepares a check for the hospital. The check will be deposited in the hospitals current account at
the PNB. (Culled from the testimony of Dr. Adena Canlas, TSN, October 17, 1983, pp. 8-11; December 6,
1983, pp. 43-44.)
625

VOL. 252, JANUARY 31, 1996


625
Associated Bank vs. Court of Appeals
then discovered that the hospital did not receive several allotment checks drawn by the Province.
On February 19, 1981, the Provincial Treasurer requested the manager of the PNB to return all of its
cleared checks which were issued from 1977 to 1980 in order to verify the regularity of their
encashment. After the checks were examined, the Provincial Treasurer learned that 30 checks

amounting to P203,300.00 were encashed by one Fausto Pangilinan, with the Associated Bank acting as
collecting bank.
It turned out that Fausto Pangilinan, who was the administrative officer and cashier of payee hospital
until his retirement on February 28, 1978, collected the questioned checks from the office of the
Provincial Treasurer. He claimed to be assisting or helping the hospital follow up the release of the
checks and had official receipts.3 Pangilinan sought to encash the first check4 with Associated Bank.
However, the manager of Associated Bank refused and suggested that Pangilinan deposit the check in
his personal savings account with the same bank. Pangilinan was able to withdraw the money when the
check was cleared and paid by the drawee bank, PNB.
After forging the signature of Dr. Adena Canlas who was chief of the payee hospital, Pangilinan followed
the same procedure for the second check, in the amount of P5,000.00 and dated April 20, 1978,5 as well
as for twenty-eight other checks of various amounts and on various dates. The last check negotiated by
Pangilinan was for P8,000.00 and dated February 10, 1981.6 All the checks bore the stamp of Associated
Bank which reads All prior endorsements guaranteed ASSOCIATED BANK.
Jesus David, the manager of Associated Bank testified that Pangilinan made it appear that the checks
were paid to him for certain projects with the hospital.7 He did not find as
____________________________

3 TSN, March 13, 1984, pp. 51-60.


4 Check No. 530863 K, dated January 17, 1978 for P10,000.00.
5 Check No. 526788 K.
6 Check No. 391351 L.
7 TSN, July 10, 1985, pp. 14-15.
626

626
SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
irregular the fact that the checks were not payable to Pangilinan but to the Concepcion Emergency
Hospital. While he admitted that his wife and Pangilinans wife are first cousins, the manager denied
having given Pangilinan preferential treatment on this account.8

On February 26, 1981, the Provincial Treasurer wrote the manager of the PNB seeking the restoration of
the various amounts debited from the current account of the Province.9 In turn, the PNB manager
demanded reimbursement from the Associated Bank on May 15, 1981.10
As both banks resisted payment, the Province of Tarlac brought suit against PNB which, in turn,
impleaded Associated Bank as third-party defendant. The latter then filed a fourth-party complaint
against Adena Canlas and Fausto Pangilinan.11
After trial on the merits, the lower court rendered its decision on March 21, 1988, disposing as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. On the basic complaint, in favor of plaintiff Province of Tarlac and against defendant Philippine
National Bank (PNB), ordering the latter to pay to the former, the sum of Two Hundred
____________________________

8 TSN, July 10, 1985, pp. 20-21, 34-35; September 24, 1985.
9 Exhibit FF for Province of Tarlac. On March 20, 1981, the Province of Tarlac reiterated its request in
another letter to PNB. Associated Bank was allegedly furnished with a copy of this letter. (Records, pp.
246-247) PNB requested the Province to return the checks in a letter dated March 31, 1981. The checks
were returned to PNB on April 22, 1981. (Exhibit GG) On April 24, 1981, PNB gave the checks to
Associated Bank. (Exhibit 5) Associated Bank returned the checks to PNB on April 28, 1981, along with a
letter stating its refusal to return the money paid by PNB. (Exhibit 6)
10 Exhibit MM for Province of Tarlac.
11 Civil Case No. 6227, Province of Tarlac v. Philippine National Bank; Philippine National Bank v.
Associated Bank; Associated Bank v. Fausto Pangilinan and Adena G. Canlas, Regional Trial Court Branch
64, Tarlac, Tarlac.
627

VOL. 252, JANUARY 31, 1996


627
Associated Bank vs. Court of Appeals
Three Thousand Three Hundred (P203,300.00) Pesos with legal interest thereon from March 20, 1981
until fully paid;

2. On the third-party complaint, in favor of defendant/third-party plaintiff Philippine National Bank


(PNB) and against third-party defendant/fourth-party plaintiff Associated Bank ordering the latter to
reimburse to the former the amount of Two Hundred Three Thousand Three Hundred (P203,300.00)
Pesos with legal interests thereon from March 20, 1981 until fully paid;
3. On the fourth-party complaint, the same is hereby ordered dismissed for lack of cause of action as
against fourth-party defendant Adena Canlas and lack of jurisdiction over the person of fourth-party
defendant Fausto Pangilinan as against the latter.
4. On the counterclaims on the complaint, third-party complaint and fourth-party complaint, the same
are hereby ordered dismissed for lack of merit.
SO ORDERED.12
PNB and Associated Bank appealed to the Court of Appeals.13 Respondent court affirmed the trial
courts decision in toto on September 30, 1992.
Hence these consolidated petitions which seek a reversal of respondent appellate courts decision.
PNB assigned two errors. First, the bank contends that respondent court erred in exempting the
Province of Tarlac from liability when, in fact, the latter was negligent because it delivered and released
the questioned checks to Fausto Pangilinan who was then already retired as the hospitals cashier and
administrative officer. PNB also maintains its innocence and alleges that as between two innocent
persons, the one whose act was the cause of the loss, in this case the Province of Tarlac, bears the loss.
Next, PNB asserts that it was error for the court to order it to pay the province and then seek
reimbursement from Associated Bank. According to petitioner bank, respondent appellate court should
have directed Associated Bank to pay the adjudged liability directly to the Province of Tarlac to
____________________________

12 Penned by Judge Arturo U. Barias, Jr., Rollo, pp. 391-392.


13 CA-G.R. CV No. 17962.
628

628
SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
avoid circuity.14

Associated Bank, on the other hand, argues that the order of liability should be totally reversed, with the
drawee bank (PNB) solely and ultimately bearing the loss.
Respondent court allegedly erred in applying Section 23 of the Philippine Clearing House Rules instead
of Central Bank Circular No. 580, which, being an administrative regulation issued pursuant to law, has
the force and effect of law.15 The PCHC Rules are merely contractual stipulations among and between
member-banks. As such, they cannot prevail over the aforesaid CB Circular.
It likewise contends that PNB, the drawee bank, is estopped from asserting the defense of guarantee of
prior indorsements against Associated Bank, the collecting bank. In stamping the guarantee (for all prior
indorsements), it merely followed a mandatory requirement for clearing and had no choice but to place
the stamp of guarantee; otherwise, there would be no clearing. The bank will be in a no-win situation
and will always bear the loss as against the drawee bank.16
Associated Bank also claims that since PNB already cleared and paid the value of the forged checks in
question, it is now estopped from asserting the defense that Associated Bank guaranteed prior
indorsements. The drawee bank allegedly has the primary duty to verify the genuineness of payees
indorsement before paying the check.17
While both banks are innocent of the forgery, Associated Bank claims that PNB was at fault and should
solely bear the loss because it cleared and paid the forged checks.
***
The case at bench concerns checks payable to the order of Concepcion Emergency Hospital or its Chief.
They were prop____________________________

14 Petition, pp. 6-7; Rollo, pp. 13-14, G.R. No. 107612.


15 Citing Antique Sawmills, Inc. v. Zayco, 17 SCRA 316, et al., Petition, p. 9, Rollo, p. 10.
16 Associated Banks Petition, p. 13.
17 Id., at 12.
629

VOL. 252, JANUARY 31, 1996


629
Associated Bank vs. Court of Appeals

erly issued and bear the genuine signatures of the drawer, the Province of Tarlac. The infirmity in the
questioned checks lies in the payees (Concepcion Emergency Hospital) indorsements which are
forgeries. At the time of their indorsement, the checks were order instruments.
Checks having forged indorsements should be differentiated from forged checks or checks bearing the
forged signature of the drawer.
Section 23 of the Negotiable Instruments Law (NIL) provides:
Sec. 23. FORGED SIGNATURE, EFFECT OF.When a signature is forged or made without authority of the
person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument,
or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be
acquired through or under such signature unless the party against whom it is sought to enforce such
right is precluded from setting up the forgery or want of authority.
A forged signature, whether it be that of the drawer or the payee, is wholly inoperative and no one can
gain title to the instrument through it. A person whose signature to an instrument was forged was never
a party and never consented to the contract which allegedly gave rise to such instrument.18 Section 23
does not avoid the instrument but only the forged signature.19 Thus, a forged indorsement does not
operate as the payees indorsement.
The exception to the general rule in Section 23 is where a party against whom it is sought to enforce a
right is precluded from setting up the forgery or want of authority. Parties who warrant or admit the
genuineness of the signature in question and those who, by their acts, silence or negligence are es____________________________

18 J. CAMPOS & M. LOPEZ-CAMPOS, NEGOTIABLE INSTRUMENTS LAW, 227-230 (4th ed., 1990).
19 I A. AGBAYANI, COMMENTARIES AND JURISPRUDENCE ON THE COMMERCIAL LAWS OF THE
PHILIPPINES 198 (1989 ed.).
630

630
SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
topped from setting up the defense of forgery, are precluded from using this defense. Indorsers,
persons negotiating by delivery and acceptors are warrantors of the genuineness of the signatures on
the instrument.20

In bearer instruments, the signature of the payee or holder is unnecessary to pass title to the
instrument. Hence, when the indorsement is a forgery, only the person whose signature is forged can
raise the defense of forgery against a holder in due course.21
The checks involved in this case are order instruments, hence, the following discussion is made with
reference to the effects of a forged indorsement on an instrument payable to order.
Where the instrument is payable to order at the time of the forgery, such as the checks in this case, the
signature of its rightful holder (here, the payee hospital) is essential to transfer title to the same
instrument. When the holders indorsement is forged, all parties prior to the forgery may raise the real
defense of forgery against all parties subsequent thereto.22
An indorser of an order instrument warrants that the instrument is genuine and in all respects what it
purports to be; that he has a good title to it; that all prior parties had capacity to contract; and that the
instrument is at the time of his indorsement valid and subsisting.23 He cannot interpose the defense
that signatures prior to him are forged.
A collecting bank where a check is deposited and which indorses the check upon presentment with the
drawee bank, is such an indorser. So even if the indorsement on the check deposited by the banks client
is forged, the collecting bank is
____________________________

20 Id., at 199.
21 J. VITUG, PANDECT OF COMMERCIAL LAW AND JURISPRUDENCE 51-53 (Rev. ed., 1990).
22 Id.
23 Section 66, Negotiable Instruments Law.
631

VOL. 252, JANUARY 31, 1996


631
Associated Bank vs. Court of Appeals
bound by his warranties as an indorser and cannot set up the defense of forgery as against the drawee
bank.
The bank on which a check is drawn, known as the drawee bank, is under strict liability to pay the check
to the order of the payee. The drawers instructions are reflected on the face and by the terms of the

check. Payment under a forged indorsement is not to the drawers order. When the drawee bank pays a
person other than the payee, it does not comply with the terms of the check and violates its duty to
charge its customers (the drawer) account only for properly payable items. Since the drawee bank did
not pay a holder or other person entitled to receive payment, it has no right to reimbursement from the
drawer.24 The general rule then is that the drawee bank may not debit the drawers account and is not
entitled to indemnification from the drawer.25 The risk of loss must perforce fall on the drawee bank.
However, if the drawee bank can prove a failure by the customer/drawer to exercise ordinary care that
substantially contributed to the making of the forged signature, the drawer is precluded from asserting
the forgery.
If at the same time the drawee bank was also negligent to the point of substantially contributing to the
loss, then such loss from the forgery can be apportioned between the negligent drawer and the
negligent bank.26
In cases involving a forged check, where the drawers signature is forged, the drawer can recover from
the drawee
____________________________

24 S. NICKLES, NEGOTIABLE INSTRUMENTS AND OTHER RELATED COMMERCIAL PAPER 416 (2nd ed.,
1993).
25 Great Eastern Life Insurance Co. v. Hongkong and Shanghai Banking Corp., 43 Phil. 678; Banco de Oro
Savings and Mortgage Bank v. Equitable Banking Corporation, G.R. No. L-74917, January 20, 1988, 157
SCRA 188; CAMPOS & LOPEZ-CAMPOS, op. cit. note 18 at 283, citing La Fayette v. Merchants Bank, 73
Ark 561; Wills v. Barney, 22 Cal 240; Wellington National Bank v. Robbins, 71 Kan 748.
26 R. JORDAN & W. WARREN, NEGOTIABLE INSTRUMENTS AND LETTERS OF CREDIT 216 (1992).
632

632
SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
bank. No drawee bank has a right to pay a forged check. If it does, it shall have to recredit the amount of
the check to the account of the drawer. The liability chain ends with the drawee bank whose
responsibility it is to know the drawers signature since the latter is its customer.27

In cases involving checks with forged indorsements, such as the present petition, the chain of liability
does not end with the drawee bank. The drawee bank may not debit the account of the drawer but may
generally pass liability back through the collection chain to the party who took from the forger and, of
course, to the forger himself, if available.28 In other words, the drawee bank can seek reimbursement
or a return of the amount it paid from the presentor bank or person.29 Theoretically, the latter can
demand reimbursement from the person who indorsed the check to it and so on. The loss falls on the
party who took the check from the forger, or on the forger himself.
In this case, the checks were indorsed by the collecting bank (Associated Bank) to the drawee bank
(PNB). The former will necessarily be liable to the latter for the checks bearing forged indorsements. If
the forgery is that of the payees or holders indorsement, the collecting bank is held liable, without
prejudice to the latter proceeding against the forger.
Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the drawee
bank. The former must necessarily return the money paid by the latter because it was paid
wrongfully.30
____________________________

27 Id.
28 Id., at 216-235; VITUG, op. cit. note 21 at 53.
29 Banco de Oro v. Equitable Banking Corp., supra; Great Eastern Life Insurance Co. v. HSBC, supra.
30 Article 2154 of the Civil Code provides: If something is received when there is no right to demand it,
and it was unduly delivered through mistake, the obligation to return it arises. Banco de Oro v.
Equitable Banking Corp., supra.
633

VOL. 252, JANUARY 31, 1996


633
Associated Bank vs. Court of Appeals
More importantly, by reason of the statutory warranty of a general indorser in Section 66 of the
Negotiable Instruments Law, a collecting bank which indorses a check bearing a forged indorsement and
presents it to the drawee bank guarantees all prior indorsements, including the forged indorsement. It
warrants that the instrument is genuine, and that it is valid and subsisting at the time of his
indorsement. Because the indorsement is a forgery, the collecting bank commits a breach of this
warranty and will be accountable to the drawee bank. This liability scheme operates without regard to

fault on the part of the collecting/presenting bank. Even if the latter bank was not negligent, it would
still be liable to the drawee bank because of its indorsement.
The Court has consistently ruled that the 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 had done its duty to ascertain the genuineness of the endorsements.31
The drawee bank is not similarly situated as the collecting bank because the former makes no warranty
as to the genuineness of any indorsement.32 The drawee banks duty is but to verify the genuineness of
the drawers signature and not of the indorsement because the drawer is its client.
Moreover, the collecting bank is made liable because it is privy to the depositor who negotiated the
check. The bank knows him, his address and history because he is a client. It has taken a risk on his
deposit. The bank is also in a better position to detect forgery, fraud or irregularity in the indorsement.
____________________________

31 Bank of the Phil. Islands v. CA, G.R. No. 102383, November 26, 1992, 216 SCRA 51, 63 citing Banco de
Oro v. Equitable Banking Corp., supra; Great Eastern Life Insurance Co. v. HSBC, supra.
32 CAMPOS & LOPEZ-CAMPOS, op. cit. note 18 at 283 citing Inter-state Trust Co. v. U.S. National Bank,
185 Pac. 260; Hongkong and Shanghai Banking Corp. v. Peoples Bank and Trust Co., supra.
634

634
SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
Hence, the drawee bank can recover the amount paid on the check bearing a forged indorsement from
the collecting bank. However, a drawee bank has the duty to promptly inform the presentor of the
forgery upon discovery. If the drawee bank delays in informing the presentor of the forgery, thereby
depriving said presentor of the right to recover from the forger, the former is deemed negligent and can
no longer recover from the presentor.33
Applying these rules to the case at bench, PNB, the drawee bank, cannot debit the current account of
the Province of Tarlac because it paid checks which bore forged indorsements. However, if the Province
of Tarlac as drawer was negligent to the point of substantially contributing to the loss, then the drawee
bank PNB can charge its account. If both drawee bank-PNB and drawer-Province of Tarlac were
negligent, the loss should be properly apportioned between them.

The loss incurred by drawee bank-PNB can be passed on to the collecting bank-Associated Bank which
presented and indorsed the checks to it. Associated Bank can, in turn, hold the forger, Fausto Pangilinan,
liable.
If PNB negligently delayed in informing Associated Bank of the forgery, thus depriving the latter of the
opportunity to recover from the forger, it forfeits its right to reimbursement and will be made to bear
the loss.
After careful examination of the records, the Court finds that the Province of Tarlac was equally
negligent and should, therefore, share the burden of loss from the checks bearing a forged indorsement.
The Province of Tarlac permitted Fausto Pangilinan to collect the checks when the latter, having already
retired from government service, was no longer connected with the hospital. With the exception of the
first check (dated January 17, 1978), all the checks were issued and released after Pangilinans
retirement on February 28, 1978. After nearly three
____________________________

33 JORDAN & WARREN, op. cit. note 26 at 217; CAMPOS & LOPEZ-CAMPOS, op. cit. note 18 at 283.
635

VOL. 252, JANUARY 31, 1996


635
Associated Bank vs. Court of Appeals
years, the Treasurers office was still releasing the checks to the retired cashier. In addition, some of the
aid allotment checks were released to Pangilinan and the others to Elizabeth Juco, the new cashier. The
fact that there were now two persons collecting the checks for the hospital is an unmistakable sign of an
irregularity which should have alerted employees in the Treasurers office of the fraud being committed.
There is also evidence indicating that the provincial employees were aware of Pangilinans retirement
and consequent dissociation from the hospital. Jose Meru, the Provincial Treasurer, testified:
ATTY. MORGA:
Q:
Now, is it true that for a given month there were two releases of checks, one went to Mr. Pangilinan and
one went to Miss Juco?
JOSE MERU:

A:
Yes, sir.
Q:
Will you please tell us how at the time (sic) when the authorized representative of Concepcion
Emergency Hospital is and was supposed to be Miss Juco?
A:
Well, as far as my investigation show (sic) the assistant cashier told me that Pangilinan represented
himself as also authorized to help in the release of these checks and we were apparently misled because
they accepted the representation of Pangilinan that he was helping them in the release of the checks
and besides according to them they were, Pangilinan, like the rest, was able to present an official receipt
to acknowledge these receipts and according to them since this is a government check and believed that
it will eventually go to the hospital following the standard procedure of negotiating government checks,
they released the checks to Pangilinan aside from Miss Juco.34
The failure of the Province of Tarlac to exercise due care contributed to a significant degree to the loss
tantamount to
____________________________

34 TSN, June 19, 1984, pp. 10-11.


636

636
SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
negligence. Hence, the Province of Tarlac should be liable for part of the total amount paid on the
questioned checks.
The drawee bank PNB also breached its duty to pay only according to the terms of the check. Hence, it
cannot escape liability and should also bear part of the loss.
As earlier stated, PNB can recover from the collecting bank.

In the case of Associated Bank v. CA,35 six crossed checks with forged indorsements were deposited in
the forgers account with the collecting bank and were later paid by four different drawee banks. The
Court found the collecting bank (Associated) to be negligent and held:
The Bank should have first verified his right to endorse the crossed checks, of which he was not the
payee, and to deposit the proceeds of the checks to his own account. The Bank was by reason of the
nature of the checks put upon notice that they were issued for deposit only to the private respondents
account. x x x
The situation in the case at bench is analogous to the above case, for it was not the payee who
deposited the checks with the collecting bank. Here, the checks were all payable to Concepcion
Emergency Hospital but it was Fausto Pangilinan who deposited the checks in his personal savings
account.
Although Associated Bank claims that the guarantee stamped on the checks (All prior and/or lack of
endorsements guaranteed) is merely a requirement forced upon it by clearing house rules, it cannot but
remain liable. The stamp guaranteeing prior indorsements is not an empty rubric which a bank must
fulfill for the sake of convenience. A bank is not required to accept all the checks negotiated to it. It is
within the banks discretion to receive a check for no banking institution would consciously or
deliberately accept a check bearing a forged indorsement. When a check is deposited with the collecting
bank, it takes a risk on its depositor. It is only logi____________________________

35 G.R. No. 89802, May 7, 1992, 208 SCRA 465.


637

VOL. 252, JANUARY 31, 1996


637
Associated Bank vs. Court of Appeals
cal that this bank be held accountable for checks deposited by its customers.
A delay in informing the collecting bank (Associated Bank) of the forgery, which deprives it of the
opportunity to go after the forger, signifies negligence on the part of the drawee bank (PNB) and will
preclude it from claiming reimbursement.
It is here that Associated Banks assignment of error concerning C.B. Circular No. 580 and Section 23 of
the Philippine Clearing House Corporation Rules comes to fore. Under Section 4 (c) of CB Circular No.
580, items bearing a forged endorsement shall be returned within twenty-four (24) hours after

discovery of the forgery but in no event beyond the period fixed or provided by law for filing of a legal
action by the returning bank. Section 23 of the PCHC Rules deleted the requirement that items bearing a
forged endorsement should be returned within twenty-four hours. Associated Bank now argues that the
aforementioned Central Bank Circular is applicable. Since PNB did not return the questioned checks
within twenty-four hours, but several days later, Associated Bank alleges that PNB should be considered
negligent and not entitled to reimbursement of the amount it paid on the checks.
The Court deems it unnecessary to discuss Associated Banks assertions that CB Circular No. 580 is an
administrative regulation issued pursuant to law and as such, must prevail over the PCHC rule. The
Central Bank circular was in force for all banks until June 1980 when the Philippine Clearing House
Corporation (PCHC) was set up and commenced operations. Banks in Metro Manila were covered by the
PCHC while banks located elsewhere still had to go through Central Bank Clearing. In any event, the
twenty-four-hour return rule was adopted by the PCHC until it was changed in 1982. The contending
banks herein, which are both branches in Tarlac province, are therefore not covered by PCHC Rules but
by CB Circular No. 580. Clearly then, the CB circular was applicable when the forgery of the checks was
discovered in 1981.
638

638
SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
The rule mandates that the checks be returned within twenty-four hours after discovery of the forgery
but in no event beyond the period fixed by law for filing a legal action. The rationale of the rule is to give
the collecting bank (which indorsed the check) adequate opportunity to proceed against the forger. If
prompt notice is not given, the collecting bank may be prejudiced and lose the opportunity to go after
its depositor.
The Court finds that even if PNB did not return the questioned checks to Associated Bank within twentyfour hours, as mandated by the rule, PNB did not commit negligent delay. Under the circumstances, PNB
gave prompt notice to Associated Bank and the latter bank was not prejudiced in going after Fausto
Pangilinan. After the Province of Tarlac informed PNB of the forgeries, PNB necessarily had to inspect
the checks and conduct its own investigation. Thereafter, it requested the Provincial Treasurers office
on March 31, 1981 to return the checks for verification. The Province of Tarlac returned the checks only
on April 22, 1981. Two days later, Associated Bank received the checks from PNB.36
Associated Bank was also furnished a copy of the Provinces letter of demand to PNB dated March 20,
1981, thus giving it notice of the forgeries. At this time, however, Pangilinans account with Associated
had only P24.63 in it.37 Had Associated Bank decided to debit Pangilinans account, it could not have
recovered the amounts paid on the questioned checks. In addition, while Associated Bank filed a fourth-

party complaint against Fausto Pangilinan, it did not present evidence against Pangilinan and even
presented him as its rebuttal witness.38 Hence, Associated Bank was not prejudiced by PNBs failure to
comply with the twenty-four-hour return rule.
Next, Associated Bank contends that PNB is estopped from requiring reimbursement because the latter
paid and cleared
____________________________

36 See footnote 9.
37 Exhibit 3-G for Associated Bank.
38 TSN, January 8, 1987.
639

VOL. 252, JANUARY 31, 1996


639
Associated Bank vs. Court of Appeals
the checks. The Court finds this contention unmeritorious. Even if PNB cleared and paid the checks, it
can still recover from Associated Bank. This is true even if the payees Chief Officer who was supposed to
have indorsed the checks is also a customer of the drawee bank.39 PNBs duty was to verify the
genuineness of the drawers signature and not the genuineness of payees indorsement. Associated
Bank, as the collecting bank, is the entity with the duty to verify the genuineness of the payees
indorsement.
PNB also avers that respondent court erred in adjudging circuitous liability by directing PNB to return to
the Province of Tarlac the amount of the checks and then directing Associated Bank to reimburse PNB.
The Court finds nothing wrong with the mode of the award. The drawer, Province of Tarlac, is a client or
customer of the PNB, not of Associated Bank. There is no privity of contract between the drawer and the
collecting bank.
The trial court made PNB and Associated Bank liable with legal interest from March 20, 1981, the date of
extrajudicial demand made by the Province of Tarlac on PNB. The payments to be made in this case
stem from the deposits of the Province of Tarlac in its current account with the PNB. Bank deposits are
considered under the law as loans.40 Central Bank Circular No. 416 prescribes a twelve percent (12%)
interest per annum for loans, forebearance of money, goods or credits in the absence of express
stipulation. Normally, current accounts are likewise interest-bearing, by express contract, thus excluding
them from the coverage of CB Circular No. 416. In this case, however, the actual interest rate, if any, for

the current account opened by the Province of Tarlac with PNB was not given in evidence. Hence, the
Court deems it wise to affirm the trial courts use of the legal interest rate, or six percent (6%) per
annum. The interest rate shall be com____________________________

39 San Carlos Milling Co. Ltd. v. BPI, 59 Phil. 59.


40 Article 1980 of the Civil Code reads: Fixed, savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions concerning simple loan.
640

640
SUPREME COURT REPORTS ANNOTATED
Associated Bank vs. Court of Appeals
puted from the date of default, or the date of judicial or extrajudicial demand.41 The trial court did not
err in granting legal interest from March 20, 1981, the date of extrajudicial demand.
The Court finds as reasonable, the proportionate sharing of fifty percentfifty percent (50%-50%). Due
to the negligence of the Province of Tarlac in releasing the checks to an unauthorized person (Fausto
Pangilinan), in allowing the retired hospital cashier to receive the checks for the payee hospital for a
period close to three years and in not properly ascertaining why the retired hospital cashier was
collecting checks for the payee hospital in addition to the hospitals real cashier, respondent Province
contributed to the loss amounting to P203,300.00 and shall be liable to the PNB for fifty (50%) percent
thereof. In effect, the Province of Tarlac can only recover fifty percent (50%) of P203,300.00 from PNB.
The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%) percent of P203,300.00. It is
liable on its warranties as indorser of the checks which were deposited by Fausto Pangilinan, having
guaranteed the genuineness of all prior indorsements, including that of the chief of the payee hospital,
Dr. Adena Canlas. Associated Bank was also remiss in its duty to ascertain the genuineness of the
payees indorsement.
IN VIEW OF THE FOREGOING, the petition for review filed by the Philippine National Bank (G.R. No.
107612) is hereby PARTIALLY GRANTED. The petition for review filed by the Associated Bank (G.R. No.
107382) is hereby DENIED. The decision of the trial court is MODIFIED. The Philippine National Bank shall
pay fifty percent (50%) of P203,300.00 to the Province of Tarlac, with legal interest from March 20, 1981
until the payment thereof. Associated Bank shall pay fifty percent (50%) of P203,300.00 to the Philippine
National

____________________________

41 Eastern Shipping Lines, Inc. v. CA, G.R. No. 97412, July 12, 1994, 234 SCRA 78.
641

VOL. 252, JANUARY 31, 1996


641
Paredes, Jr. vs. Sandiganbayan, Second Division
Bank, likewise, with legal interest from March 20, 1981 until payment is made.
SO ORDERED.
Regalado (Chairman), Puno and Mendoza, JJ., concur.
Petition of PNB partially granted while that of Associated Bank denied. Judgment of trial court modified.
Note.Forgery cannot be presumed it must be proved by clear, positive and convincing evidence.
(Tenio-Obsequio vs. Court of Appeals, 230 SCRA 550 [1994])
o0o

Copyright 2014 Central Book Supply, Inc. All rights reserved. [Associated Bank vs. Court of Appeals,
252 SCRA 620(1996)]

Westmont Bank vs. Ong


G.R. No. 132560. January 30, 2002.*
WESTMONT BANK (formerly ASSOCIATED BANKING CORP.), petitioner, vs. EUGENE ONG, respondent.
Remedial Law; Action; Definition of a cause of action; Essential elements of a cause of action.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.

Banks and Banking; The collecting bank is liable to the payee and must bear the loss because it is its legal
duty to ascertain that the payees endorsement was genuine before the check.The collecting bank is
liable to the payee and must bear the loss because it is its legal duty to ascertain that the payees
endorsement was genuine before cashing the check. 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 other from the drawee, is liable for the proceeds thereof to
the payee or other owner, notwithstanding that the amount has been paid to the person from whom
the check was obtained.
Same; Same; The position of the bank taking the check on the forged or unauthorized indorsement is
the same as if it had taken the check and collected the money without indorsement at all and the act of
the bank amounts to conversion of the check.The theory of the rule is that the possession of the check
on the forged or unauthorized indorsement is
_______________

* SECOND DIVISION.
213

VOL. 375, JANUARY 30, 2002


213
Westmont Bank vs. Ong
wrongful, and when the money had been collected on the check, the bank or other person or
corporation can be held as for moneys had and received, and the proceeds are held for the rightful
owners who may recover them. The position of the bank taking the check on the forged or unauthorized
indorsement is the same as if it had taken the check and collected the money without indorsement at all
and the act of the bank amounts to conversion of the check.
Same; Same; Banks are engaged in a business impressed with public interest, and it is their duty to
protect in return their many clients and depositors who transact business with them.Admittedly,
respondent Eugene Ong at the time the fraudulent transaction took place was a depositor petitioner
bank. Banks are engaged in a business impressed with public interest, and it is their duty to protect in
return their many clients and depositors who transact business with them. 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.

Civil Law; Laches; Laches 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.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. It concerns itself with whether or not by reason of long
inaction or inexcusable neglect, a person claiming a right should be barred from asserting the same,
because to allow him to do so would be unjust to the person against whom such right is sought to be
enforced.
PETITION for review on certiorari of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.


Villanueva, Caa & Associates Law Offices for petitioners.
Alberto, Salazar & Associates for private respondent E. Ong.
214

214
SUPREME COURT REPORTS ANNOTATED
Westmont Bank vs. Ong
QUISUMBING, J.:

This is a petition for review of the decision1 dated January 13, 1998, of the Court of Appeals in CA-G.R.
CV No. 28304 ordering the petitioner to pay respondent P1,754,787.50 plus twelve percent (12%)
interest per annum computed from October 7, 1977, the date of the first extrajudicial demand, plus
damages.
The facts of this case are undisputed.
Respondent Eugene Ong maintained a current account with petitioner, formerly the Associated Banking
Corporation, but now known as Westmont Bank. Sometime in May 1976, he sold certain shares of
stocks through Island Securities Corporation. To pay Ong, Island Securities purchased two (2) Pacific
Banking Corporation managers checks,2 both dated May 4, 1976, issued in the name of Eugene Ong as
payee. Before Ong could get hold of the checks, his friend Paciano Tanlimco got hold of them, forged
Ongs signature and deposited these with petitioner, where Tanlimco was 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.
Instead of going straight to the bank to stop or question the payment, Ong first sought the help of
Tanlimcos family to recover the amount. Later, he reported the incident to the Central Bank, which like
the first effort, unfortunately proved futile.
It was only on October 7, 1977, about five (5) months from discovery of the fraud, did Ong cry foul and
demanded in his complaint 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.3
_______________

1 Rollo, pp. 32-39.


2 No. NI-141439 for P880,850.00 (Exh. A) and No. 141476 for P873,937.50 (Exh. B), RTC Records, pp.
9-10.
3 Supra, note 1 at 34-35.
215

VOL. 375, JANUARY 30, 2002


215
Westmont Bank vs. Ong
The bank did not present evidence to the contrary, but simply contended that since plaintiff Ong
claimed to have never received the originals of the two (2) checks in question from Island Securities,
much less to have authorized Tanlimco to receive the same, he never acquired ownership of these
checks. Thus, he had no legal personality to sue as he is a real party in interest. The bank then filed a
demurrer to evidence which was denied.
On February 8, 1989, after trial on the merits, the Regional Trial Court of Manila, Branch 38, rendered a
decision, thus:
IN VIEW OF THE FOREGOING, the court hereby renders judgment for the plaintiff and against the
defendant, and orders the defendant to pay the plaintiff:

1. The sum of P1,754,787.50 representing the total face value of the two checks in question, exhibits A
and B, respectively, with interest thereon at the legal rate of twelve percent (12%) per annum
computed from October 7, 1977 (the date of the first extrajudicial demand) up to and until the same
shall have been paid in full;
2. Moral damages in the amount of P250,000.00;
3. Exemplary or corrective damages in the sum of P100,000.00 by way of example or correction for the
public good;
4. Attorneys fees of P50,000.00 and costs of suit.
Dependants counterclaims are dismissed for lack of merit.
SO ORDERED.4
Petitioner elevated the case to the Court of Appeals without success. In its decision, the appellate court
held:
WHEREFORE, in view of the foregoing, the appealed decision is AFFIRMED in toto.5
Petitioner now comes before this Court on a petition for review, alleging that the Court of Appeals
erred:
_______________

4 CA Rollo, pp. 99-100.


5 Supra, note 1 at 38.
216

216
SUPREME COURT REPORTS ANNOTATED
Westmont Bank vs. Ong
I

. . . IN AFFIRMING THE TRIAL COURTS CONCLUSION THAT RESPONDENT HAS A CAUSE OF ACTION
AGAINST THE PETITIONER.

II

. . . IN AFFIRMING THE TRIAL COURTS DECISION FINDING PETITIONER LIABLE TO RESPONDENT AND
DECLARING THAT THE LATTER MAY RECOVER DIRECTLY FROM THE FORMER; AND
III

. . . IN NOT ADJUDGING RESPONDENT GUILTY OF LACHES AND IN NOT ABSOLVING PETITIONER FROM
LIABILITY.
Essentially the issues in this case are: (1) whether or not respondent has a cause of action against
petitioner Westmont Bank; and (2) whether or not Ong is barred to recover the money from Westmont
Bank due to laches.
Respondent admitted that he was never in actual or physical possession of the two (2) checks of the
Island Securities nor did he authorize Tanlimco or any of the latters 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 Law6 it is only when a person becomes a holder of a
negotiable instrument can he sue in his own name. Conversely, prior to his becoming a holder, he had
no right or cause of action under such negotiable instrument. Petitioner further argues that since
Section 1917 of the Negotiable Instruments
_______________

6 Sec. 51. Right of holder to sue payment.The holder of a negotiable instrument may sue thereon in
his own name; and payment to him in due course discharges the instrument.
7 Sec. 191. Definitions and meaning of terms.In this Act, unless the contract otherwise requires:
xxx
Holder means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof;
xxx
217

VOL. 375, JANUARY 30, 2002


217

Westmont Bank vs. Ong


Law defines a holder as the payee or indorsee of a bill or note, who is in possession of it, or the bearer
thereof, in order to be a holder, it is a requirement that he be in possession of the instrument or the
bearer thereof. Simply stated, since Ong never had possession of the checks nor did he authorize
anybody, he did not become a holder thereof hence he cannot sue in his own name.8
Petitioner also cites Article 12499 of the Civil Code explaining that a check, even if it is a managers
check, is not legal tender. Hence, the creditor cannot be compelled to accept payment thru this
means.10 It is petitioners position that for all intents and purposes, Island Securities has not yet
tendered payment to respondent Ong, thus, any action by Ong should be directed towards collecting
the amount from Island Securities. Petitioner claims that Ongs cause of action against it has not ripened
as of yet. It may be that petitioner would be liable to the drawee bankbut that is a matter between
petitioner and drawee-bank, Pacific Banking Corporation.11
For its part, respondent Ong leans on the ruling of the trial court and the Court of Appeals which held
that the suit of Ong against the petitioner bank is a desirable shortcut to reach the party who ought in
any event to be ultimately liable.12 It likewise cites the ruling of the courts a quo which held that
according to the general rule, a bank 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
_______________

8 Supra, note 1 at 24-25.


9 Art. 1249. x x x
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents
shall produce the effect of payment only when they have been cashed, or when through the fault of the
creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.
10 Supra, note 1 at 25.
11 Id., at 26.
12 Id., at 47-48.
218

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SUPREME COURT REPORTS ANNOTATED


Westmont Bank vs. Ong
for the proceeds thereof to the payee. The theory of said rule is that the collecting banks possession of
such check is wrongful.13
Respondent also cites Associated Bank vs. Court of Appeals14 which held that the collecting bank or last
endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior
endorsements. The collecting bank is also made liable because it is privy to the depositor who
negotiated the check. The bank knows him, his address and history because he is a client. Hence, it is in
a better position to detect forgery, fraud or irregularity in the indorsement.15
Anent Article 1249 of the Civil Code, Ong points out that bank checks are specifically governed by the
Negotiable Instruments Law which is a special law and only in the absence of specific provisions or
deficiency in the special law may the Civil Code be invoked.16
Considering the contentions of the parties and the evidence on record, we find no reversible error in the
assailed decisions of the appellate and trial courts, hence there is no justifiable reason to grant the
petition.
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.17 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.18
_______________

13 Id., at 48.
14 G.R. No. 107382, 252 SCRA 620, 633 (1996).
15 Supra, note 1 at 48.
16 Supra, note 1 at 49-50 citing Art. 18. Civil Code of the Philippines. In matters which are governed by
the Code of Commerce and special laws, their deficiency shall be supplied by the provisions of this
Code.
17 Sec. 2, Rule 2, 1997 Rules of Court.
18 R.J. Francisco, CIVIL PROCEDURE 86 (First Edition 2001) Vol. I, citing Ma-ao Sugar Central Co. vs.
Barrios, G.R. No. L-1539, 79 Phil. 666, 667 (1947).
219

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219
Westmont Bank vs. Ong
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.19
Under Section 23 of the Negotiable Instruments Law:
When a signature is forged or made without the authority of the person whose signature it purports to
be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to
enforce payment thereof against any party thereto, can be acquired through or under such signature,
unless the party against whom it is sought to enforce such right is precluded from setting up the forgery
or want of authority.
Since the signature of the payee, in the case at bar, was forged to make it appear that he had made an
indorsement in favor of the forger, such signature should be deemed as inoperative and ineffectual.
Petitioner, as the collecting bank, grossly erred in making payment by virtue of said forged signature.
The payee, herein respondent, should therefore be allowed to recover from the collecting bank.
The collecting bank is liable to the payee and must bear the loss because it is its legal duty to ascertain
that the payees endorsement was genuine before cashing the check.20 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 other from the drawee, is liable for the
proceeds thereof to the payee or other owner, notwithstanding that the amount has been paid to the
person from whom the check was obtained.21
_______________

19 RTC Records, pp. 5-6.


20 A. F. Agbayani, COMMERCIAL LAWS OF THE PHILIPPINES 200 (Vol. I 1987) citing Great Eastern Life
Ins. Co. vs. Hongkong & Shanghai Bank, G.R. No. 18657, 43 Phil. 678, 682-683 (1922).
21 Agbayani, op. cit. 201 citing 21 A.L.R. 1068.
220

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SUPREME COURT REPORTS ANNOTATED
Westmont Bank vs. Ong
The theory of the rule is that the possession of the check on the forged or unauthorized indorsement is
wrongful, and when the money had been collected on the check, the bank or other person or
corporation can be held as for moneys had and received, and the proceeds are held for the rightful
owners who may recover them. The position of the bank taking the check on the forged or unauthorized
indorsement is the same as if it had taken the check and collected the money without indorsement at all
and the act of the bank amounts to conversion of the check.22
Petitioners claim that since there was no delivery yet and respondent has never acquired possession of
the checks, respondents remedy is with the drawer and not with petitioner bank. Petitioner relies on
the view to the effect that where there is no delivery to the payee and no title vests in him, he ought not
to be allowed to recover on the ground that he lost nothing because he never became the owner of the
check and still retained his claim of debt against the drawer.23 However, another view in certain cases
holds that even if the absence of delivery is considered, such consideration is not material. The rationale
for this view is that in said cases the plaintiff uses one action to reach, by a desirable short cut, the
person who ought in any event to be ultimately liable as among the innocent persons involved in the
transaction. In other words, the payee ought to be allowed to recover directly from the collecting bank,
regardless of whether the check was delivered to the payee or not.24
Considering the circumstances in this case, in our view, petitioner could not escape liability for its
negligent acts. Admittedly, respondent Eugene Ong at the time the fraudulent transaction took place
was a depositor petitioner bank. Banks are engaged in a business impressed with public interest, and it
is their duty to protect in return their many clients and depositors who transact
_______________

22 Agbayani, op. cit. 202 citing 31 A.L.R. 1070; U.S. Portland Co. vs. U.S. Nat. Bank; L.R.A. 1917-A, 145,
146; 21 A.L.R. 1072; 31 A.L.R. 1071.
23 Agbayani, op. cit. 207 citing 31 Mich. L. Rev. 819.
24 Agbayani, op. cit. 206-207 citing 31 A.L.R. 1021-2; Brannan, 7th ed., 453.
221

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221

Westmont Bank vs. Ong


business with them.25 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.26 In the present case, petitioner was
held to be grossly negligent in performing its duties. As found by the trial court:
x x x (A)t the time the questioned checks were accepted for deposit to Paciano Tanlimcos account by
defendant bank, defendant bank, admittedly had in its files specimen signatures of plaintiff who
maintained a current account with them (Exhibits L-1 and M-1; testimony of Emmanuel Torio).
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.
The Court cannot help but note that had defendant conducted even the most cursory comparison with
plaintiffs specimen signatures in its files (Exhibit L-1 and M-1) it would have at once seen that the
alleged indorsements were falsified and were not those of the plaintiff-payee. 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.27
These findings are binding and conclusive on the appellate and the reviewing courts.
On the second issue, petitioner avers that respondent Ong is barred by laches for failing to assert his
right for recovery from the bank as soon as he discovered the scam. The lapse of five months before he
went to seek relief from the bank, according to petitioner, constitutes laches.
_______________

25 Citytrust Banking Corp. vs. Intermediate Appellate Court, G.R. No. 84281, 232 SCRA 559, 563 (1994).
26 Bank of the Philippine Islands vs. Court of Appeals, G.R. No. 112392, 326 SCRA 641, 657 (2000),
Philippine Bank of Commerce vs. Court of Appeals, G.R. No. 97626, 269 SCRA 695, 708-709 (1997).
27 Supra, note 1 at 251-252.
222

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SUPREME COURT REPORTS ANNOTATED
Westmont Bank vs. Ong

In turn, respondent contends that petitioner presented no evidence to support its claim of laches. On
the contrary, the established facts of the case as found by the trial court and affirmed by the Court of
Appeals are that respondent left no stone unturned to obtain relief from his predicament.
On the matter of delay in reporting the loss, respondent calls attention to the fact that the checks were
issued on May 4, 1976, and on the very next day, May 5, 1976, these were already credited to the
account of Paciano Tanlimco and presented for payment to Pacific Banking Corporation. So even if the
theft of the checks were discovered and reported earlier, respondent argues, it would not have altered
the situation as the encashment of the checks was consummated within twenty four hours and
facilitated by the gross negligence of the petitioner bank.28
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.29 It concerns itself with whether or not by reason
of long inaction or inexcusable neglect, a person claiming a right should be barred from asserting the
same, because to allow him to do so would be unjust to the person against whom such right is sought to
be enforced.30
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
_______________

28 Supra, note 1 at 50-52.


29 Felizardo et al. vs. Fernandez, G.R. No. 137509, August 15, 2001, p. 8, 363 SCRA 182, citing Heirs of
Pedro Lopez vs. De Castro, G.R. No. 112905, 324 SCRA 591, 614-615 (2000), Catholic Bishop of Balanga
vs. Court of Appeals, G.R. No. 112519, 332 Phil. 206, 218-219 (1996), 264 SCRA 181, 192-194 (1996).
30 Felizardo vs. Fernandez, id. citing Heirs of Teodoro Dela Cruz vs. Court of Appeals, G.R. No. 117384,
298 SCRA 172, 182 (1998), Pablate vs. Echarri, Jr., G.R. No. L- 24357, 37 SCRA 518, 521-522 (1971).
223

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223
Westmont Bank vs. Ong

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.
Moreover, the claim of petitioner that respondent should be barred by laches is clearly a vain attempt to
deflect responsibility for its negligent act. As explained by the appellate court, it is petitioner which had
the last clear chance to stop the fraudulent encashment of the subject checks had it exercised due
diligence and followed the proper and regular banking procedures in clearing checks.31 As we had
earlier ruled, the one who had the last clear opportunity to avoid the impending harm but failed to do so
is chargeable with the consequences thereof.32
WHEREFORE, the instant petition is DENIED for lack of merit. The assailed decision of the Court of
Appeals, sustaining the judgment of the Regional Trial Court of Manila, is AFFIRMED.
Costs against petitioner.
SO ORDERED.
Bellosillo (Chairman), Mendoza, Buena and De Leon, Jr., JJ., concur.
Petition denied, judgment affirmed.
Note.Banks being greatly affected with public interest are expected to exercise a degree of diligence
in the handling of its affairs higher than that expected of an ordinary business firm. (Ibaan Rural Bank,
Inc. vs. Court of Appeals, 321 SCRA 88 [1999])
o0o

_______________

31 Supra, note 1 at 51-52.


32 Philippine Bank of Commerce vs. CA, G.R. No. 97626, 269 SCRA 695, 707-708 (1997).
224

Copyright 2014 Central Book Supply, Inc. All rights reserved. [Westmont Bank vs. Ong, 375 SCRA
212(2002)]

VOL. 430, MAY 28, 2004


261
Bank of the Philippine Islands vs. Casa Montessori Internationale
G.R. No. 149454. May 28, 2004.*
BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. CASA MONTESSORI INTERNATIONALE and LEONARDO
T. YABUT, respondents.
G.R. No. 149507. May 28, 2004.*
CASA MONTESSORI INTERNATIONALE, petitioner, vs. BANK OF THE PHILIPPINE ISLANDS, respondents.
Negotiable Instruments Law; A forged signature is a real or absolute defense, and a person whose
signature on a negotiable instrument is forged is deemed to have never become a party thereto and to
have never consented to the contract that allegedly gave rise to it.Section 23 of the NIL provides:
Section 23. Forged signature; effect of.When a signature is forged or made without the authority of
the person whose signature it purports to be, it is wholly inoperative, and no right x x x to enforce
payment thereof against any party thereto, can be acquired through or under such signature, unless the
party against whom it is sought to enforce such right is precluded from setting up the forgery or want of
authority. Under this provision, a forged signature is a real or absolute defense, and a person whose
signature on a negotiable instrument is forged is deemed to have never become a party thereto and to
have never consented to the contract that allegedly gave rise to it. The counterfeiting of any writing,
consisting in the signing of anothers name with intent to defraud, is forgery.
_______________

* FIRST DIVISION.
262

262
SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Casa Montessori Internationale
Administrative Investigations; Rights of Suspects; The mantle of protection under Section 12 of Article III
of the 1987 Constitution covers only the period from the time a person is taken into custody for
investigation of his possible participation in the commission of a crime or from the time he is singled out
as a suspect in the commission of a crime although not yet in custodyto fall within the ambit of

Section 12, there must be an arrest or a deprivation of freedom, with questions propounded on him by
the police authorities for the purpose of eliciting admissions, confessions, or any information.In the
first place, he was not under custodial investigation. His Affidavit was executed in private and before
private individuals. The mantle of protection under Section 12 of Article III of the 1987 Constitution
covers only the period from the time a person is taken into custody for investigation of his possible
participation in the commission of a crime or from the time he is singled out as a suspect in the
commission of a crime although not yet in custody. Therefore, to fall within the ambit of Section 12,
quoted above, there must be an arrest or a deprivation of freedom, with questions propounded on him
by the police authorities for the purpose of eliciting admissions, confessions, or any information. The
said constitutional provision does not apply to spontaneous statements made in a voluntary manner
whereby an individual orally admits to authorship of a crime. What the Constitution proscribes is the
compulsory or coercive disclosure of incriminating facts.
Same; Self-Incrimination; The right against self-incrimination, which is ordinarily available only in
criminal prosecutions, extends to all other government proceedingsincluding civil actions, legislative
investigations, and administrative proceedings that possess a criminal or penal aspectbut not to
private investigations done by private individuals.The right against self-incrimination under Section 17
of Article III of the Constitution, which is ordinarily available only in criminal prosecutions, extends to all
other government proceedingsincluding civil actions, legislative investigations, and administrative
proceedings that possess a criminal or penal aspectbut not to private investigations done by private
individuals. Even in such government proceedings, this right may be waived, provided the waiver is
certain; unequivocal; and intelligently, understanding and willingly made. If in these government
proceedings waiver is allowed, all the more is it so in private investigations. It is of no moment that no
criminal case has yet been filed against Yabut. The filing thereof is entirely up to the appropriate
authorities or to the private individuals upon whom damage has been caused. As we shall also explain
later, it is not mandatory for CASAthe plaintiff belowto implead Yabut in the civil case before the
lower court.
Same; Bill of Rights; The Bill of Rights does not concern itself with the relation between a private
individual and another individualthe Bill of Rights is a charter of liberties for the individual and a
limitation upon
263

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Bank of the Philippine Islands vs. Casa Montessori Internationale
the power of the State.Under these two constitutional provisions, *t+he Bill of Rights does not
concern itself with the relation between a private individual and another individual. It governs the

relationship between the individual and the State. Moreover, the Bill of Rights is a charter of liberties
for the individual and a limitation upon the power of the *S+tate. These rights are guaranteed to
preclude the slightest coercion by the State that may lead the accused to admit something false, not
prevent him from freely and voluntarily telling the truth.
Negotiable Instruments Law; Checks; Evidence; Best Evidence Rule; Under the best evidence rule as
applied to documentary evidence, like the checks in question, no secondary evidence or substitutionary
evidence may inceptively be introduced, as the original writing itself must be produced in court, but
when, without bad faith on the part of the offeror, the original checks have already been destroyed or
cannot be produced in court, secondary evidence, like microfilm copies, may be produced.Forgery
cannot be presumed. It must be established by clear, positive and convincing evidence. Under the best
evidence rule as applied to documentary evidence like the checks in question, no secondary or
substitutionary evidence may inceptively be introduced, as the original writing itself must be produced
in court. But when, without bad faith on the part of the offeror, the original checks have already been
destroyed or cannot be produced in court, secondary evidence may be produced. Without bad faith on
its part, CASA proved the loss or destruction of the original checks through the Affidavit of the one
person who knew of that factYabut. He clearly admitted to discarding the paid checks to cover up his
misdeed. In such a situation, secondary evidence like microfilm copies may be introduced in court.
Same; Same; Same; Same; Even with respect to documentary evidence, the best evidence rule applies
only when the contents of the documentsuch as the drawers signature on a checkis the subject of
inquiry.Even with respect to documentary evidence, the best evidence rule applies only when the
contents of a documentsuch as the drawers signature on a checkis the subject of inquiry. As to
whether the document has been actually executed, this rule does not apply; and testimonial as well as
any other secondary evidence is admissible. Carina Lebron herself, the drawers authorized signatory,
testified many times that she had never signed those checks. Her testimonial evidence is admissible; the
checks have not been actually executed. The genuineness of her handwriting is proved, not only through
the courts comparison of the questioned hand-writings and admittedly genuine specimens thereof, but
above all by her.
Same; Same; Same; Same; Of no consequence is the fact that the depositor did not present the
signature card containing the signatures with which those on the checks were comparedspecimens of
standard signatures are not limited to such a card.The failure of CASA to produce the
264

264
SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Casa Montessori Internationale

original checks neither gives rise to the presumption of suppression of evidence nor creates an
unfavorable inference against it. Such failure merely authorizes the introduction of secondary evidence
in the form of microfilm copies. Of no consequence is the fact that CASA did not present the signature
card containing the signatures with which those on the checks were compared. Specimens of standard
signatures are not limited to such a card. Considering that it was not produced in evidence, other
documents that bear the drawers authentic signature may be resorted to. Besides, that card was in the
possession of BPIthe adverse party.
Banks and Banking; Checks; Since the banking business is impressed with public interest, of paramount
importance thereto is the trust and confidence of the public in generalthe highest degree of diligence
is expected, and high standards of integrity and performance are even required of it; A bank is bound to
know the signatures of its customers, and if it pays a forged check, it must be considered as making the
payment out of its own funds, and cannot ordinarily charge the amount so paid to the account of the
depositor whose name was forged.We have repeatedly emphasized that, since the banking business is
impressed with public interest, of paramount importance thereto is the trust and confidence of the
public in general. Consequently, the highest degree of diligence is expected, and high standards of
integrity and performance are even required, of it. By the nature of its functions, a bank is under
obligation to treat the accounts of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship. BPI contends that it has a signature verification procedure, in
which checks are honored only when the signatures therein are verified to be the same with or similar
to the specimen signatures on the signature cards. Nonetheless, it still failed to detect the eight
instances of forgery. Its negligence consisted in the omission of that degree of diligence required of a
bank. It cannot now feign ignorance, for very early on we have already ruled that a bank is bound to
know the signatures of its customers; and if it pays a forged check, it must be considered as making the
payment out of its own funds, and cannot ordinarily charge the amount so paid to the account of the
depositor whose name was forged. In fact, BPI was the same bank involved when we issued this ruling
seventy years ago.
Same; Same; Audit Procedures; The notice in the monthly statements issued by the bank that if no error
is reported in ten (10) days, the account will be correct cannot be considered a waiver, even if the
depositor failed to report the error, and neither is it estopped from questioning the mistake after the
lapse of the ten-day periodsuch notice is a simple confirmation or circularization,in accounting
parlance, that requests client-depositors to affirm the accuracy of items recorded by the banks.The
monthly statements issued by BPI to its clients contain a notice worded as follows: If no error is
reported in ten (10) days, account will be correct.
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Bank of the Philippine Islands vs. Casa Montessori Internationale


Such notice cannot be considered a waiver, even if CASA failed to report the error. Neither is it estopped
from questioning the mistake after the lapse of the ten-day period. This notice is a simple confirmation
or circularizationin accounting parlancethat requests client-depositors to affirm the accuracy of
items recorded by the banks. Its purpose is to obtain from the depositors a direct corroboration of the
correctness of their account balances with their respective banks. Internal or external auditors of a bank
use it as a basic audit procedurethe results of which its client-depositors are neither interested in nor
privy toto test the details of transactions and balances in the banks records. Evidential matter
obtained from independent sources outside a bank only serves to provide greater assurance of reliability
than that obtained solely within it for purposes of an audit of its own financial statements, not those of
its client-depositors.
Same; Same; Same; Banks have no right to impose a condition unilaterally and thereafter consider
failure to meet such condition a waiver, and neither may a depositor renounce a right it never
possessed.There is always the audit risk that errors would not be detected for various reasons. One,
materiality is a consideration in audit planning; and two, the information obtained from such a
substantive test is merely presumptive and cannot be the basis of a valid waiver. BPI has no right to
impose a condition unilaterally and thereafter consider failure to meet such condition a waiver. Neither
may CASA renounce a right it has never possessed.
Same; Same; Same; Every right has subjectsactive and passive, the active subject being entitled to
demand its enforcement while the passive one being duty-bound to suffer such enforcement; The bank
could not have been an active subject, because it could not have demanded from the depositor a
response to its notice, while, on the other hand, the depositor could not have been a passive subject
because it had no obligation to respond.Every right has subjectsactive and passive. While the active
subject is entitled to demand its enforcement, the passive one is duty-bound to suffer such
enforcement. On the one hand, BPI could not have been an active subject, because it could not have
demanded from CASA a response to its notice. Besides, the notice was a measly request worded as
follows: Please examine x x x and report x x x. CASA, on the other hand, could not have been a passive
subject, either, because it had no obligation to respond. It couldas it didchoose not to respond.
Same; Same; Estoppel; Words and Phrases; Estoppel precludes individuals from denying or asserting, by
their own deed or representation, anything contrary to that established as the truth, in legal
contemplation; Estoppel will not arise from a conduct due to ignorance founded upon an innocent
mistake.Estoppel precludes individuals from denying or asserting, by their own deed or
representation, anything contrary to that
266

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SUPREME COURT REPORTS ANNOTATED


Bank of the Philippine Islands vs. Casa Montessori Internationale
established as the truth, in legal contemplation. Our rules on evidence even make a juris et de jure
presumption that whenever one has, by ones own act or omission, intentionally and deliberately led
another to believe a particular thing to be true and to act upon that belief, one cannotin any litigation
arising from such act or omissionbe permitted to falsify that supposed truth. In the instant case, CASA
never made any deed or representation that misled BPI. The formers omission, if any, may only be
deemed an innocent mistake oblivious to the procedures and consequences of periodic audits. Since its
conduct was due to such ignorance founded upon an innocent mistake, estoppel will not arise. A person
who has no knowledge of or consent to a transaction may not be estopped by it. Estoppel cannot be
sustained by mere argument or doubtful inference x x x. CASA is not barred from questioning BPIs
error even after the lapse of the period given in the notice.
Same; Same; For allowing payment on the checks to a wrongful and fictitious payee, the drawee bank
becomes liable to its depositor-drawer.For allowing payment on the checks to a wrongful and
fictitious payee, BPIthe drawee bankbecomes liable to its depositor-drawer. Since the encashing
bank is one of its branches, BPI can easily go after it and hold it liable for reimbursement. It may not
debit the drawers account and is not entitled to indemnification from the drawer. In both law and
equity, when one of two innocent persons must suffer by the wrongful act of a third person, the loss
must be borne by the one whose negligence was the proximate cause of the loss or who put it into the
power of the third person to perpetrate the wrong.
Same; Same; Proximate Cause; Words and Phrases; Proximate cause is that cause which, in natural and
continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without
which the result would not have occurred.Proximate cause is determined by the facts of the case. It
is that cause which, in natural and continuous sequence, unbroken by any efficient intervening cause,
produces the injury, and without which the result would not have occurred. Pursuant to its prime duty
to ascertain well the genuineness of the signatures of its client-depositors on checks being encashed, BPI
is expected to use reasonable business prudence. In the performance of that obligation, it is bound by
its internal banking rules and regulations that form part of the contract it enters into with its depositors.
Same; Same; Same; Negligence; Forgery; In this jurisdiction, the negligence of the party invoking forgery
is recognized as an exception to the general rule that a forged signature is wholly inoperative.In this
jurisdiction, the negligence of the party invoking forgery is recognized as an exception to the general
rule that a forged signature is wholly inoperative. Contrary to BPIs claim, however, we do not find CASA
negligent in han267

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Bank of the Philippine Islands vs. Casa Montessori Internationale
dling its financial affairs. CASA, we stress, is not precluded from setting up forgery as a real defense.
Accountants and Auditors; The major purpose of an independent audit is to investigate and determine
objectively if the financial statements submitted for audit by a corporation have been prepared in
accordance with the appropriate financial reporting practices of private entities.The major purpose of
an independent audit is to investigate and determine objectively if the financial statements submitted
for audit by a corporation have been prepared in accordance with the appropriate financial reporting
practices of private entities. The relationship that arises therefrom is both legal and moral. It begins with
the execution of the engagement letter that embodies the terms and conditions of the audit and ends
with the fulfilled expectation of the auditors ethical and competent performance in all aspects of the
audit. The financial statements are representations of the client; but it is the auditor who has the
responsibility for the accuracy in the recording of data that underlies their preparation, their form of
presentation, and the opinion expressed therein. The auditor does not assume the role of employee or
of management in the clients conduct of operations and is never under the control or supervision of the
client.
Same; Negligence; Nothing could be more horrible to a client than to discover later on that the person
tasked to detect fraud was the same one who perpetrated it.Yabut was an independent auditor hired
by CASA. He handled its monthly bank reconciliations and had access to all relevant documents and
checkbooks. In him was reposed the clients trust and confidence that he would perform precisely those
functions and apply the appropriate procedures in accordance with generally accepted auditing
standards. Yet he did not meet these expectations. Nothing could be more horrible to a client than to
discover later on that the person tasked to detect fraud was the same one who perpetrated it.
Same; Same; Awareness is not equipollent with discernment.It is a non sequitur to say that the person
who receives the monthly bank statements, together with the cancelled checks and other debit/credit
memoranda, shall examine the contents and give notice of any discrepancies within a reasonable time.
Awareness is not equipollent with discernment.
Same; Same; A preschool teacher charged with molding the minds of the youth cannot be burdened
with the intricacies or complexities of corporate existence.Moreover, there was a time gap between
the period covered by the bank statement and the date of its actual receipt. Lebron personally received
the December 1990 bank statement only in January 1991when she was also informed of the forgery
for the first time, after which she immediately requested a stop payment order. She cannot be faulted
for the late detection of the forged December check. After all, the
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Bank of the Philippine Islands vs. Casa Montessori Internationale
bank account with BPI was not personal but corporate, and she could not be expected to monitor
closely all its finances. A preschool teacher charged with molding the minds of the youth cannot be
burdened with the intricacies or complexities of corporate existence.
Same; Same; The depositor could only be blamed, if at all, for its unintelligent choice in the selection and
appointment of an auditora fault that is not tantamount to negligence.There is also a cutoff period
such that checks issued during a given month, but not presented for payment within that period, will not
be reflected therein. An experienced auditor with intent to defraud can easily conceal any devious
scheme from a client unwary of the accounting processes involved by manipulating the cash balances on
recordespecially when bank transactions are numerous, large and frequent. CASA could only be
blamed, if at all, for its unintelligent choice in the selection and appointment of an auditora fault that
is not tantamount to negligence.
Same; Same; Negligence is not presumed, but proven by whoever alleges it; The Professional Regulation
Commission, through the Board of Accountancy, now requires not only accreditation for the practice of
public accountancy, but also the registration of firms in the practice thereof.Negligence is not
presumed, but proven by whoever alleges it. Its mere existence is not sufficient without proof that it,
and no other cause, has given rise to damages. In addition, this fault is common to, if not prevalent
among, small and medium-sized business entities, thus leading the Professional Regulation Commission
(PRC), through the Board of Accountancy (BOA), to require today not only accreditation for the practice
of public accountancy, but also the registration of firms in the practice thereof. In fact, among the
attachments now required upon registration are the code of good governance and a sworn statement
on adequate and effective training.
Same; Same; If auditors may be held liable for breach of contract and negligence, with all the more
reason may they be charged with the perpetration of fraud upon an unsuspecting client.Clearly then,
Yabut was able to perpetrate the wrongful act through no fault of CAS A. If auditors may be held liable
for breach of contract and negligence, with all the more reason may they be charged with the
perpetration of fraud upon an unsuspecting client. CASA had the discretion to pursue BPI alone under
the NIL, by reason of expediency or munificence or both. Money paid under a mistake may rightfully be
recovered, and under such terms as the injured party may choose.
Damages; The adverse result of an action does not per se make the action wrongful, or the party liable
for it.In the absence of a wrongful act or omission, or of fraud or bad faith, moral damages cannot be
awarded.
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The adverse result of an action does not per se make the action wrongful, or the party liable for it. One
may err, but error alone is not a ground for granting such damages. While no proof of pecuniary loss is
necessary thereforwith the amount to be awarded left to the courts discretionthe claimant must
nonetheless satisfactorily prove the existence of its factual basis and causal relation to the claimants act
or omission.
Same; As a general rule, a corporation is not entitled to moral damages because it cannot experience
physical suffering and mental anguish, but, for breach of the fiduciary duty required of a bank, a
corporate client may claim such damages when its good reputation is besmirched by such breach, and
social humiliation results therefrom.As a general rule, a corporationbeing an artificial person
without feelings, emotions and senses, and having existence only in legal contemplationis not entitled
to moral damages, because it cannot experience physical suffering and mental anguish. However, for
breach of the fiduciary duty required of a bank, a corporate client may claim such damages when its
good reputation is besmirched by such breach, and social humiliation results therefrom. CASA was
unable to prove that BPI had debased the good reputation of, and consequently caused incalculable
embarrassment to, the former. CASAs mere allegation or supposition thereof, without any sufficient
evidence on record, is not enough.
Same; Attorneys Fees; When the act or omission of the defendant has compelled the plaintiff to incur
expenses to protect the latters interest, or where the court deems it just and equitable, attorneys fees
may be recovered.Although it is a sound policy not to set a premium on the right to litigate, we find
that CASA is entitled to reasonable attorneys fees based on factual, legal, and equitable justification.
When the act or omission of the defendant has compelled the plaintiff to incur expenses to protect the
latters interest, or where the court deems it just and equitable, attorneys fees may be recovered. In
the present case, BPI persistently denied the claim of CASA under the NIL to recredit the latters account
for the value of the forged checks. This denial constrained CASA to incur expenses and exert effort for
more than ten years in order to protect its corporate interest in its bank account. Besides, we have
already cautioned BPI on a similar act of negligence it had committed seventy years ago, but it has
remained unrelenting. Therefore, the Court deems it just and equitable to grant ten percent (10%) of
the total value adjudged to CASA as attorneys fees.
Same; Interest Rates; Since a court judgment is not a loan or a forbearance of recovery, the legal
interest shall be at six percent (6%) per annum.For the failure of BPI to pay CASA upon demand and
for compelling the latter to resort to the courts to obtain payment, legal interest may be adjudicated at
the discretion of the Court, the same to run from the
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SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Casa Montessori Internationale
filing of the Complaint. Since a court judgment is not a loan or a forbearance of recovery, the legal
interest shall be at six percent (6%) per annum. If the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the
contrary, shall be the payment of x x x legal interest, which is six percent per annum. The actual base
for its computation shall be on the amount finally adjudged, compounded annually to make up for the
cost of money already lost to CASA.
Same; Negotiable Instruments Law; Code of Commerce; Under Section 196 of the NIL, any case not
provided for shall be governed by the provisions of existing legislation or, in default thereof, by the
rules of the law merchant, and, since damages are not provided for in the NIL, resort is had to the Code
of Commerce and the Civil Code.Moreover, the failure of the CA to award interest does not prevent us
from granting it upon damages awarded for breach of contract. Because BPI evidently breached its
contract of deposit with CASA, we award interest in addition to the total amount adjudged. Under
Section 196 of the NIL, any case not provided for shall be governed by the provisions of existing
legislation or, in default thereof, by the rules of the law merchant. Damages are not provided for in the
NIL. Thus, we resort to the Code of Commerce and the Civil Code. Under Article 2 of the Code of
Commerce, acts of commerce shall be governed by its provisions and, in their absence, by the usages of
commerce generally observed in each place; and in the absence of both rules, by those of the civil law.
This law being silent, we look at Article 18 of the Civil Code, which states: In matters which are
governed by the Code of Commerce and special laws, their deficiency shall be supplied by its
provisions. A perusal of these three statutes unmistakably shows that the award of interest under our
civil law is justified.
PETITION for review on certiorari of the decision and resolution of the Court of Appeals.

The facts are stated in the opinion of the Court.


Benedicto, Verzosa, Geslogo, Burkley & Associates for Bank of the Philippine Islands.
Oscar F. Martinez for Casa Montessori Internationale
Mauricio Law Office for Leonardo Yabut.
PANGANIBAN, J.:

By the nature of its functions, a bank is required to take meticulous care of the deposits of its clients,
who have the right to expect high standards of integrity and performance from it. Among
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Bank of the Philippine Islands vs. Casa Montessori Internationale
its obligations in furtherance thereof is knowing the signatures of its clients. Depositors are not
estopped from questioning wrongful withdrawals, even if they have failed to question those errors in
the statements sent by the bank to them for verification.
The Case
Before us are two Petitions for Review1 under Rule 45 of the Rules of Court, assailing the March 23,
2001 Decision2 and the August 17, 2001 Resolution3 of the Court of Appeals (CA) in CA-GR CV No.
63561. The decretal portion of the assailed Decision reads as follows:
WHEREFORE, upon the premises, the decision appealed from is AFFIRMED with the modification that
defendant bank [Bank of the Philippine Islands (BPI)] is held liable only for one-half of the value of the
forged checks in the amount of P547,115.00 after deductions subject to REIMBURSEMENT from third
party defendant Yabut who is likewise ORDERED to pay the other half to plaintiff corporation [Casa
Montessori Internationale (CASA)+.4
The assailed Resolution denied all the parties Motions for Reconsideration.
The Facts
The facts of the case are narrated by the CA as follows:
On November 8, 1982, plaintiff CASA Montessori International5 opened Current Account No. 02910081-01 with defendant BPI*,+ with CASAs President Ms. Ma. Carina C. Lebron as one of its authorized
signatories.
_______________

1 G.R. No. 149454, Rollo, pp. 20-40; G.R. No. 149507, Rollo, pp. 3-20.
2 Id., pp. 44-52 & 22-30. Penned by Justice Portia Alio-Hormachuelos, with the concurrence of Justices
Fermin A. Martin Jr. (Second Division chairman) and Mercedes Gozo-Dadole (member).

3 Id., pp. 54 & 32. Penned by Justice Portia Alio-Hormachuelos, with the concurrence of Justices Ramon
A. Barcelona (Special Former Second Division chairman) and Mercedes Gozo-Dadole (member).
4 Assailed CA Decision, pp. 8-9; G.R. No. 149454, Rollo, pp. 51-52; G.R. No. 149507, Rollo, pp. 29-30.
5 This is also referred to in the records as Casa Montessori Internationale or Casa Montessori
International, Inc.
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SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Casa Montessori Internationale
In 1991, after conducting an investigation, plaintiff discovered that nine (9) of its checks had been
encashed by a certain Sonny D. Santos since 1990 in the total amount of P782,000.00, on the following
dates and amounts:

Check No.
Date
Amount

1.
839700
April 24, 1990
P 43,400.00

2.
839459
Nov. 2, 1990
110,500.00

3.
839609
Oct. 17, 1990
47,723.00

4.
839549
April 7, 1990
90,700.00

5.
839569
Sept. 23, 1990
52,277.00

6.
729149
Mar. 22, 1990
148,000.00

7.
729129
Mar. 16, 1990
51,015.00

8.
839684
Dec. 1, 1990
140,000.00

9.
729034
Mar. 2, 1990
98,985.00

Total --P 782,600.006

It turned out that Sonny D. Santos with account at BPIs Greenbelt Branch *was+ a fictitious name used
by third party defendant Leonardo T. Yabut who worked as external auditor of CASA. Third party
defendant voluntarily admitted that he forged the signature of Ms. Lebron and encashed the checks.
The PNP Crime Laboratory conducted an examination of the nine (9) checks and concluded that the
handwritings thereon compared to the standard signature of Ms. Lebron were not written by the latter.
On March 4, 1991, plaintiff filed the herein Complaint for Collection with Damages against defendant
bank praying that the latter be ordered to reinstate the amount of P782,500.007 in the current and
savings accounts of the plaintiff with interest at 6% per annum.
On February 16, 1999, the RTC rendered the appealed decision in favor of the plaintiff.8
Ruling of the Court of Appeals
Modifying the Decision of the Regional Trial Court (RTC), the CA apportioned the loss between BPI and
CASA. The appellate court took into account CASAs contributory negligence that re-

_______________

6 The amount was earlier stated in the CA Decision as P782,000.


7 The total amount of the encashed checks was earlier computed in the CA Decision to be P782,600.
8 Assailed CA Decision, pp. 2-4; G.R. No. 149454, Rollo, pp. 45-47; G.R. No. 149507, Rollo, pp. 23-25.
Citations omitted.
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Bank of the Philippine Islands vs. Casa Montessori Internationale
sulted in the undetected forgery. It then ordered Leonardo T. Yabut to reimburse BPI half the total
amount claimed; and CASA, the other half. It also disallowed attorneys fees and moral and exemplary
damages.
Hence, these Petitions.9
Issues
In G.R. No. 149454, Petitioner BPI submits the following issues for our consideration:
I. The Honorable Court of Appeals erred in deciding this case NOT in accord with the applicable
decisions of this Honorable Court to the effect that forgery cannot be presumed; that it must be proved
by clear, positive and convincing evidence; and that the burden of proof lies on the party alleging the
forgery.
II. The Honorable Court of Appeals erred in deciding this case not in accord with applicable laws, in
particular the Negotiable Instruments Law (NIL) which precludes CASA, on account of its own
negligence, from asserting its forgery claim against BPI, specially taking into account the absence of any
negligence on the part of BPI.10
In G.R. No. 149507, Petitioner CASA submits the following issues:
1. The Honorable Court of Appeals erred when it ruled that there is no showing that *BPI+, although
negligent, acted in bad faith x x x thus denying the prayer for the award of attorneys fees, moral
damages and exemplary damages to [CASA]. The Honorable Court also erred when it did not order [BPI]
to pay interest on the amounts due to [CASA].

_______________

9 These two cases were consolidated and deemed submitted for decision on July 25, 2002, upon the
Courts receipt of BPIs Memorandum in G.R. No. 149454, which was signed by Atty. Justino M. Marquez
III. CASAs Memorandum, signed by Atty. Oscar F. Martinez, was filed on July 4, 2002; while Yabuts
Memorandum, signed by Atty. Leny L. Mauricio, was filed on June 25, 2002.
In G.R. No. 149507, a Manifestation (re: Memorandum) by Yabut, also signed by Atty. Mauricio, was
filed on June 25, 2002. BPIs Memorandum, also signed by Atty. Marquez, was filed on June 3, 2002;
while CASAs Memorandum, also signed by Atty. Martinez, was filed on April 19, 2002.
10 BPIs Memorandum, p. 7; G.R. No. 149454, Rollo, p. 140. Boldface and upper case characters copied
verbatim.
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SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Casa Montessori Internationale
2. The Honorable Court of Appeals erred when it declared that *CASA+ was likewise negligent in the
case at bar, thus warranting its conclusion that the loss in the amount of P547.115.00 be apportioned
between *CASA+ and *BPI+ x x x. 11
These issues can be narrowed down to three. First, was there forgery under the Negotiable Instruments
Law (NIL)? Second, were any of the parties negligent and therefore precluded from setting up forgery as
a defense? Third, should moral and exemplary damages, attorneys fees, and interest be awarded?
The Courts Ruling
The Petition in G.R. No. 149454 has no merit, while that in G.R. No. 149507 is partly meritorious.
First Issue:
Forged Signature Wholly Inoperative
Section 23 of the NIL provides:
Section 23. Forged signature; effect of.When a signature is forged or made without the authority of
the person whose signature it purports to be, it is wholly inoperative, and no right x x x to enforce
payment thereof against any party thereto, can be acquired through or under such signature, unless the

party against whom it is sought to enforce such right is precluded from setting up the forgery or want of
authority.12
Under this provision, a forged signature is a real13 or absolute defense,14 and a person whose signature
on a negotiable instrument is forged is deemed to have never become a party thereto and to have never
consented to the contract that allegedly gave rise to it.15
_______________

11 CASAs Memorandum, p. 6; G.R. No. 149507, Rollo, p. 83.


12 Act No. 2031 took effect on June 2, 1911. Agbayani, Commentaries and Jurisprudence on the
Commercial Laws of the Philippines, Vol. I (1989 ed.), p. 191.
13 Campos and Lopez-Campos, Notes and Selected Cases on Negotiable Instruments Law (5th ed.,
1994), pp. 268-269.
14 Gempesaw v. Court of Appeals, 218 SCRA 682, 689, February 9, 1993.
15 Associated Bank v. Court of Appeals, 322 Phil. 677, 695; 252 SCRA 620, 629, January 31, 1996.
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Bank of the Philippine Islands vs. Casa Montessori Internationale
The counterfeiting of any writing, consisting in the signing of anothers name with intent to defraud, is
forgery.16
In the present case, we hold that there was forgery of the drawers signature on the check.
First, both the CA17 and the RTC18 found that Respondent Yabut himself had voluntarily admitted,
through an Affidavit, that he had forged the drawers signature and encashed the checks.19 He never
refuted these findings.20 That he had been coerced into admission was not corroborated by any
evidence on record.21
Second, the appellate and the trial courts also ruled that the PNP Crime Laboratory, after its
examination of the said checks,22 had concluded that the handwritings thereoncompared to the
standard signature of the drawerwere not hers.23 This conclusion was the same as that in the
Report24 that the PNP Crime Laboratory had earlier issued to BPIthe drawee bankupon the latters
request.

Indeed, we respect and affirm the RTCs factual findings, especially when affirmed by the CA, since these
are supported by substantial evidence on record.25
_______________

16 Agbayani, supra, p. 191.


17 Assailed CA Decision, p. 7; G.R. No. 149454, Rollo, p. 50; G.R. No. 149507, Rollo, p. 28.
18 RTC Decision, p. 4; G.R. No. 149454, Rollo, p. 59.
19 Yabuts Affidavit, pp. 1-2; G.R. No. 149454, Records, pp. 323-324.
20 RTC Decision, p. 4; G.R. No. 149454, Rollo, p. 59.
21 Assailed CA Decision, p. 8; id., p. 51; G.R. No. 149507, Rollo, p. 29.
22 Questioned Document Report No. 291-91 dated November 25, 1991; G.R. No. 149454, Records, p.
326.
23 Assailed CA Decision, p. 7; G.R. No. 149454, Rollo, p. 50; G.R. No. 149507, Rollo, p. 28. See also RTC
Decision, p. 3; G.R. No. 149454, Rollo, p. 58.
24 Questioned Document Report No. 029-91 dated January 28, 1991, issued upon the request of BPI
Vice President Amante S. Bueno; G.R. No. 149454, Records, p. 328.
25 Francisco v. Court of Appeals, 377 Phil. 368, 378; 319 SCRA 354, 362, November 29, 1999. See also
Almeda v. Court of Appeals, 336 Phil. 621, 629; 269 SCRA 643, 652, March 13, 1997; Fuente v. Court of
Appeals, 335 Phil. 1163, 1169; 268 SCRA 703, February 26, 1997; and People v. Magallano, 334 Phil. 276,
282; 266 SCRA 305, January 16, 1997.
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SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Casa Montessori Internationale
Voluntary Admission Not
Violative of Constitutional Rights`
The voluntary admission of Yabut did not violate his constitutional rights (1) on custodial investigation,
and (2) against self-incrimination.

In the first place, he was not under custodial investigation.26 His Affidavit was executed in private and
before private individuals.27 The mantle of protection under Section 12 of Article III of the 1987
Constitution28 covers only the period from the time a person is
_______________

26 Custodial investigation is defined as any questioning initiated by law enforcement officers after a
person has been taken into custody or otherwise deprived of his freedom of action in any significant
way. Sebastian, Sr. v. Garchitorena, 343 SCRA 463, 470, October 18, 2000, per De Leon, Jr., J. See also
Navallo v. Sandiganbayan, 234 SCRA 175, 183-184, July 18, 1994; People v. Loveria, 187 SCRA 47, 61, July
2, 1990; and Miranda v. Arizona, 384 US 436, 444, 16 L. Ed. 2d 694, 706, June 13, 1966.
In the deliberations on the 1987 Constitution, Commissioner Felicitas Aquino summed up the right as
extending to the period of custodial interrogation, temporary detention and preliminary technical
custody. Bernas, The Constitution of the Republic of the Philippines: A Commentary, Vol. I (1st ed.,
1987), p. 345; citing Record of the Constitutional Commission: Proceedings and Debates, Vol. I (1986),
pp. 713-714, 716-717.
12 of Article III of the Constitution provides for the rights available to a person facing custodial
investigation. Cruz, Constitutional Law (1995 ed.), p. 292.
27 Yabuts Affidavit, supra.
28 x x x *A+mong the rights of a person under custodial investigation is the right to have competent and
independent counsel preferably of his own choice and if the person cannot afford the services of
counsel, that he must be provided with one. Marcelo v. Sandiganbayan, 361 Phil. 772, 788; 302 SCRA
102, 116, January 26, 1999, per Mendoza, J. See also People v. Porio, 376 SCRA 596, 609-610, February
13, 2002; People v. Suela, 373 SCRA 163, 182, January 15, 2002; People v. Tulin, 416 Phil. 365, 382-383;
364 SCRA 10, August 30, 2001; People v. Continente, 339 SCRA 1, 17-18, 20-21, 26, August 25, 2000;
People v. Santocildes, Jr., 378 Phil. 943, 949-950; 321 SCRA 310, December 21, 1999; People v. Bermas,
365 Phil. 581, 593-596; 306 SCRA 135, 146, April 21, 1999; People v. Santos, 347 Phil. 943, 949-950; 283
SCRA 443, 453, December 22, 1997; People v. Andal, 344 Phil. 889, 911-912; 279 SCRA 474, September
25, 1997; People v. Fabro, 342 Phil. 708, 772, 726; 277 SCRA 19, 32, August 11, 1997; People v. Deniega,
251 SCRA 626, 638-639, De
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Bank of the Philippine Islands vs. Casa Montessori Internationale

taken into custody for investigation of his possible participation in the commission of a crime or from
the time he is singled out as a suspect in the commission of a crime although not yet in custody.29
Therefore, to fall within the ambit of Section 12, quoted above, there must be an arrest or a deprivation
of freedom, with questions propounded on him by the police authorities for the purpose of eliciting
admissions, confessions, or any information.30 The said constitutional provision does not apply to
spontaneous statements made in a voluntary manner31 whereby an individual orally admits to
authorship of a crime.32 What the Constitution proscribes is the compulsory or coercive disclosure of
incriminating facts.33
_______________

cember 29, 1995; and People v. Duero, 191 Phil. 679, 687-688; 104 SCRA 379, May 13, 1981.
29 People v. Felixminia, 379 SCRA 567, 575, March 20, 2002, per curiam. See also People v. Bariquit, 341
SCRA 600, 618, October 2, 2000; People v. Bravo, 376 Phil. 931, 940; 318 SCRA 812, 821-822, November
22, 1999; People v. Andan, 336 Phil. 91, 102; 269 SCRA 95, March 3, 1997; and People v. Marra, 236
SCRA 565, 573, September 20, 1994. These rights are available if a person is in custody, even if not yet a
suspect; or if already the suspect, even if not yet in custody. Bernas, supra.
30 People v. Arondain, 418 Phil. 354, 367-368; 366 SCRA 98, 105, September 27, 2001, per YnaresSantiago, J. See also People v. Amestuzo, 413 Phil. 500, 508; 361 SCRA 184, 191, July 12, 2001; People v.
Valdez, 341 SCRA 25, 41-42, September 25, 2000; People v. Labtan, 377 Phil. 967, 982, 984; 320 SCRA
140, December 8, 1999; People v. De la Cruz, 344 Phil. 653, 660-661; 279 SCRA 245, September 17,
1997; People v. Del Rosario, 365 Phil. 292, 310; 305 SCRA 740, April 14, 1999; People v. Ayson, 175 SCRA
216, 231, July 7, 1989; and Gamboa v. Cruz, 162 SCRA 642, 648, June 27, 1988.
31 People v. Dano, 339 SCRA 515, 528, September 1, 2000, per Quisumbing, J. See also Aballe v. People,
183 SCRA 196, 205, March 15, 1990; People v. Dy, 158 SCRA 111, 123-124, February 23, 1988; and
People v. Taylaran, 195 Phil. 226, 233-234; 108 SCRA 373, October 23, 1981.
32 In fact, the exclusionary rule under 12, paragraph (2) of the Bill of Rights, applies only to admissions
made in a criminal investigation but not to those made in an administrative investigation. Remolona v.
CSC, 414 Phil. 590, 599; 362 SCRA 304, 311-312, August 2, 2001, per Puno, J. See also Sebastian, Sr. v.
Garchitorena, supra; Manuel v. N.C. Construction Supply, 346 Phil. 1014, 1024; 282 SCRA 326, 335,
November 28, 1997; and Lumiqued v. Exevea, 346 Phil. 807, 822-823; 282 SCRA 125, November 18,
1997.
33 People v. Dano, supra. See People v. Ordoo, 390 Phil. 169, 183-184; 334 SCRA 673, June 29, 2000.
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SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Casa Montessori Internationale
Moreover, the right against self-incrimination34 under Section 17 of Article III35 of the Constitution,
which is ordinarily available only in criminal prosecutions, extends to all other government
proceedingsincluding civil actions, legislative investigations,36 and administrative proceedings that
possess a criminal or penal aspect37but not to private investigations done by private individuals. Even
in such government proceedings, this right may be waived,38 provided the waiver is certain;
unequivocal; and intelligently, understanding and willingly made.39
If in these government proceedings waiver is allowed, all the more is it so in private investigations. It is
of no moment that no criminal case has yet been filed against Yabut. The filing thereof is entirely up to
the appropriate authorities or to the private individuals upon whom damage has been caused. As we
shall also explain later, it is not mandatory for CASAthe plaintiff belowto implead Yabut in the civil
case before the lower court.
Under these two constitutional provisions, *t+he Bill of Rights40 does not concern itself with the
relation between a private individ_______________

34 This provision prohibits the compulsory oral examination of prisoners before the trial, or upon trial,
for the purpose of extorting unwilling confessions or declarations implicating them in the commission of
a crime. Bernas, supra, pp. 422-423; citing US v. Tan Teng, 23 Phil. 145, 152, September 7, 1912.
The kernel of this right is against testimonial compulsion only. Cruz, supra, p. 283. See Regalado,
Remedial Law Compendium, Vol. II (7th rev. ed., 1995), p. 369.
35 People v. Rondero, 378 Phil. 123, 139-140; 320 SCRA 383, 400, December 9, 1999. See People v.
Bacor, 366 Phil. 197, 212; 306 SCRA 522, 536, April 30, 1999.
36 Cruz, supra, p. 282.
37 Secretary of Justice v. Lantion, 379 Phil. 165, 200; 322 SCRA 160, January 18, 2000; citing Pascual, Jr.
v. Board of Medical Examiners, 138 Phil. 361, 366; 28 SCRA 344, 348, May 26, 1969, and Cabal v.
Kapunan, Jr., 116 Phil. 1361, 1366-1369; 6 SCRA 1059, December 29, 1962. See Bernas, supra, p. 423.
38 Alvero v. Dizon, 76 Phil. 637, 645, May 4, 1946.
39 Cruz, supra, p. 286.

40 The Bill of Rights in Article III of the Constitution is a statement of an individuals rights that are
normally protected, except in extreme cases of real public necessity, against impairment, usurpation, or
removal
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Bank of the Philippine Islands vs. Casa Montessori Internationale
ual and another individual. It governs the relationship between the individual and the State.41
Moreover, the Bill of Rights is a charter of liberties for the individual and a limitation upon the power of
the *S+tate.42 These rights43 are guaranteed to preclude the slightest coercion by the State that may
lead the accused to admit something false, not prevent him from freely and voluntarily telling the
truth.44
Yabut is not an accused here. Besides, his mere invocation of the aforesaid rights does not
automatically entitle him to the constitutional protection.45 When he freely and voluntarily
executed46 his Affidavit, the State was not even involved. Such Affidavit may therefore be admitted
without violating his constitutional rights while under custodial investigation and against selfincrimination.
_______________

by any form of State action. Sinco, Philippine Political Law: Principles and Concepts (10th ed., 1954), p.
73.
41 People v. Silvano, 381 SCRA 607, 616, April 29, 2002, per Mendoza, J. See People v. Domantay, 366
Phil. 459, 474; 307 SCRA 1, 17, May 11, 1999; People v. Maqueda, 312 Phil. 646, 675-676; 242 SCRA 565,
March 22, 1995; People v. Marti, 193 SCRA 57, 67, January 18, 1991.
42 Filoteo, Jr. v. Sandiganbayan, 331 Phil. 531, 574; 263 SCRA 222, 261, October 16, 1996, per
Panganiban, J. See Bernas, supra, p. 33.
43 A person suspected or accused of a crime is entitled to the specific safeguards embodied in 12 and
17 of the Bill of Rights against arbitrary prosecution or punishment. Cruz, supra, p. 274.
44 People v. Vallejo, 382 SCRA 192, 216, May 9, 2002, per curiam; citing People v. Andan, supra. See also
People v. Ordoo, supra; People v. Barlis, 231 SCRA 426, 441, March 24, 1994; and People v. Layuso, 175
SCRA 47, 53, July 5, 1989.

45 Sinco, supra, p. 670.


46 In the absence of coercion, paragraph 17 of Article 32 of the Civil Code does not apply. It states:
Art. 32. Any x x x private individual x x x who directly or indirectly x x x violates or in any manner
impedes or impairs any of the following rights and liberties of another person shall be liable to the latter
for damages:
(17) Freedom from being compelled to be a witness against ones self, or from being forced to confess
a guilt x x x.
280

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Bank of the Philippine Islands vs. Casa Montessori Internationale
Clear, Positive and Convincing
Examination and Evidence
The examination by the PNP, though inconclusive, was nevertheless clear, positive and convincing.
Forgery cannot be presumed.47 It must be established by clear, positive and convincing evidence.48
Under the best evidence rule as applied to documentary evidence like the checks in question, no
secondary or substitutionary evidence may inceptively be introduced, as the original writing itself must
be produced in court.49 But when, without bad faith on the part of the offeror, the original checks have
already been destroyed or cannot be produced in court, secondary evidence may be produced.50
Without bad faith on its part, CASA proved the loss or destruction of the original checks through the
Affidavit of the one person who knew of that fact51Yabut. He clearly admitted to discarding the paid
checks to cover up his misdeed.52 In such a situation, secondary evidence like microfilm copies may be
introduced in court.
The drawers signatures on the microfilm copies were compared with the standard signature. PNP
Document Examiner II Josefina de la Cruz testified on cross-examination that two different persons had
written them.53 Although no conclusive report could be issued in the absence of the original checks,54
she affirmed that her findings were 90 percent conclusive.55 According to her, even if the microfilm
copies were the only basis of comparison, the differences
_______________

47 American Express International, Inc. v. Court of Appeals, 367 Phil. 333, 341; 308 SCRA 65, 71, June 8,
1999, per Bellosillo, J.; citing Tenio-Obsequio v. Court of Appeals, 230 SCRA 550, 558, March 1, 1994. See
Siasat v. Intermediate Appellate Court, 139 SCRA 238, 248, October 10, 1985.
48 Metropolitan Bank & Trust Co. v. Court of Appeals, 194 SCRA 169, 176, February 18, 1991. See MWSS
v. Court of Appeals, 227 Phil. 18, 26; 143 SCRA 20, 30, July 14, 1986.
49 Regalado, supra, p. 555.
50 3(a) of Rule 130 of the Rules of Court.
51 De Vera v. Aguilar, 218 SCRA 602, 607, February 9, 1993.
52 Yabuts Affidavit, p. 1; G.R. No. 149454, Records, p. 323.
53 TSN, January 18, 1994, p. 13.
54 Id., p. 29.
55 Id., pp. 33-34.
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Bank of the Philippine Islands vs. Casa Montessori Internationale
were evident.56 Besides, the RTC explained that although the Report was inconclusive, no conclusive
report could have been given by the PNP, anyway, in the absence of the original checks.57 This
explanation is valid; otherwise, no such report can ever be relied upon in court.
Even with respect to documentary evidence, the best evidence rule applies only when the contents of a
documentsuch as the drawers signature on a checkis the subject of inquiry.58 As to whether the
document has been actually executed, this rule does not apply; and testimonial as well as any other
secondary evidence is admissible.59 Carina Lebron herself, the drawers authorized signatory, testified
many times that she had never signed those checks. Her testimonial evidence is admissible; the checks
have not been actually executed. The genuineness of her handwriting is proved, not only through the
courts comparison of the questioned handwritings and admittedly genuine specimens thereof,60 but
above all by her.
The failure of CASA to produce the original checks neither gives rise to the presumption of suppression
of evidence61 nor creates an unfavorable inference against it.62 Such failure merely authorizes
_______________

56 Ibid.
57 RTC Decision, p. 3; G.R. No. 149454, Rollo, p. 58.
58 3 of Rule 130 of the Rules of Court.
59 Regalado, supra.
60 22 of Rule 132 of the Rules of Court.
61 This adverse presumption does not arise when the suppression is not willful. Regalado, supra, p. 639;
citing People v. Navaja, 220 SCRA 624, 633, March 30, 1993.
62 x x x *T+he genuineness of a standard writing may be established by any of the following: (1) by the
admission of the person sought to be charged with the disputed writing made at or for the purposes of
the trial, or by his testimony; (2) by witnesses who saw the standards written or to whom or in whose
hearing the person sought to be charged acknowledged the writing thereof; (3) by evidence showing
that the reputed writer of the standard has acquiesced in or recognized the same, or that it has been
adopted and acted upon by him in his business transactions or other concerns. Security Bank & Trust
Company v. Triumph Lumber and Construction Corp., 361 Phil. 463, 478; 301 SCRA 537, 551-552,
January 21, 1999, per Davide, Jr., C.J., citing BA Finance Corp. v. Court of Appeals, 161 SCRA 608, 618,
May 28, 1988.
282

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the introduction of secondary evidence63 in the form of microfilm copies. Of no consequence is the fact
that CASA did not present the signature card containing the signatures with which those on the checks
were compared.64 Specimens of standard signatures are not limited to such a card. Considering that it
was not produced in evidence, other documents that bear the drawers authentic signature may be
resorted to.65 Besides, that card was in the possession of BPIthe adverse party.
We have held that without the original document containing the allegedly forged signature, one cannot
make a definitive comparison that would establish forgery;66 and that a comparison based on a mere
reproduction of the document under controversy cannot produce reliable results.67 We have also said,
however, that a judge cannot merely rely on a handwriting experts testimony,68 but should also
exercise independent judgment in evaluating the authenticity of a signature under scrutiny.69 In the
present case, both the RTC and the CA conducted independent examinations of the evidence presented

and arrived at reasonable and similar conclusions. Not only did they admit secondary evidence; they also
appositely considered testimonial and other documentary evidence in the form of the Affidavit.
The best evidence rule admits of exceptions and, as we have discussed earlier, the first of these has
been met.70 The result of examining a questioned handwriting, even with the aid of experts and
scientific instruments, may be inconclusive;71 but it is a non sequitur to say that such result is not clear,
positive and convincing. The preponderance of evidence required in this case has been satisfied.72
_______________

63 Regalado, supra, p. 561.


64 This is the normal process followed in verifying signatures for purposes of making bank withdrawals.
65 Chiang Yia Min v. Court of Appeals, 355 SCRA 608, 622-623, March 28, 2001.
66 Heirs of Gregorio v. Court of Appeals, 360 Phil. 753, 763; 300 SCRA 565, 574, December 29, 1998.
67 Ibid.
68 Id., p. 764.
69 Ibid.
70 3(a) of Rule 130 of the Rules of Court.
71 Regalado, supra, p. 627.
72 1 of Rule 133 of the Rules of Court.
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Second Issue:
Negligence Attributable to BPI Alone
Having established the forgery of the drawers signature, BPIthe draweeerred in making payments
by virtue thereof. The forged signatures are wholly inoperative, and CASAthe drawer whose

authorized signatures do not appear on the negotiable instrumentscannot be held liable thereon.
Neither is the latter precluded from setting up forgery as a real defense.
Clear Negligence in Allowing Payment
Under a Forged Signature
We have repeatedly emphasized that, since the banking business is impressed with public interest, of
paramount importance thereto is the trust and confidence of the public in general. Consequently, the
highest degree of diligence73 is expected,74 and high standards of integrity and performance are even
required, of it.75 By the nature of its functions, a bank is under obligation to treat the accounts of its
depositors with meticulous care,76 always having in mind the fiduciary nature of their relationship.77
BPI contends that it has a signature verification procedure, in which checks are honored only when the
signatures therein are verified to be the same with or similar to the specimen signatures on the
signature cards. Nonetheless, it still failed to detect the eight instances of forgery. Its negligence
consisted in the omission
_______________

73 The diligence required of banks is more than that of a pater familias or good father of a family. Bank
of the Philippine Islands v. Court of Appeals, 383 Phil. 538, 554; 326 SCRA 641, 657, February 29, 2000.
See Philippine Bank of Commerce v. Court of Appeals, 336 Phil. 667, 681; 269 SCRA 695, 708-709, March
14, 1997.
74 Philippine Commercial International Bank v. Court of Appeals, 350 SCRA 446, 472, January 29, 2001.
75 2 of Republic Act No. 8791, otherwise known as The General Banking Law of 2000.
76 Westmont Bank v. Ong, 375 SCRA 212, 221, January 30, 2002; citing Citytrust Banking Corp. v.
Intermediate Appellate Court, 232 SCRA 559, 564, May 27, 1994.
77 Simex International (Manila), Inc. v. Court of Appeals, 183 SCRA 360, 367, March 19, 1990, per Cruz, J.
284

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SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Casa Montessori Internationale
of that degree of diligence required78 of a bank. It cannot now feign ignorance, for very early on we
have already ruled that a bank is bound to know the signatures of its customers; and if it pays a forged

check, it must be considered as making the payment out of its own funds, and cannot ordinarily charge
the amount so paid to the account of the depositor whose name was forged.79 In fact, BPI was the
same bank involved when we issued this ruling seventy years ago.
Neither Waiver nor Estoppel
Results from Failure to
Report Error in Bank Statement
The monthly statements issued by BPI to its clients contain a notice worded as follows: If no error is
reported in ten (10) days, account will be correct.80 Such notice cannot be considered a waiver, even if
CASA failed to report the error. Neither is it estopped from questioning the mistake after the lapse of
the ten-day period.
This notice is a simple confirmation81 or circularizationin accounting parlancethat requests clientdepositors to affirm the accuracy of items recorded by the banks.82 Its purpose is to obtain from the
depositors a direct corroboration of the correctness of their account balances with their respective
banks.83 Internal or external auditors of a bank use it as a basic audit procedure84the
_______________

78 Article 1173 of the Civil Code.


79 San Carlos Milling Co., Ltd. v. Bank of the Philippine Islands, 59 Phil. 59, 66, December 11, 1933, per
Hull, J.
80 BPIs Memorandum, p. 14; G.R. No. 149454, Rollo, p. 147.
81 Aside from positive confirmations, there are also negative ones that request debtors to respond to an
auditor only if the balance in an attached statement is incorrect. Ricchiute, Auditing Concepts and
Standards (rev. 2nd ed., 1991), p. 491.
82 Santos, Basic Auditing: Theory and Concepts, Vol. I (1988), p. 111.
83 Association of CPAs in Public Practice, Audit Manual (1985), p. 49.
84 Confirmation of accounts payable balances is normally applied to nearly every audit engagement.
Holmes and Burns, Auditing Standards and Procedures (9th ed., 1979), p. 675.
A bank deposit is in the nature of a simple loan or mutuum, as provided for in Articles 1953 and 1980 of
the Civil Code. See De
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Bank of the Philippine Islands vs. Casa Montessori Internationale
results of which its client-depositors are neither interested in nor privy toto test the details of
transactions and balances in the banks records.85 Evidential matter obtained from independent
sources outside a bank only serves to provide greater assurance of reliability86 than that obtained solely
within it for purposes of an audit of its own financial statements, not those of its client-depositors.
Furthermore, there is always the audit risk that errors would not be detected87 for various reasons.
One, materiality is a consideration in audit planning;88 and two, the information obtained from such a
substantive test is merely presumptive and cannot be the basis of a valid waiver.89 BPI has no right to
impose a condition unilaterally and thereafter consider failure to meet such condition a waiver. Neither
may CASA renounce a right90 it has never possessed.91
Every right has subjectsactive and passive. While the active subject is entitled to demand its
enforcement, the passive one is duty-bound to suffer such enforcement.92
On the one hand, BPI could not have been an active subject, because it could not have demanded from
CASA a response to its
_______________

Leon, Comments and Cases on Credit Transactions, 1995 ed., pp. 32-33; Integrated Realty Corp. v.
Philippine National Bank, 174 SCRA 295, 309, June 28, 1989; Serrano v. Central Bank of the Philippines,
96 SCRA 96, 102, February 14, 1980; and Central Bank of the Philippines v. Morfe, 63 SCRA 114, 119,
March 12, 1975. In bank parlance, a bank deposit is an account payable by the bank to its clientdepositor.
85 Santos, supra, p. 102.
86 Association of CPAs in Public Practice, Audit Manual, supra.
87 Id., p. 57.
88 Id., p. 24.
89 Waiver is defined as the relinquishment of a known right with both knowledge of its existence and
an intention to relinquish it. Tolentino, Commentaries and Jurisprudence on the Civil Code of the
Philippines, Vol. I (1990), p. 29.
90 Article 6 of the Civil Code.

91 The general rule of law is that a person may renounce any right which the law gives x x x. The
Manila Railroad Company v. The Attorney-General, 20 Phil. 523, 537, December 1, 1911, per Moreland,
J. See Tolentino, supra, p. 30.
92 Tolentino, supra, p. 28.
286

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SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Casa Montessori Internationale
notice. Besides, the notice was a measly request worded as follows: Please examine x x x and report x x
x.93 CASA, on the other hand, could not have been a passive subject, either, because it had no
obligation to respond. It couldas it didchoose not to respond.
Estoppel precludes individuals from denying or asserting, by their own deed or representation, anything
contrary to that established as the truth, in legal contemplation.94 Our rules on evidence even make a
juris et de jure presumption95 that whenever one has, by ones own act or omission, intentionally and
deliberately led another to believe a particular thing to be true and to act upon that belief, one cannot
in any litigation arising from such act or omis-sionbe permitted to falsify that supposed truth.96
In the instant case, CASA never made any deed or representation that misled BPI. The formers
omission, if any, may only be deemed an innocent mistake oblivious to the procedures and
consequences of periodic audits. Since its conduct was due to such ignorance founded upon an innocent
mistake, estoppel will not arise.97 A person who has no knowledge of or consent to a transaction may
not be estopped by it.98 Estoppel cannot be sustained by mere argument or doubtful inference x x
x.99 CASA is not barred from questioning BPIs error even after the lapse of the period given in the
notice.
_______________

93 BPIs Memorandum, p. 14; G.R. No. 149454, Rollo, p. 147.


94 Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. IV (1991), p.
656.
95 Conclusive or absolute presumption. 2(a) of Rule 131 of the Rules of Court.
96 Art. 1431 of the Civil Code also provides:

Through estoppel an admission or representation is rendered conclusive upon the person making it,
and cannot be denied or disproved as against the person relying thereon.
97 Ramiro v. Grao, 54 Phil. 744, 750, March 31, 1930.
98 Lodovica v. Court of Appeals, 65 SCRA 154, 158, July 18, 1975.
99 Kalalo v. Luz, 145 Phil. 152, 161; 34 SCRA 337, July 31, 1970, per Zaldivar, J.
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Bank of the Philippine Islands vs. Casa Montessori Internationale
Loss Borne by
Proximate Source
of Negligence
For allowing payment100 on the checks to a wrongful and fictitious payee, BPIthe drawee bank
becomes liable to its deposi-tor-drawer. Since the encashing bank is one of its branches,101 BPI can
easily go after it and hold it liable for reimbursement.102 It may not debit the drawers account103 and
is not entitled to indemnification from the drawer.104 In both law and equity, when one of two
innocent persons must suffer by the wrongful act of a third person, the loss must be borne by the one
whose negligence was the proximate cause of the loss or who put it into the power of the third person
to perpetrate the wrong.105
Proximate cause is determined by the facts of the case.106 It is that cause which, in natural and
continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without
which the result would not have occurred.107
_______________

100 Under Article 1231(1) of the Civil Code, payment is the actual performance that extinguishes an
obligation.
It implies not only an assent to the order of the drawer and a recognition of the drawees obligation to
pay the sum therein, but also a compliance with such obligation. Philippine National Bank v. Court of
Appeals, 134 Phil. 829, 833; 25 SCRA 693, 698, October 29, 1968.

101 Greenbelt Branch. Assailed CA Decision, p. 3; G.R. No. 149454, Rollo, p. 46; G.R. No. 149507, Rollo,
p. 24.
102 The Great Eastern Life Insurance Co. v. Hongkong & Shanghai Banking Corp., 43 Phil. 678, 683,
August 23, 1922.
103 Campos and Lopez-Campos, supra, pp. 286-287.
104 Associated Bank v. Court of Appeals, 322 Phil. 677, 697; 252 SCRA 620, 631, January 31, 1996, per
Romero, J.; citing The Great Eastern Life Insurance Co. v. Hongkong & Shanghai Banking Corp., supra,
and Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corp., 157 SCRA 188, 198, January
20, 1988.
105 Philippine National Bank v. Court of Appeals, supra, per Concepcion, CJ; citing Blondeau v. Nano, 61
Phil. 625, 631-632, July 26, 1935. See Philippine National Bank v. The National City Bank of New York, 63
Phil. 711, 723-726, October 31, 1936.
106 Sangco, Philippine Law on Torts and Damages, Vol. I (rev. ed., 1993), p. 90.
107 Bataclan v. Medina, 109 Phil. 181, 185-186, October 22, 1957, per Montemayor, J.
288

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SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Casa Montessori Internationale
Pursuant to its prime duty to ascertain well the genuineness of the signatures of its client-depositors on
checks being encashed, BPI is expected to use reasonable business prudence.108 In the performance
of that obligation, it is bound by its internal banking rules and regulations that form part of the contract
it enters into with its depositors.109
Unfortunately, it failed in that regard. First, Yabut was able to open a bank account in one of its
branches without privity;110 that is, without the proper verification of his corresponding identification
papers. Second, BPI was unable to discover early on not only this irregularity, but also the marked
differences in the signatures on the checks and those on the signature card. Third, despite the
examination procedures it conducted, the Central Verification Unit111 of the bank even passed off
these evidently different signatures as genuine. Without exercising the required prudence on its part,
BPI accepted and encashed the eight checks presented to it. As a result, it proximately contributed to
the fraud and should be held primarily liable112 for the negligence of its officers or agents when acting
within the course and scope of their employment.113 It must bear the loss.
CASA Not Negligent

in Its Financial Affairs


In this jurisdiction, the negligence of the party invoking forgery is recognized as an exception114 to the
general rule that a forged
_______________

108 Philippine National Bank v. Quimpo, 158 SCRA 582, 585, March 14, 1988, per Gancayco, J.
109 Gempesaw v. Court of Appeals, supra, p. 696.
110 Agbayani, supra, p. 207.
111 As testified to on direct examination by Angelita Dandan, senior manager of the BPI Muntinlupa
Branch and formerly connected with the BPI Forbes Park Branch. TSN, August 26, 1997, pp. 3-4, and 7.
112 x x x [B]anks are expected to exercise the highest degree of diligence in the selection and
supervision of their employees. Bank of the Philippine Island v. Court of Appeals, 216 SCRA 51, 71,
November 26, 1992, per Gutierrez, Jr., J.
113 Philippine Commercial International Bank v. Court of Appeals, supra, per Quisumbing, J., p. 469.
114 Agbayani, supra, p. 199.
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Bank of the Philippine Islands vs. Casa Montessori Internationale
signature is wholly inoperative.115 Contrary to BPIs claim, however, we do not find CASA negligent in
handling its financial affairs. CASA, we stress, is not precluded from setting up forgery as a real defense.
Role of Independent Auditor
The major purpose of an independent audit is to investigate and determine objectively if the financial
statements submitted for audit by a corporation have been prepared in accordance with the
appropriate financial reporting practices116 of private entities. The relationship that arises therefrom is
both legal and moral.117 It begins with the execution of the engagement letter118 that embodies the
terms and conditions of the audit and ends with the fulfilled expectation of the auditors ethical119 and
competent performance in all aspects of the audit.120

The financial statements are representations of the client; but it is the auditor who has the responsibility
for the accuracy in the
_______________

115 Bank of the Philippine Islands v. Court of Appeals, supra, p. 65.


116 Holmes and Burns, supra, p. 1.
During the pendency of this case, an auditor had to ascertain whether the financial statements were in
conformity with the Generally Accepted Accounting Principles (GAAP). Valix and Peralta, Financial
Accounting (Vol. I, 1985 ed.), p. 8.
As of April 2004, the Accounting Standards Council (ASC) of the Philippines has approved many
Statements of Financial Accounting Standards (SFAS) and has also adopted several International
Accounting Standards (IAS) issued by the International Accounting Standards Council (IASC).
http://www.picpa.com.ph/press. htm, last visited April 23, 2004, 12:05 p.m. PST.
117 Holmes and Burns, supra, p. 79.
118 Id., p. 206.
119 Certified public accountants or CPAs adhere to a Code of Professional Ethics, promulgated by the
Board of Accountancy (BOA) on March 15, 1978. In January 2004, a new Code of Ethics for CPAs was
approved by the Board of Directors of the Philippine Institute of CPAs (PICPA), to be recommended for
adoption by the BOA and approval by the Professional Regulation Commission (PRC) as part of the rules
and regulations of the BOA for the practice of the accountancy profession in the Philippines.
http://www.picpa.com.ph/news/codeofethics2.pdf, last visited April 23, 2004, 12:17 p.m. PST.
120 Holmes and Burns, supra, p. 79.
290

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SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Casa Montessori Internationale
recording of data that underlies their preparation, their form of presentation, and the opinion121
expressed therein.122 The auditor does not assume the role of employee or of management in the
clients conduct of operations123 and is never under the control or supervision124 of the client.

Yabut was an independent auditor125 hired by CASA. He handled its monthly bank reconciliations and
had access to all relevant documents and checkbooks.126 In him was reposed the clients127 trust and
confidence128 that he would perform precisely those functions and apply the appropriate procedures in
accordance with generally accepted auditing standards.129 Yet he did not meet these expectations.
Nothing could be more horrible to a client than to discover later on that the person tasked to detect
fraud was the same one who perpetrated it.
Cash Balances
Open to Manipulation
It is a non sequitur to say that the person who receives the monthly bank statements, together with the
cancelled checks and other debit/credit memoranda, shall examine the contents and give notice of any
discrepancies within a reasonable time. Awareness is not equipollent with discernment.
_______________

121 Santos, supra, pp. 11 & 168.


122 Holmes and Burns, supra, p. 80.
123 Ricchiute, supra, p. 48.
124 Santos, supra, pp. 52 & 76.
125 As testified to on cross-examination by Carina Lebron (TSN, February 13, 1992, pp. 18-19). See
Yabuts Affidavit, p. 1; G.R. No. 149454, Records, p. 323.
That Respondent Yabut is a CPA appears in CASAs pretrial Brief. G.R. No. 149454, Records, p. 83.
126 Yabuts Affidavit, supra.
127 Ricchiute, supra, p. 54.
128 Santos, supra, p. 6.
129 Commissioner of Internal Revenue v. TMX Sales, Inc., 205 SCRA 184, 191, January 15, 1992.
As of April 2004, many Generally Accepted Auditing Standards (GAAS) have been replaced by
International Standards on Auditing (ISA).
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Besides, in the internal accounting control system prudently installed by CASA,130 it was Yabut who
should examine those documents in order to prepare the bank reconciliations.131 He owned his
working papers,132 and his output consisted of his opinion as well as the clients financial statements
and accompanying notes thereto. CASA had every right to rely solely upon his outputbased on the
terms of the audit engagementand could thus be unwittingly duped into believing that everything was
in order. Besides, *g+ood faith is always presumed and it is the burden of the party claiming otherwise
to adduce clear and convincing evidence to the contrary.133
Moreover, there was a time gap between the period covered by the bank statement and the date of its
actual receipt. Lebron personally received the December 1990 bank statement only in January
1991134when she was also informed of the forgery for the first time, after which she immediately
requested a stop payment order. She cannot be faulted for the late detection of the forged December
check. After all, the bank account with BPI was not personal but corporate, and she could not be
expected to monitor closely all its finances. A preschool teacher charged with molding the minds of the
youth cannot be burdened with the intricacies or complexities of corporate existence.
There is also a cutoff period such that checks issued during a given month, but not presented for
payment within that period, will not be reflected therein.135 An experienced auditor with intent to
defraud can easily conceal any devious scheme from a client
_______________

130 A depositor has a duty to set up an accounting system that is reasonably calculated to prevent any
forgery or to render it difficult to perpetrate. Gempesaw v. Court of Appeals, supra, p. 690.
131 A bank reconciliation is an audit technique that verifies if the cash balance appearing on a bank
statement per bank records is in agreement with that in the depositors records or books of accounts.
Meigs and Meigs, Accounting: The Basis for Business Decisions, Part I (5th ed., 1981), p. 315.
132 24 of Presidential Decree (PD) No. 692, otherwise known as The Revised Accountancy Law.
133 Chiang Yia Min v. Court of Appeals, supra, p. 624, per Gonzaga-Reyes, J.
134 G.R. No. 149454, Records, p. 491.
135 Cutoff bank statements do not represent all the transactions in a given month. Ricchiute, supra, p.
498.
292

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SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Casa Montessori Internationale
unwary of the accounting processes involved by manipulating the cash balances on recordespecially
when bank transactions are numerous, large and frequent. CASA could only be blamed, if at all, for its
unintelligent choice in the selection and appointment of an auditora fault that is not tantamount to
negligence.
Negligence is not presumed, but proven by whoever alleges it.136 Its mere existence is not sufficient
without proof that it, and no other cause,137 has given rise to damages.138 In addition, this fault is
common to, if not prevalent among, small and medium-sized business entities, thus leading the
Professional Regulation Commission (PRC), through the Board of Accountancy (BOA), to require today
not only accreditation for the practice of public accountancy,139 but also the registration of firms in the
practice thereof. In fact, among the attachments now required upon registration are the code of good
governance140 and a sworn statement on adequate and effective training.141
The missing checks were certainly reported by the bookkeeper142 to the accountant143her
immediate supervisorand by the latter
_______________

136 Taylor v. The Manila Electric Railroad and Light Co., 16 Phil. 8, 28, March 22, 1910, per Carson, J.;
citing Scaevola in Jurisprudencia del Codigo Civil, Vol. 6 (1902), pp. 551-552.
137 Taylor v. The Manila Electric Railroad and Light Co., supra, p. 27, quoting the judgment of the
Supreme Court of Spain on June 12, 1900.
138 Before there can be a judgment for damages, negligence must be affirmatively established by
competent evidence. Sor Consuelo Barcel v. The Manila Electric Railroad and Light Co., 29 Phil. 351,
359, January 28, 1915, per Carson, J.
139 27 of PD 692.
140 Good governance has been defined as a really strong senior managerial control exercised by the
chief executive officer or CEO and one of his/her strongest direct reports. Gerry Conroy, Good
Governance and Good Management Keys to Successful Project Management.
http://www.pwcglobal.com/Extweb/ncinthenews.nsf/docid/28123C3F882E4-8B7CA256AFA007A33EA,
last visited May 6, 2004, 1:12 p.m. PST.

Accountability is a key requirement of good governance. As such, it cannot be enforced without


transparency and the rule of law. http://www.unescap.org/huset/gg/governance.htm, last visited May
6, 2004, 12:55 p.m. PST.
141 http://www.picpa.com.ph, last visited May 4, 2004, 1:57 p.m. PST.
142 Isidra Carandang, TSN, February 13, 1992, pp. 18-19.
143 Felipa Cabuyao, TSN, February 13, 1992, pp. 18-19.
293

VOL. 430, MAY 28, 2004


293
Bank of the Philippine Islands vs. Casa Montessori Internationale
to the auditor. However, both the accountant and the auditor, for reasons known only to them, assured
the bookkeeper that there were no irregularities.
The bookkeeper144 who had exclusive custody of the checkbooks145 did not have to go directly to
CASAs president or to BPI. Although she rightfully reported the matter, neither an investigation was
conducted nor a resolution of it was arrived at, precisely because the person at the top of the helm was
the culprit. The vouchers, invoices and check stubs in support of all check disbursements could be
concealed or fabricatedeven in collusionand management would still have no way to verify its cash
accountabilities.
Clearly then, Yabut was able to perpetrate the wrongful act through no fault of CAS A. If auditors may be
held liable for breach of contract and negligence,146 with all the more reason may they be charged with
the perpetration of fraud upon an unsuspecting client. CASA had the discretion to pursue BPI alone
under the NIL, by reason of expediency or munificence or both. Money paid under a mistake may
rightfully be recovered,147 and under such terms as the injured party may choose.
Third Issue:
Award of Monetary Claims
Moral Damages Denied
We deny CASAs claim for moral damages.
In the absence of a wrongful act or omission,148 or of fraud or bad
_______________

Yabut admitted that he had recommended Cabuyao to the position. Yabuts Afffidavit, supra.
144 The job of a bookkeeper is so integrated with a corporation that the regular recording of its business
accounts and transactions safeguards it from possible fraud, which is adverse to its corporate interest.
Pabon v. National Labor Relations Commission, 296 SCRA 7, 14, September 24, 1998.
145 Yabuts Affidavit, p. 1; G.R. No. 149454, Records, p. 323.
146 Holmes and Burns, supra, pp. 84-86.
147 Campos and Lopez-Campos, supra, p. 287; Agbayani, supra, p. 211. Both cited Article 2154 of the
Civil Code.
148 Ong Yiu v. Court of Appeals, 91 SCRA 223, 229, June 29, 1979.
294

294
SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Casa Montessori Internationale
faith,149 moral damages cannot be awarded.150 The adverse result of an action does not per se make
the action wrongful, or the party liable for it. One may err, but error alone is not a ground for granting
such damages.151 While no proof of pecuniary loss is necessary thereforwith the amount to be
awarded left to the courts discretion152the claimant must nonetheless satisfactorily prove the
existence of its factual basis153 and causal relation154 to the claimants act or omission.155
Regrettably, in this case CASA was unable to identify the particular instanceenumerated in the Civil
Codeupon which its claim for moral damages is predicated.156 Neither bad faith nor negligence so
gross that it amounts to malice157 can be imputed to BPI. Bad faith, under the law, does not simply
connote bad judgment or negligence;158 it imports a dishonest purpose or some moral obliquity and
conscious doing of a wrong, a breach of a known duty through some motive or interest or ill will that
partakes of the nature of fraud.159
_______________

149 Suario v. Bank of the Philippine Islands, 176 SCRA 688, 696, August 25, 1989; citing Guita v. Court of
Appeals, 139 SCRA 576, 580, November 11, 1985.

150 Rubio v. Court of Appeals, 141 SCRA 488, 515-516, March 12, 1986; citing R and B Surety &
Insurance Co., Inc. v. Intermediate Appellate Court, 214 Phil. 649, 657; 129 SCRA 736, 743, June 22,
1984.
151 Filinvest Credit Corp v. Mendez, 152 SCRA 593, 601, July 31, 1987.
152 Article 2216 of the Civil Code.
153 Silva v. Peralta, 110 Phil. 57, 64, November 25, 1960.
154 Article 2217 of the Civil Code.
155 Dee Hua Liong Electrical Equipment Corp. v. Reyes, 230 Phil. 101, 107; 145 SCRA 713, November 25,
1986.
156 Guilatco v. City of Dagupan, 171 SCRA 382, 389, March 21, 1989; citing Bagumbayan Corp. v.
Intermediate Appellate Court, 217 Phil. 421, 424; 132 SCRA 441, September 30, 1984.
157 Soberano v. Manila Railroad Co., 124 Phil. 1330, 1337; 18 SCRA 732, 738, November 23, 1966; citing
Fores v. Miranda, 105 Phil. 266, 274, 276, March 4, 1959 and Necesito v. Paras, 104 Phil. 75, 82-83, June
30, 1958.
158 Northwest Orient Airlines v. Court of Appeals, 186 SCRA 440, 444, June 8, 1990; citing Sabena
Belgian World Airlines v. Court of Appeals, 171 SCRA 620, 629, March 31, 1989.
159 Cathay Pacific Airways, Ltd. v. Vazquez, 399 SCRA 207, 220, March 14, 2003, per Davide, Jr., CJ;
citing Francisco v. Ferrer, Jr., 353
295

VOL. 430, MAY 28, 2004


295
Bank of the Philippine Islands vs. Casa Montessori Internationale
As a general rule, a corporationbeing an artificial person without feelings, emotions and senses, and
having existence only in legal contemplationis not entitled to moral damages,160 because it cannot
experience physical suffering and mental anguish.161 However, for breach of the fiduciary duty required
of a bank, a corporate client may claim such damages when its good reputation is besmirched by such
breach, and social humiliation results therefrom.162 CASA was unable to prove that BPI had debased
the good reputation of,163 and consequently caused incalculable embarrassment to, the former. CASAs
mere allegation or supposition thereof, without any sufficient evidence on record,164 is not enough.
Exemplary Damages Also Denied

We also deny CASAs claim for exemplary damages.


Imposed by way of correction165 for the public good,166 exemplary damages cannot be recovered as a
matter of right.167 As we have
_______________

SCRA 261, 265, February 28, 2001. See also Morris v. Court of Appeals, 352 SCRA 428, 437, February 21,
2001; Magat, Jr. v. Court of Appeals, 337 SCRA 298, 307, August 4, 2000; and Tan v. Northwest Airlines,
Inc., 383 Phil. 1026, 1032; 327 SCRA 263, 268, March 3, 2000.
160 LBC Express, Inc. v. Court of Appeals, 236 SCRA 602, 607, September 21, 1994. See Layda v. Court of
Appeals, 90 Phil. 724, 730, January 29, 1952.
161 Article 2217 of the Civil Code.
162 Morales, The Philippine General Banking Law (Annotated 2002), pp. 3-4; citing Simex International
(Manila), Inc. v. Court of Appeals, supra, and Mambulao Lumber Co. v. Philippine National Bank, 130
Phil. 366, 391; 22 SCRA 359, January 30, 1968.
163 Sangco, supra, p. 989.
164 Grapilon v. Municipal Council of Carigara, Leyte, 112 Phil. 24, 29; 2 SCRA 103, 108, May 30, 1961.
165 Article 2229 of the Civil Code.
166 Ledesma v. Court of Appeals, 160 SCRA 449, 456, April 15, 1988, Prudenciado v. Alliance Transport
System, Inc., 148 SCRA 440, 450, March 16, 1987; and Lopez v. Pan American World Airways, 123 Phil.
256, 267; 16 SCRA 431, March 30, 1966.
167 De Leon v. Court of Appeals, 165 SCRA 166, 176, August 31, 1988; Sweet Lines, Inc. v. Court of
Appeals, 206 Phil. 663, 669; 121 SCRA 769, 775, April 28, 1983; Octot v. Ybaez, 197 Phil. 76, 82; 111
SCRA 79, January 18, 1982; and Ventanilla v. Centeno, 110 Phil. 811, 816; 1 SCRA 215, 221, January 28,
1961, citing Article 2233 of the Civil Code
296

296
SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Casa Montessori Internationale

said earlier, there is no bad faith on the part of BPI for paying the checks of CASA upon forged
signatures. Therefore, the former cannot be said to have acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner.168 The latter, having no right to moral damages, cannot demand
exemplary damages.169
Attorneys Fees Granted
Although it is a sound policy not to set a premium on the right to litigate,170 we find that CASA is
entitled to reasonable attorneys fees based on factual, legal, and equitable justification.171
When the act or omission of the defendant has compelled the plaintiff to incur expenses to protect the
latters interest,172 or where the court deems it just and equitable,173 attorneys fees may be
recovered. In the present case, BPI persistently denied the claim of CASA under the NIL to recredit the
latters account for the value of the forged checks. This denial constrained CASA to incur expenses and
exert effort for more than ten years in order to protect its corporate interest in its bank account.
Besides, we have already cautioned BPI on a similar act of negligence it had committed seventy years
ago, but it has remained unrelenting. Therefore,
_______________

168 Article 2232 of the Civil Code. See Nadura v. Benguet Consolidated, Inc., 116 Phil. 28, 32; 5 SCRA
879, August 24, 1962.
169 Estopa v. Piansay, Jr., 109 Phil. 640, 642, September 30, 1960.
170 Firestone Tire & Rubber Co. of the Philippines v. Ines Chavez & Co., Ltd., 124 Phil. 947, 950; 18 SCRA
356, 358, October 19, 1966, citing Heirs of Basilisa Justiva vs. Gustilo, 117 Phil. 71, 73; 7 SCRA 72, 73,
January 31, 1963. See Tan Ti (alias Tan Tico) v. Alvear, 26 Phil. 566, 571, January 16, 1914.
171 Scott Consultants & Resource Development Corporation, Inc. v. Court of Appeals, 312 Phil. 466, 481;
242 SCRA 393, 406, March 16, 1995, per Davide, Jr., J. (now C.J.).
172 Article 2208 (2) of the Civil Code. See Rivera v. Litam & Co., Inc., 114 Phil. 1009, 1022; 4 SCRA 1072,
April 25, 1962; and Luneta Motor Co. v. Baguio Bus Co., Inc., 108 Phil. 892, 898, June 30, 1960.
173 Article 2208 (11) of the Civil Code. See Philippine National Bank v. Utility Assurance & Surety Co.,
Inc., 177 SCRA 208, 219, September 1, 1989; citing Plaridel Surety & Insurance Co., Inc. v. P.L. Galang
Machinery Co., Inc., 100 Phil. 679, 682, January 11, 1957. See also Apelario v. Ines Chavez & Co., Ltd.,
113 Phil. 215, 217-218; 3 SCRA 226, 229, October 16, 1961; and Guitarte v. Sabaco, 107 Phil. 437, 440,
March 28, 1960.
297

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297
Bank of the Philippine Islands vs. Casa Montessori Internationale
the Court deems it just and equitable to grant ten percent (10%)174 of the total value adjudged to CASA
as attorneys fees.
Interest Allowed
For the failure of BPI to pay CASA upon demand and for compelling the latter to resort to the courts to
obtain payment, legal interest may be adjudicated at the discretion of the Court, the same to run from
the filing175 of the Complaint.176 Since a court judgment is not a loan or a forbearance of recovery, the
legal interest shall be at six percent (6%) per annum.177 If the obligation consists in the payment of a
sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of x x x legal interest, which is six percent per annum.178 The actual
base for its computation shall be on the amount finally adjudged,179 compounded180 annually to
make up for the cost of money181 already lost to CASA.
Moreover, the failure of the CA to award interest does not prevent us from granting it upon damages
awarded for breach of contract.182 Because BPI evidently breached its contract of deposit with CASA,
we award interest in addition to the total amount adjudged. Under Section 196 of the NIL, any case not
provided for shall be governed by the provisions of existing legislation or, in default
_______________

174 Jarenco, Torts and Damages in Philippine Law (4th ed., 1983), p. 334; citing Pirovano v. The De la
Rama Steamship Co., 96 Phil. 335, 367, December 29, 1954.
175 When a claim is made judicially under Article 1169 of the Civil Code.
176 Philippine National Bank v. Utility Assurance & Surety Co., Inc., supra.
177 Cabral v. Court of Appeals, 178 SCRA 90, 93, September 29, 1989.
178 Article 2209 of the Civil Code.
179 Francisco v. Court of Appeals, supra, p. 381, per Gonzaga-Reyes, J.
180 In compounding interest, x x x the amount of interest earned for a certain period is added to the
principal for the next period. Interest for the subsequent period is computed on the new amount, which
includes both the principal and accumulated interest. Smith and Skousen, Intermediate Accounting, the
11th ed., 1992, p. 235.

181 The payment (cost) for the use of money is interest. Id., p. 234.
182 Article 2210 of the Civil Code.
298

298
SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Casa Montessori Internationale
thereof, by the rules of the law merchant.183 Damages are not provided for in the NIL. Thus, we resort
to the Code of Commerce and the Civil Code. Under Article 2 of the Code of Commerce, acts of
commerce shall be governed by its provisions and, in their absence, by the usages of commerce
generally observed in each place; and in the absence of both rules, by those of the civil law.184 This law
being silent, we look at Article 18 of the Civil Code, which states: In matters which are governed by the
Code of Commerce and special laws, their deficiency shall be supplied by its provisions. A perusal of
these three statutes unmistakably shows that the award of interest under our civil law is justified.
WHEREFORE, the Petition in G.R. No. 149454 is hereby DENIED, and that in G.R. No. 149507 PARTLY
GRANTED. The assailed Decision of the Court of Appeals is AFFIRMED with modification: BPI is held liable
for P547,115, the total value of the forged checks less the amount already recovered by CASA from
Leonardo T. Yabut, plus interest at the legal rate of six percent (6%) per annumcompounded annually,
from the filing of the complaint until paid in full; and attorneys fees of ten percent (10%) thereof,
subject to reimbursement from Respondent Yabut for the entire amount, excepting attorneys fees. Let
a copy of this Decision be furnished the Board of Accountancy of the Professional Regulation
Commission for such action as it may deem appropriate against Respondent Yabut. No costs.
SO ORDERED.
Ynares-Santiago, Carpio and Azcuna, JJ., concur.
Davide, Jr. (C.J., Chairman), On Official Leave.
Petition in G.R. No. 149454 denied, that in G.R. No. 149507 partly granted, assailed decision affirmed
with modification.
_______________

183 The law merchant refers to the body of law relating to mercantile transactions and instruments of
widespread use. Its usage as adopted by the courts is the origin of the law merchant on negotiable
securities. Agbayani, supra, pp. 11-12.

184 A current account is a commercial transaction. In re Liquidation of Mercantile Bank of China, Tan
Tiong Tick v. American Apothecaries Co., 65 Phil. 414, 419-420, March 31, 1938.
299

VOL. 430, MAY 28, 2004


299
Philippine National Bank vs. RBL Enterprises, Inc.
Notes.A check is a bill of exchange drawn on a bank payable on demand. (Moran vs. Court of Appeals,
230 SCRA 799 [1994])
The language of negotiability which characterizes a negotiable paper as a credit instrument is its
freedom to circulate as a substitute for money. (Traders Royal Bank vs. Court of Appeals, 269 SCRA 15
[1997])
Failure of a payee to encash a check for more than ten (10) years undoubtedly resulted in the
impairment of the check through his unreasonable and unexplained delay. (Papa vs. A.U. Valencia and
Co., Inc., 284 SCRA 643 [1998])
o0o

Copyright 2014 Central Book Supply, Inc. All rights reserved. [Bank of the Philippine Islands vs. Casa
Montessori Internationale, 430 SCRA 261(2004)]

Metropolitan Waterworks and Sewerage System vs. Court of Appeals


No. L-62943. July 14, 1986.*
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner, vs. COURT OF APPEALS (Now
INTERMEDIATE APPELLATE COURT) and THE PHILIPPINE NATIONAL BANK, respondents.
Negotiable Instruments Law; Evidence; There is no clear evidence in this case that the signatures on the
checks are forgeries. The NBI reports indicate that the anomalous encashment of the checks were an
inside job or due to negligence of MWSS.We have carefully reviewed the documents cited by the
petitioner. There is no express and categorical finding in these documents that the twenty-three (23)
questioned checks were indeed signed by persons other than the authorized MWSS signatories. On the
contrary, the findings of the National Bureau of Investigation in its Report dated November 2, 1970
show that the MWSS fraud was an inside job

__________________

* SECOND DIVISION.
21

VOL. 143, JULY 14, 1986


21
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
and that the petitioners delay in the reconciliation of bank statements and the laxity and loose records
control in the printing of its personalized checks facilitated the fraud. Likewise, the questioned
Documents Report No, 159-1074 dated November 21, 1974 of the National Bureau of Investigation does
not declare or prove that the signatures appearing on the questioned checks are forgeries. The report
merely mentions the alleged differences in the typeface, checkwriting, and printing characteristics
appearing in the standard or submitted models and the questioned typewritings. The NBI Chemistry
Report No. C-74-891 merely describes the inks and pens used in writing the alleged forged signatures. It
is clear that these three (3) NBI Reports relied upon by the petitioner are inadequate to sustain its
allegations of forgery. These reports did not touch on the inherent qualities of the signatures which are
indispensable in the determination of the existence of forgery. There must be conclusive findings that
there is a variance in the inherent characteristics of the signatures and that they were written by two or
more different persons.
Same; Same; MWSS officials admitted that the checks in question can be easily passed on as genuine.
Considering the absence of sufficient security in the printing of the checks coupled with the very close
similarities between the genuine signatures and the alleged forgeries, the twenty-three (23) checks in
question could have been presented to the petitioners signatories without their knowing that they
were bogus checks. Indeed, the cashier of the petitioner whose signatures were allegedly forged was
unable to tell the difference between the allegedly forged signature and his own genuine signature. On
the other hand, the MWSS officials admitted that these checks could easily be passed on as genuine. The
memorandum of Mr. A. T. Tolentino, Assistant Chief Accountant of the drawee Philippine National Bank
to Mr. E. Villatuya, Executive Vice-President of the petitioner dated June 9, 1969 cites an instance where
even the concerned NWSA officials could not tell the differences between the genuine checks and the
alleged forged checks.
Same; Where a depositor is using its own personalized checks, its failure to provide adequate security
measures to prevent forgeries of its checks constitutes gross negligence and bars it from setting up the
defense of forgery.The records show that at the time the twenty-three (23) checks were prepared,
negotiated, and encashed, the petitioner was using its own personalized checks, instead of the official

22

22
SUPREME COURT REPORTS ANNOTATED
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
PNB Commercial blank checks. In the exercise of this special privilege, however, the petitioner failed to
provide the needed security measures. That there was gross negligence in the printing of its
personalized checks is shown by the following uncontroverted facts, to wit: (1) The petitioner failed to
give its printer, Mesina Enterprises, specific instructions relative to the safekeeping and disposition of
excess forms, check vouchers, and safety papers; (2) The petitioner failed to retrieve from its printer all
spoiled check forms; (3) The petitioner failed to provide any control regarding the paper used in the
printing of said checks; x xxx.
Same; Failure of depositor to make prompt reconciliation of the monthly bank statements furnished by
the bank constitutes negligence for which the bank cannot be blamed in case depositors checks are
forged.It is accepted banking procedure for the depository bank to furnish its depositors bank
statements and debt and credit memos through the mail. The records show that the petitioner
requested the respondent drawee bank to discontinue the practice of mailing the bank statements, but
instead to deliver the same to a certain Mr. Emiliano Zaporteza. For reasons known only to Mr.
Zaporteza however, he was unreasonably delayed in taking prompt deliveries of the said bank
statements and credit and debit memos. As a consequence, Mr. Zaporteza failed to reconcile the bank
statements with the petitioners records. If Mr. Zaporteza had not been remiss in his duty of taking the
bank statements and reconciling them with the petitioners records, the fraudulent encashments of the
first checks should have been discovered, and further frauds prevented. This negligence was, therefore,
the proximate cause of the failure to discover the fraud.
Same; Depository bank cannot be blamed for not detecting fraudulent encashment of checks where
depositor uses its own personalized checks.We cannot fault the respondent drawee Bank for not
having detected the fraudulent encashment of the checks because the printing of the petitioners
personalized checks was not done under the supervision and control of the Bank. There is no evidence
on record indicating that because of this private printing, the petitioner furnished the respondent Bank
with samples of checks, pens, and inks or took other precautionary measures with the PNB to safeguard
its interests. Under the circumstances, therefore, the petitioner was in a better position to detect and
prevent the fraudulent encashment of its checks.
23

VOL. 143, JULY 14, 1986

23
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
PETITION for certiorari to review the decision of the Intermediate Appellate Court.

The facts are stated in the opinion of the Court


Juan J. Diaz and Cesar T. Basa for respondent PNB.
San Juan, Africa, Gonzales & San Agustin Law Offices for respondent PC IB.
GUTIERREZ, JR., J .:

This petition for review asks us to set aside the October 29, 1982 decision of the respondent Court of
Appeals, now Intermediate Appellate Court which reversed the decision of the Court of First Instance of
Manila, Branch XL, and dismissed the plaintiffs complaint, the third party complaint, as well as the
defendants counterclaim.
The background facts which led to the filing of the instant petition are summarized in the decision of the
respondent Court of Appeals:
Metropolitan Waterworks and Sewerage System (hereinafter referred to as MWSS) is a government
owned and controlled corporation created under Republic Act No. 6234 as the successor-in-interest of
the defunct NWSA. The Philippine National Bank (PNB for short), on the other hand, is the depository
bank of MWSS and its predecessor-in-interest NWSA. Among the several accounts of NWSA with PNB is
NWSA Account No. 6, otherwise known as Account No. 381-777 and which is presently allocated No.
010-500281. The authorized signature for said Account No. 6 were those of MWSS treasurer Jose
Sanchez, its auditor Pedro Aguilar, and its acting General Manager Victor L. Recio. Their respective
specimen signatures were submitted by the MWSS to and on file with the PNB. By special arrangement
with the PNB, the MWSS used personalized checks in drawing from this account. These checks were
printed for MWSS by its printer, F. Mesina Enterprises, located at 1775 Rizal Extension, Caloocan City.
During the months of March, April and May 1969, twenty-three (23) checks were prepared, processed,
issued and released by NWSA, all of which were paid and cleared by PNB and debited by PNB against
NWSA Account No. 6, to wit:
24

24

SUPREME COURT REPORTS ANNOTATED


Metropolitan Waterworks and Sewerage System vs. Court of Appeals
Check No.
Date
Payee
Amount
Date Paid
By PNB
1. 59546
8-21-69
Deogracias
Estrella
P3,187.79
4-2-69
2. 59548
3-31-69
Natividad
Rosario
2,848.86
4-23-69
3. 59547
3-31-69
Pangilinan
Enterprises
195.00

Unreleased
4. 59549
3-31-69
Natividad
Rosario
3,239.88
4-23-69
5. 59552
4-1-69
Villarama
&Sons
987.59
5-6-69
6. 59554
4-1-69
Gascom
Engineering
6,057.60
4-16-69
7. 59558
4-2-69
The Evening
News
112.00
Unreleased

8. 59544
3-27-69
Progressive
Const.
18,391.20
4-18-69
9. 59564
4-2-69
Ind. Insp.
Int. Inc.
594.06
4-18-69
10. 59568
4-7-69
Roberto
Marsan
800.00
4-22-69
11. 59570
4-7-69
Paz Andres
200.00
4-22-69
12. 59574
4-8-69

Florentino
Santos
100,000.00
4-11-69
13. 59578
4-8-69
Mia. Daily
Bulletin
95.00
Unreleased
14. 59580
4-8-69
Phil. Herald
100.00
5-9-69
15. 59582
4-8-69
Galauran
&Pilar
7,729.09
5-6-69
16. 59581
4-8-69
Manila
Chronicle

110.00
5-12-69
17. 59588
4-8-69
Treago
Tunnel
21,583.
00 4-11-69
18. 59587
4-8-69
Del fin
Santiago
120,000.00
4-11-69
19. 59589
4-10-69
Deogracias
Estrella
1,257.49
4-16-69
20. 59594
4-14-69
Philam Ac
cident Inc.
33.03

4-29-69
21. 59577
4-8-69
Esla
9,429.78
4-29-69

25

VOL. 143, JULY 14, 1986


25
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
22. 59601
4-16-69

Justine
20,000.00

4-18-69
23. 59595
4-14-69
Torres

Neris Phil
4,274.00
5-20-69

Inc.

P320,636.26

During the same months of March, April and May 1969, twenty-three (23) checks bearing the same
numbers as the aforementioned NWSA checks were likewise paid and cleared by PNB and debited
against NWSA Account No. 6, to wit:
Check
No.

Date
Issued
Payee
Amount
Date Paid
By PNB
1. 59546
3-6-69
Raul Dizon
P 84,401.00
3-16-69
2. 59548
3-41-69
Raul Dizon
104,790.00
4-1-69
3. 59547
3-14-69
Arturo Sison
56,903.00
4-11-69
4. 59549
3-20-69
Arturo Sison
48,903.00

4-15-69
5. 59552
3-24-69
Arturo Sison
63,845.00
4-16-89
6. 59544
3-26-69
Arturo Sison
98,450.00
4-17- 69
7. 59558
3-28-89
Arturo Sison
114,840.00
4-21-69
8. 59544
3-16-69
Antonio Mendoza
38,490.00
4-22-69
9. 59564
3-31-69
Arturo Sison
180,900.00

4-23-69
10. 59568
4-2-69
Arturo Sison
134,940.00
4-25-69
11. 59570
4-1-69
Arturo Sison
64,550.00
4-28-69
12. 59574
4-2-69
Arturo Sison
148,610.00
4-29-89
13. 59578
4-10-69
Antonio Mendoza
93,950.00
4-29-69
14. 59580
4-8-69
Arturo Sison
160,000.00

5-2-69
15. 59582
4-10-69
Arturo Sison
155,400.00
5-5-69
16. 59581
4-8-69
Antonio Mendoza
176,580.00
5-6-69
17. 59588
4-16-69
Arturo Sison
176,000.00
5-8-69
18. 59587
4-16-69
Arturo Sison
300,000.00
5-12-69
19. 59589
4-18-69
Arturo Sison
280,000.00

5-15 -6 9
20. 59594
4-18-69
Arturo Sison
122,000.00
5-14-69
21. 59577
4 -14-69
Antonio Mendoza
260,000.00
5-16-69
22. 59601
4-18-69
Arturo Sison
400,000.00
5-19-69
23. 59595
4-28-69
Arturo Sison
190,800.00
5-21-69

P3,457,903.00

26

26
SUPREME COURT REPORTS ANNOTATED
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
The foregoing checks were deposited by the payees Raul Dizon, Arturo Sison and Antonio Mendoza in
their respective current accounts with the Philippine Commercial and Industrial Bank (PCIB) and
Philippine Bank of Commerce (PBC) in the months of March, April and May 1969. Thru the Central Bank
Clearing, these checks were presented for payment by PBC and PCIB to the defendant PNB, and paid,
also in the months of March, April and May 1969. At the time of their presentation to PNB these checks
bear the standard indorsement which reads all prior indorsement and/or lack of endorsement
guaranteed.
Subsequent investigation however, conducted by the NBI showed that Raul Dizon, Arturo Sison and
Antonio Mendoza were all fictitious persons. The respective balances in their current account with the
PBC and/or PCIB stood as follows: Raul Dizon P3,455.00 as of April 30, 1969; Antonio Mendoza
P18,182.00 as of May 23, 1969; and Arturo Sison P1,398.92 as of June 30, 1969.
On June 11, 1969, NWSA addressed a letter to PNB requesting the immediate restoration to its Account
No. 6, of the total sum of P3,457,903.00 corresponding to the total amount of these twenty-three (23)
checks claimed by NWSA to be forged and/or spurious checks.
In view of the refusal of PNB to credit back to Account No. 6 the said total sum of P3,457,903.00 MWSS
filed the instant complaint on November 10, 1972 before the Court of First Instance of Manila and
docketed thereat as Civil Case No. 88950.
In its answer, PNB contended among others, that the checks in question were regular on its face in all
respects, including the genuineness of the signatures of authorized NWSA signing officers and there was
nothing on its face that could have aroused any suspicion as to its genuineness and due execution and;
that NWSA was guilty of negligence which was the proximate cause of the loss. PNB also filed a third
party complaint against the negotiating banks PBC and PCIB on the ground that they failed to ascertain
the identity of the payees and their title to the checks which were deposited in the respective new
accounts of the payees with them.
xxx

xxx

On February 6, 1976, the Court of First Instance of Manila rendered judgment in favor of the MWSS. The
dispositive portion of the decision reads:
27

VOL, 143, JULY 14, 1986


27
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
WHEREFORE, on the COMPLAINT by a clear preponderance of evidence and in accordance with Section
23 of the Negotiable Instruments Law, the Court hereby renders judgment in favor of the plaintiff
Metropolitan Waterworks and Sewerage System (MWSS) by ordering the defendant Philippine National
Bank (PNB) to restore the total sum of THREE MILLION FOUR HUNDRED FIFTY SEVEN THOUSAND NINE
HUNDRED THREE PESOS (P3,457,903.00) to plaintiffs Account No. 6, otherwise known as Account No.
010-50030-3, with legal interest thereon computed from the date of the filing of the complaint and until
restored in the said Account No. 6.
On the THIRD PARTY COMPLAINT, the Court, for lack of evidence, hereby renders judgment in favor of
the third party defendants Philippine Bank of Commerce (PBC) and Philippine Commercial and Industrial
Bank (PCIB) by dismissing the Third Party Complaint.
The counterclaims of the third party defendants are likewise dismissed for lack of evidence.
N o pronouncement as to costs.
As earlier stated, the respondent court reversed the decision of the Court of First Instance of Manila and
rendered judgment in favor of the respondent Philippine National Bank.
A motion for reconsideration filed by the petitioner MWSS was denied by the respondent court in a
resolution dated January 3, 1983.
The petitioner now raises the following assignments of errors for the grant of this petition:
I. IN NOT HOLDING THAT AS THE SIGNATURES ON THE CHECKS WERE FORGED, THE DRAWEE BANK WAS
LIABLE FOR THE LOSS UNDER SECTION 23 OF THE NEGOTIABLE INSTRUMENTS LAW.
II. IN FAILING TO CONSIDER THE PROXIMATE NEGLIGENCE OF PNB IN ACCEPTING THE SPURIOUS CHECKS
DESPITE THE OBVIOUS IRREGULARITY OF TWO SETS OF CHECKS BEARING IDENTICAL NUMBER BEING
ENCASHED WITHIN DAYS OF EACH OTHER.
III. IN NOT HOLDING THAT THE SIGNATURES OF
28

28
SUPREME COURT REPORTS ANNOTATED
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
THE DRAWEE MWSS BEING CLEARLY FORGED, AND THE CHECKS SPURIOUS, SAME ARE INOPERATIVE AS
AGAINST THE ALLEGED DRAWEE.
The appellate court applied Section 24 of the Negotiable Instruments Law which provides:
Every negotiable instrument is deemed prima facie to have been issued for valuable consideration and
every person whose signature appears thereon to have become a party thereto for value.
The petitioner submits that the above provision does not apply to the facts of the instant case because
the questioned checks were not those of the MWSS and neither were they drawn by its authorized
signatories. The petitioner states that granting that Section 24 of the Negotiable Instruments Law is
applicable, the same creates only a prima facie presumption which was overcome by the following
documents, to wit: (1) the NBI Report of November 2, 1970; (2) the NBI Report of November 21, 1974;
(3) the NBI Chemistry Report No. C-74-891; (4) the Memorandum of Mr. Juan Dino, 3rd Assistant Auditor
of the respondent drawee bank addressed to the Chief Auditor of the petitioner; (5) the admission of
the respondent banks counsel in open court that the National Bureau of Investigation found the
signature on the twenty-three (23) checks in question to be forgeries; and (6) the admission of the
respondent banks witness, Mr. Faustino Mesina, Jr. that the checks in question were not printed by his
printing press. The petitioner contends that since the signatures of the checks were forgeries, the
respondent drawee bank must bear the loss under the rulings of this Court.
A bank is bound to know the signatures of its customers; and if it pays a forged check it must be
considered as making the payment out of its own funds, and cannot ordinarily charge the amount so
paid to the account of the depositor whose name was forged.
xxx

xxx

xxx

The signatures to the checks being forged, under Section 23 of the Negotiable Instruments Law they
are not a charge against plain29

VOL, 143, JULY 14, 1986


29
Metropolitan Waterworks and Sewerage System vs. Court of Appeals

tiff nor are the checks of any value to the defendant.


It must therefore be held that the proximate cause of loss was due to the negligence of the Bank of the
Philippine Islands in honoring and cashing the two forged checks. (San Carlos Milling Co. v. Bank of the
P. I., 59 Phil. 59)
It is admitted that the Philippine National Bank cashed the check upon a forged signature, and placed
the money to the credit of Maasim, who was the forger. That the Philippine National Bank then
endorsed the check and forwarded it to the Shanghai Bank by whom it was paid. The Philippine National
Bank had no license or authority to pay the money to Maasim or anyone else upon a forged signature. It
was its legal duty to know that Malicors endorsement was genuine before cashing the check. Its remedy
is against Maasim to whom it paid the money. (Great Eastern Life Ins. Co. v. Hongkong & Shanghai
Bank, 43 Phil. 678).
We have carefully reviewed the documents cited by the petitioner. There is no express and categorical
finding in these documents that the twenty-three (23) questioned checks were indeed signed by persons
other than the authorized MWSS signatories. On the contrary, the findings of the National Bureau of
Investigation in its Report dated November 2, 1970 show that the MWSS fraud was an inside job and
that the petitioners delay in the reconciliation of bank statements and the laxity and loose records
control in the printing of its personalized checks facilitated the fraud. Likewise, the questioned
Documents Report No. 159-1074 dated November 21, 1974 of the National Bureau of Investigation does
not declare or prove that the signatures appearing on the questioned checks are forgeries. The report
merely mentions the alleged differences in the typeface, checkwriting, and printing characteristics
appearing in the standard or submitted models and the questioned typewritings. The NBI Chemistry
Report No. C-74-891 merely describes the inks and pens used in writing the alleged forged signatures.
It is clear that these three (3) NBI Reports relied upon by the petitioner are inadequate to sustain its
allegations of forgery. These reports did not touch on the inherent qualities
30

30
SUPREME COURT REPORTS ANNOTATED
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
of the signatures which are indispensable in the determination of the existence of forgery. There must
be conclusive findings that there is a variance in the inherent characteristics of the signatures and that
they were written by two or more different persons.
Forgery cannot be presumed (Siasat, et al. v. Intermediate Appellate Court, et al, 139 SCRA 238). It must
be established by clear, positive, and convincing evidence. This was not done in the present case.

The cases of San Carlos Milling Co, Ltd. v. Bank of the Philippine Islands, et al. (59 Phil, 59) and Great
Eastern Life Ins., Co. v. Hongkong and Shanghai Bank (43 Phil. 678) relied upon by the petitioner are
inapplicable in this case because the forgeries in those cases were either clearly established or admitted
while in the instant case, the allegations of forgery were not clearly established during trial.
Considering the absence of sufficient security in the printing of the checks coupled with the very close
similarities between the genuine signatures and the alleged forgeries, the twenty-three (23) checks in
question could have been presented to the petitioners signatories without their knowing that they
were bogus checks. Indeed, the cashier of the petitioner whose signatures were allegedly forged was
unable to tell the difference between the allegedly forged signature and his own genuine signature. On
the other hand, the MWSS officials admitted that these checks could easily be passed on as genuine,
The memorandum of Mr. A. T. Tolentino, Assistant Chief Accountant of the drawee Philippine National
Bank to Mr. E. Villatuya, Executive Vice-President of the petitioner dated June 9, 1969 cites an instance
where even the concerned NWSA officials could not tell the differences between the genuine checks
and the alleged forged checks.
At about 12:00 oclock on June 6, 1960, VP Maramag requested me to see him in his office at the
Cashiers Dept. where Messrs. Jose M. Sanchez, treasurer of NAWASA and Romeo Oliva of the same
office were present. Upon my arrival I observed the NAWASA officials questioning the issue of the
NAWASA checks
31

VOL, 143, JULY 14, 1988


31
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
appearing in their own list, xerox copy attached.
For verification purposes, therefore, the checks were taken from our file. To everybody there present
namely VIP Maramag, the two abovementioned NAWASA officials, AVP, Buhain, Asst. Cashier Castelo,
Asst. Cashiet Tejada and Messrs. A. Lopez and L. Lechuga, both C/A bookkeepers, no one was able to
point out any difference on the signatures of the NAWASA officials appearing on the checks compared
to their official signatures on file. In fact 3 checks, one of those under question, were presented to the
NAWASA treasurer for verification but he could not point out which was his genuine signature. After
intent comparison, he pointed on the questioned check as bearing his correct signature.
xxx

xxx

xxx

Moreover, the petitioner is barred from setting up the defense of forgery under Section 23 of the
Negotiable Instruments Law which provides that:

SEC. 23. FORGED SIGNATURE; EFFECT OF.When the signature is forged or made without authority of
the person whose signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto can
be acquired through or under such signature unless the party against whom it is sought to enforce such
right is precluded from setting up the forgery or want of authority.
because it was guilty of negligence not only before the questioned checks were negotiated but even
after the same had already been negotiated. (See Republic v. Equitable Banking Corporation. 10 SCRA 8)
The records show that at the time the twenty-three (23) checks were prepared, negotiated, and
encashed, the petitioner was using its own personalized checks, instead of the official PNB Commercial
blank checks. In the exercise of this special privilege, however, the petitioner failed to provide the
needed security measures. That there was gross negligence in the printing of its personalized checks is
shown by the following uncontroverted facts, to wit:
32

32
SUPREME COURT REPORTS ANNOTATED
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
(1) The petitioner failed to give its printer, Mesina Enterprises, specific instructions relative to the
safekeeping and disposition of excess forms, check vouchers, and safety papers;
(2) The petitioner failed to retrieve from its printer all spoiled check forms;
(3) The petitioner failed to provide any control regarding the paper used in the printing of said checks;
(4) The petitioner failed to furnish the respondent drawee bank with samples of typewriting, check
writing, and print used by its printer in the printing of its checks and of the inks and pens used in signing
the same; and
(5) The petitioner failed to send a representative to the printing office during the printing of said checks.
This gross negligence of the petitioner is very evident from the sworn statement dated June 19, 1969 of
Faustino Mesina, Jr., the owner of the printing press which printed the petitioners personalized checks:
xxx

xxx

xxx

7. Q:
Do you have any business transaction with the National Waterworks and Sewerage Authority
(NAWASA)?

A:
Yes, sir. I have a contract with the NAWASA in printing NAWASA Forms such as NAWASA Check
Vouchers and Office Forms.

xxx

xxx

xxx

15. Q:
Were you given any instruction by the NAWASA in connection with the printing of these check
vouchers?
A:
There is none, sir. No instruction whatsoever was given to me.
16. Q:
Were you not advised as to what kind of paper would be used in the check vouchers?
A:
Only as per sample, sir.

x xx

xxx

xx x

20. Q:
Where did you buy this Hammermill Safety check paper?
A:
From Tan Chiong, a paper dealer with store located at
33

VOL. 143, JULY 14, 1986


33
Metropolitan Waterworks and Sewerage System vs. Court of Appeals

Juan Luna, Binondo, Manila. (In front of the Metropolitan Bank).

xxx

xxx

xxx

24.
Q:
Were all these check vouchers printed by you submitted to NAWASA?

A:
Not all, sir. Because we have to make reservations or allowances for spoilage.
25.
Q:
Out of these vouchers printed by you, how many were spoiled and how many were the excess printed
check vouchers?

A:
Approximately four hundred (400) sheets, sir. I cannot determine the proporti on of the excess and
spoiled because the final act of perforating these check vouchers has not yet been done and spoilage
can only be determined after this final act of printing.
26.
Q:
What did you do with these excess check vouchers?

A:
I keep it under lock and key in my filing cabinet.

xxx

xxx

xxx

28.
Q:
Were you not instructed by the NAWASA authorities to burn these excess check vouchers?

A:
No, sir. I was not instructed.
29.
Q:
What do you intend to do with these excess printed check vouchers?

A:
I intend to use them for future orders from the NAWASA.

xxx

xxx

xxx

32.
Q:
In the process of printing the check vouchers ordered by the NAWASA, how many sheets were actually
spoiled?

A:
I cannot approximate, sir. But there are spoilage in the process of printing and perforating.
33.
Q:

What did you do with these spoilages?

A:
Spoiled printed materials are usually thrown out, in the garbage can.
34.
Q:
Was there any representative of the NAWASA to supervise the printing or watch the printing of these
check vouchers?

A:
None, sir.

xxx

xxx

xxx

39.
Q:
During the period of printing after the days work, what measures do you undertake to safeguard the
mold and other paraphernalia used in the printing of
34

34
SUPREME COURT REPORTS ANNOTATED
Metropolitan Waterworks and Sewerage System vs. Court of Appeals

these particular orders of NAWASA?


A:

Inasmuch as I have an employee who sleeps in the printing shop and at the same time do the guarding,
we just leave the mold attached to the machine and the other finished or unfinished work check
vouchers are left in the rack so that the work could be continued thefollowing day.
The National Bureau of Investigation Report dated November 2, 1970 is even more explicit, Thus
xxx

xxx

xxx

60. We observed also that there is some laxity and loose control in the printing of NAWASA checks. We
gathered from MESINA ENTERPRISES, the printing firm that undertook the printing of the check
vouchers of NAWASA that NAWASA had no representative at the printing press during the process of
the printing and no particular security measure instructions adopted to safeguard the interest of the
government in connection with printing of this accountable form.
Another factor which facilitated the fraudulent encashment of the twenty-three (23) checks in question
was the failure of the petitioner to reconcile the bank statements with its own records.
It is accepted banking procedure for the depository bank to furnish its depositors bank statements and
debt and credit memos through the mail The records show that the petitioner requested the respondent
drawee bank to discontinue the practice of mailing the bank statements, but instead to deliver the same
to a certain Mr. Emiliano Zaporteza. For reasons known only to Mr. Zaporteza however, he was
unreasonably delayed in taking prompt deliveries of the said bank statements and credit and debit
memos. As a consequence, Mr. Zaporteza failed to reconcile the bank statements with the petitioners
records. If Mr. Zaporteza had not been remiss in his duty of taking the bank statements and reconciling
them with the petitioners records, the fraudulent encashments of the first checks should have been
discovered, and further frauds prevented. This negligence was, therefore, the proximate cause
35

VOL. 143, JULY 14, 1986


35
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
of the failure to discover the fraud. Thus,
When a person opens a checking account with a bank, he is given blank checks which he may fill out
and use whenever he wishes. Each time he issues a check, he should also fill out the check stub to which
the check is usually attached. This stub, if properly kept, will contain the number of the check, the date
of its issue, the name of the payee and the amount thereof. The drawer would therefore have a
complete record of the checks he issues. It is the custom of banks to send to its depositors a monthly
statement of the status of their accounts, together with all the cancelled checks which have been
cashed by their respective holders. If the depositor has filled out his check stubs properly, a comparison

between them and the cancelled checks will reveal any forged check not taken from his checkbook. It is
the duty of a depositor to carefully examine the banks statement, his cancelled checks, his check stubs
and other pertinent records within a reasonable time, and to report any errors without unreasonable
delay. If his negligence should cause the bank to honor a forged check or prevent it from recovering the
amount it may have already paid on such check, he cannot later complain should the bank refuse to
recredit his account with the amount of such check. (First Nat. Bank of Richmond v. Richmond Electric
Co., 106 Va. 347, 56 SE 152, 7 LRA, NS 744 *1907+. See also Leather Manufacturers Bank v. Morgan, 117
US 96, 6 S. Ct. 657 [1886]; Deer Island Fish and Oyster Co. v. First Nat. Bank of Biloxi, 166 Miss. 162, 146
So. 116 [1933]). Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law, 1971,
pp. 267-268).
This failure of the petitioner to reconcile the bank statements with its cancelled checks was noted by the
National Bureau of Investigation in its report dated November 2, 1970:
58. One factor which facilitated this fraud was the delay in the reconciliation of bank (PNB) statements
with the NAWASA bank accounts, xxx. Had the NAWASA representative come to the PNB early for the
statements and had the bank been advised promptly of the reported bogus check, the negotiation of
practically all of the remaining checks on May, 1969, totalling P2,224,736.00 could have been
prevented.
36

36
SUPREME COURT REPORTS ANNOTATED
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
The records likewise show that the petitioner failed to provide appropriate security measures over its
own records thereby laying confidential records open to unauthorized persons. The petitioners own
Fact Finding Committee, in its report submitted to their General Manager underscored this laxity of
records control. It observed that the office of Mr. Ongtengco (Cashier No. VI of the Treasury
Department at the NAWASA) is quite open to any person known to him or his staff members and that
the check writer is merely on top of his table.
When confronted with this report at the Anti-Fraud Action Section of the National Bureau of
Investigation, Mr. Ongtengco could only state that:
A.
Generally my order is not to allow anybody to enter my office. Only authorized persons are allowed to
enter my office. There are some cases, however, where some pers ons enter my office because they are
following up their checks. Maybe, these persons may have been authorizedby Mr. Pantig. Most of the

people entering my office are changing checks as allowed by the Resolution of the Board of Directors of
the NAWASA and the Treasurer. The check writer was never placed on my table. There is a place for the
checkwriter which is also under lock and key.
Q.
Is Mr. Pantig authorized to allow unauthorized persons to enter your office?
A.
No, sir.
Q.
Why are you tolerating Mr. Pantig admitting unauthorized persons in your office?
A,
I do not want to embarrass Mr. Pantig. Most of the people following up checks are employees of the
NAWASA.
Q.
Was the authority given by the Board of Directors and the approval by the Treasurer for employees, and
other persons to encash their checks carry with it their authority to enter your office?
A.
No, sir.

xxx

xxx

xxx

Q.
From the answers that you have given to us we observed that actually there is laxity and poor control on
your part with regards to the preparations of check payments in37

VOL. 143, JULY 14, 1986


37
Metropolitan Waterworks and Sewerage System vs. Court of Appeals

asmuch as you allow unauthorized persons to follow-up their vouchers inside your office which may
leakout confidential informations or your books of account. After being apprised of all the shortcomings
in your office, as head of the Cashiers Office of the Treasury Department what remedial measures do
you intend to undertake?
A.
Time and again the Treasurer has been calling our attention not to allow interested persons to hand
carry their voucher checks and we are trying our best and if I can do it to follow the instructions to the
letter, I will do it but unfortunately the persons who are allowed to enter my office are my coemployees and persons who have connections with our higher ups and I can not possibly antagonize
them. Rest assured that even though that everybody will get hurt, I will do my best not to allow
unauthorized persons to enter my office.

xxx

xxx

xxx

Q.
Is it not possible inasmuch as your office is in charge of the posting of check payments in your books that
leakage of payments to the banks came from your office?
A.
I am not aware of it but it only takes us a couple of minutes to process the checks. And there are cases
wherein every information about the checks may be obtained from the Accounting Department,
Auditing Department, or the Office of the General Manager.
Relying on the foregoing statement of Mr. Ongtengco, the National Bureau of Investigation concluded in
its Report dated November 2, 1970 that the fraudulent encashment of the twenty-three (23) checks in
question was an inside job. Thus
We have all the reasons to believe that this fraudulent act was an inside job or one pulled with inside
connivance at NAWASA. As pointed earlier in this report, the serial numbers of these checks in question
conform with the numbers in current use of NAWASA, aside from the fact that these fraudulent checks
were found to be of the same kind and design as that of NAWASAs own checks. While knowledge as to
such facts may be obtained through the possession of a NAWASA check of current issue, an outsider
without information from the inside can not possibly pinpoint which of NAWASAs
38

38

SUPREME COURT REPORTS ANNOTATED


Metropolitan Waterworks and Sewerage System vs. Court of Appeals
various accounts has sufficient balance to cover all these fraudulent checks. None of these checks, it
should be noted, was dishonored for insufficiency of funds. . .
Even if the twenty-three (23) checks in question are considered forgeries, considering the petitioners
gross negligence, it is barred from setting up the defense of forgery under Section 23 of the Negotiable
Instruments Law.
Nonetheless, the petitioner claims that it was the negligence of the respondent Philippine National Bank
that was the proximate cause of the loss. The petitioner relies on our ruling in Philippine National Bank
v. Court of Appeals (25 SCRA 693) that.
Thus, by not returning the check to the PCIB, by thereby indicating that the PNB had found nothing
wrong with the check and would honor the same, and by actually paying its amount to the PCIB, the PNB
induced the latter, not only to believe that the check was genuine and good in every respect, but, also,
to pay its amount to Augusto Lim. In other words, the PNB was the primary or proximate cause of the
loss, and, hence, may not recover from the PCIB.
The argument has no merit. The records show that th e respondent drawee bank, had taken the
necessary measures in the detection of forged checks and the prevention of their fraudulent
encashment. In fact, long before the encashment of the twenty-three (23) checks in question, the
respondent Bank had issued constant reminders to all Current Account Bookkeepers informing them of
the activities of forgery syndicates. The Memorandum of the Assistant Vice-President and Chief
Accountant of the Philippine National Bank dated February 17, 1966 reads in part:
SUBJECT: ACTIVITIES OF FORGERY SYNDICATE
From reliable information we have gathered that personalized checks of current account depositors are
now the target of the forgery syndicate. To protect the interest of the bank, you are hereby enjoined to
be more careful in examining said checks especially those
39

VOL. 143, JULY 14, 1986


39
Metropolitan Waterworks and Sewerage System vs. Court of Appeals
coming from the clearing, mails and window transactions. As a reminder please be guided with the
following:

1. Signatures of drawers should be properly scrutinized and compared with those we have on file.
2. The serial numbers of the checks should be compared with the serial numbers registered with the
Cashiers Dept.
3. The texture of the paper used and the printing of the checks should be compared with the sample
we have on file with the Cashiers Dept.
4. Checks bearing several indorsements should be given special attention.
5. Alteration in amount both in figures and words should be carefully examined even if signed by the
drawer.
6. Checks issued in substantial amounts particularly by depositors who do not usually issue checks in
big amounts should be brought to the attention of the drawer by telephone or any fastest means of
communication for purposes of confirmation.
and your attention is also invited to keep abreast of previous circulars and memo instructions issued to
bookkeepers.
We cannot fault the respondent drawee Bank for not having detected the fraudulent encashment of the
checks because the printing of the petitioners personalized checks was not done under the supervision
and control of the Bank. There is no evidence on record indicating that because of this private printing,
the petitioner furnished the respondent Bank with samples of checks, pens, and inks or took other
precautionary measures with the PNB to safeguard its interests.
Under the circumstances, therefore, the petitioner was in a better position to detect and prevent the
fraudulent encashment of its checks.
WHEREFORE, the petition for review on certiorari is hereby DISMISSED for lack of merit. The decision of
the respondent Court of Appeals dated October 29, 1982 is AFFIRMED. No pronouncement as to costs.
40

40
SUPREME COURT REPORTS ANNOTATED
Arsenal vs. Intermediate Appellate Court
SO ORDERED.
Feria (Chairman), Fernan, Alampay and Cruz, JJ., concur.
Paras **, J., took no part.

Petition dismissed Decision affirmed.


o0o

Copyright 2014 Central Book Supply, Inc. All rights reserved. [Metropolitan Waterworks and Sewerage
System vs. Court of Appeals, 143 SCRA 20(1986)]

METROPOLITAN BANK AND TRUST COMPANY, petitioner, vs. PHILIPPINE BANK OF COMMUNICATIONS,
FILIPINAS ORIENT FINANCE CORPORATION, PIPE MASTER CORPORATION and TAN JUAN LIAN,
respondents.
G.R. No. 141429. October 18, 2007.*
SOLID BANK CORPORATION, petitioner, vs. FILIPINAS ORIENT FINANCE CORPORATION, PIPE MASTER
CORPORATION, TAN JUAN LIAN and/or PHILIPPINE BANK OF COMMUNICATIONS, respondents.
Banks and Banking; Negotiable Instruments Law; Checks; Judicial Notice; While the Negotiable
Instruments Law is silent with respect to crossed checks, the Supreme Court nonetheless has taken
judicial cognizance of the practice that a check with two parallel lines on the upper left hand corner
means that it could only be deposited and not converted into cash; The crossing of a check with the
phrase Payees Account Only is a warning that the check should be deposited in the account of the
payee.A check is defined by law as a bill of exchange drawn on a bank payable on demand. The
Negotiable Instruments Law is silent with respect to crossed checks. Nonetheless, this Court has taken
judicial cognizance of the practice that a check with two parallel lines on the upper left hand corner
means that it could only be deposited and not converted into cash. The crossing of a check with the
phrase Payees Account Only is a warning that the check should be deposited in the account of the
payee. It is the collecting bank which is bound to scrutinize the check and to know its depositors before
it can make the clearing indorsement, all prior indorsements and/or lack of indorsement guaranteed.
Same; Same; Same; The effect of crossing a check means that the drawer had intended the check for
deposit only by the rightful person, i.e., the payee named therein.Here, petitioner banks have
_______________

* FIRST DIVISION.
557

VOL. 536, OCTOBER 18, 2007

557
Metropolitan Bank and Trust Company vs. Philippine Bank of Communications
the obligation to ensure that the PBCom checks were deposited in accordance with the instructions
stated in the checks. The four PBCom checks in question had been crossed and issued for payees
account only. This could only mean that the drawer, Filipinas Orient, intended the same for deposit
only by the payee, Pipe Master. The effect of crossing a check means that the drawer had intended the
check for deposit only by the rightful person, i.e., the payee named thereinPipe Master.
Same; Same; Same; 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 a good title to it; that all
prior parties had capacity to contract; and that the instrument is at the time of his indorsement valid
and subsisting; Collecting banks which stamp at the back of the check that all prior indorsements
and/or lack of indorsements are guaranteed become general endorsers and cannot deny liability.As
what transpired in this case, petitioner banks accommodated Yu Kio, being a valued client and the
president of Pipe Master, and accepted the crossed checks. They stamped at the back thereof that all
prior indorsements and/or lack of indorsements are guaranteed. In so doing, they became general
endorsers. 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 a good title to it; that all
prior parties had capacity to contract; and that the instrument is at the time of his indorsement valid
and subsisting.
Same; Same; Same; The drawee bank cannot be held liable since it mainly relied on the express
guarantee made by the collecting banks of all prior indorsements.In Associated Bank v. Court of
Appeals, 252 SCRA 620 (1996), we held that the collecting bank or last endorser generally suffers the
loss because it has the duty to ascertain the genuineness of all prior indorsements and is privy to the
depositor who negotiated the check. PBCom, as the drawee bank, cannot be held liable since it mainly
relied on the express guarantee made by petitioners, the collecting banks, of all prior indorsements.
Same; Same; Same; One who accepts and encashes a check from an individual knowing that the payee is
a corporation does so at his peril; It must be emphasized that the law imposes on the collecting bank the
duty to diligently scrutinize the checks deposited with it for the purpose of determining their
genuineness and regularitythe
558

558
SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. Philippine Bank of Communications

collecting bank, being primarily engaged in banking, holds itself out to the public as the expert on this
field, and the law thus holds it to a high standard of conduct.Petitioner banks disregarded established
banking rules and procedures. They were negligent in accepting the checks and allowing the transaction
to push through. In Jai-Alai Corp. of the Phil. v. Bank of the Phil. Islands, 66 SCRA 29 (1975), we ruled
that one who accepts and encashes a check from an individual knowing that the payee is a corporation
does so at his peril. Therefore, petitioner banks are liable to respondent Filipinas Orient. In fine, it must
be emphasized that the law imposes on the collecting bank the duty to diligently scrutinize the 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 on this field, and the law
thus holds it to a high standard of conduct. Since petitioner banks negligence was the direct cause of
the misappropriation of the checks, they should bear and answer for respondent Filipinas Orients loss,
without prejudice to their filing of an appropriate action against Yu Kio.
PETITIONS for review on certiorari of the decision and resolution of the Court of Appeals.

The facts are stated in the opinion of the Court.


Perez & Calima Law Office for Metropolitan Bank & Trust Company.
Siguion Reyna, Montecillo & Ongsiako for respondent PBCom.
Maximo Z. Banaga, Jr. for Solid Bank Corporation.
Quisumbing, Torres Law Offices for respondent Filipinas Orient Finance Corporation.
SANDOVAL-GUTIERREZ, J.:

Sometime in 1978, Pipe Master Corporation (Pipe Master) represented by Yu Kio, its president, applied
for check discounting with Filipinas Orient Finance Corporation (Filipinas Orient). The latter approved
and granted the same.
559

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559
Metropolitan Bank and Trust Company vs. Philippine Bank of Communications
On July 1, 1978, the Board of Directors of Pipe Master issued a Board Resolution authorizing Yu Kio, in
his capacity as president, and/or Tan Juan Lian, in his capacity as vicepresident, to execute, indorse,

make, sign, deliver or negotiate instruments, documents and such other papers necessary in connection
with any transaction coursed through Filipinas Orient for and in behalf of the corporation.
Tan Juan Lian then executed in favor of Filipinas Orient a continuing guaranty that he shall pay at
maturity any and all promissory notes, drafts, checks, or other instruments or evidence of indebtedness
for which Pipe Master may become liable; that the extent of his liability shall not at any one time exceed
the sum of P1,000,000.00; and that in the event of default by Pipe Master, Filipinas Orient may proceed
directly against him.
On April 9, 1980, under the check discounting agreement between Pipe Master and Filipinas Orient, Yu
Kio sold to Filipinas Orient four Metropolitan Bank and Trust Company (Metro Bank) checks amounting
to P1,000,000.00. In exchange for the four Metro Bank checks, Filipinas Orient issued to Yu Kio four
Philippine Bank of Communications (PBCom) crossed checks totaling P964,303.62, payable to Pipe
Master with the statement for payees account only.
Upon his receipt of the four PBCom checks, Yu Kio indorsed and deposited in the Metro Bank, in his
personal account, three of the checks valued at P721,596.95. As to the remaining check amounting to
P242,706.67, he deposited it in the Solid Bank Corporation (Solid Bank), also in his personal account.
Eventually, PBCom paid Metro Bank and Solid Bank the amounts of the checks. In turn, Metro Bank and
Solid Bank credited the value of the checks to the personal accounts of Yu Kio.
Subsequently, when Filipinas Orient presented the four Metro Bank checks equivalent to P1,000,000.00
it received from Yu Kio, they were dishonored by the drawee bank. Pipe Master, the drawer, refused to
pay the amounts of the checks,
560

560
SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. Philippine Bank of Communications
claiming that it never received the proceeds of the PBCom checks as they were delivered and paid to the
wrong party, Yu Kio, who was not the named payee.
Filipinas Orient then demanded that PBCom restore to its (Filipinas Orients) account the value of the
PBCom checks. In turn, PBCom sought reimbursement from Metro Bank and Solid Bank, being the
collecting banks, but they refused. Thus, Filipinas Orient filed with the Regional Trial Court (RTC), Branch
39, Manila a complaint for a sum of money against Pipe Master, Tan Juan Lian and/or PBCom.
In their answer to the complaint, Pipe Master and Tan Juan Lian averred that they did not authorize Yu
Kio to negotiate and enter into discounting transaction with Filipinas Orient, and even if Yu Kio was so
authorized, Pipe Master never received the proceeds of the checks. Consequently, they filed a cross-

claim against PBCom for gross negligence for having paid the wrong party. In turn, PBCom, Pipe Master
and Tan Juan Lian filed third-party complaints against Metro Bank and Solid Bank.
On July 12, 1990, the RTC rendered a Decision against Metro Bank and Solid Bank, the dispositive
portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered:
1. Ordering third-party defendant Metro Bank to pay plaintiff the amount of Seven Hundred Twenty One
Thousand Five Hundred Ninety Six Pesos and Ninety-Five Centavos (P721,596.95) plus legal interest;
2. Ordering third-party defendant Solid Bank to pay plaintiff the amount of Two Hundred Forty-Two
Thousand Seven Hundred Six Pesos and Sixty-Seven Centavos (P242,706.67) plus legal interest;
3. Ordering third-party defendants to pay the costs of suit.
SO ORDERED.
561

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561
Metropolitan Bank and Trust Company vs. Philippine Bank of Communications
On appeal, the appellate court affirmed in toto the Decision of the trial court. Metro Bank and Solid
Bank filed their respective motions for reconsideration but the same were denied.
Hence, the instant consolidated petitions for review on certiorari filed by Metro Bank and Solid Bank.
The issue for our resolution is whether Metro Bank and Solid Bank, petitioners, are liable to respondent
Filipinas Orient for accepting the PBCom crossed checks payable to Pipe Master.
Petitioner banks contend that respondents Pipe Master, Tan Juan Lian and/or PBCom should be made
liable to respondent Filipinas Orient for the value of the checks.
Respondents Pipe Master and Tan Juan Lian counter that although Yu Kio was expressly authorized to
indorse Pipe Masters checks, such authority extended only to acts done in the ordinary course of
business, not in his personal capacity. For its part, respondent Filipinas Orient contends that petitioner
banks were negligent in allowing Yu Kio to deposit the PBCom checks in his account. Respondent
PBCom, as the drawee bank, maintains that it has no liability because in clearing the checks, it relied on
the express guarantee made by petitioner banks that the checks were validly indorsed.
We find in favor of respondents.

A check is defined by law as a bill of exchange drawn on a bank payable on demand.1 The Negotiable
Instruments Law is silent with respect to crossed checks. Nonetheless, this Court has taken judicial
cognizance of the practice that a check with two parallel lines on the upper left hand corner means that
it could only be deposited and not converted into cash.2 The crossing of a check with the phrase
Payees Account Only is a warning that the check should be deposited
_______________

1 Section 185, Act No. 2031, The Negotiable Instruments Law.


2 State Investment House v. Intermediate Appellate Court, G.R. No. 72764, July 13, 1989, 175 SCRA 310.
562

562
SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. Philippine Bank of Communications
in the account of the payee. It is the collecting bank which is bound to scrutinize the check and to know
its depositors before it can make the clearing indorsement, all prior indorsements and/or lack of
indorsement guaranteed.3
Here, petitioner banks have the obligation to ensure that the PBCom checks were deposited in
accordance with the instructions stated in the checks.4 The four PBCom checks in question had been
crossed and issued for payees account only. This could only mean that the drawer, Filipinas Orient,
intended the same for deposit only by the payee, Pipe Master. The effect of crossing a check means that
the drawer had intended the check for deposit only by the rightful person, i.e., the payee named
therein5Pipe Master.
As what transpired in this case, petitioner banks accommodated Yu Kio, being a valued client and the
president of Pipe Master, and accepted the crossed checks. They stamped at the back thereof that all
prior indorsements and/or lack of indorsements are guaranteed. In so doing, they became general
endorsers. 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 a good title to it; that all
prior parties had capacity to contract; and that the instrument is at the time of his indorsement valid
and subsisting.
Clearly, petitioner banks, being endorsers, cannot deny liability.
_______________

3 Philippine Commercial International Bank v. Court of Appeals, G.R. No. 121413, January 29, 2001, 350
SCRA 446.
4 Under Section 72 of the Negotiable Instruments Law, presentment for payment, to be sufficient, must
be made by the holder, or by some person authorized to receive payment on his behalf.
5 Yang v. Court of Appeals, G.R. No. 138074, August 15, 2003, 409 SCRA 159.
563

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563
Metropolitan Bank and Trust Company vs. Philippine Bank of Communications
In Associated Bank v. Court of Appeals,6 we held that the collecting bank or last endorser generally
suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements and is
privy to the depositor who negotiated the check.
PBCom, as the drawee bank, cannot be held liable since it mainly relied on the express guarantee made
by petitioners, the collecting banks, of all prior indorsements.
Evidently, petitioner banks disregarded established banking rules and procedures. They were negligent
in accepting the checks and allowing the transaction to push through. In Jai-Alai Corp. of the Phil. v. Bank
of the Phil. Islands,7 we ruled that one who accepts and encashes a check from an individual knowing
that the payee is a corporation does so at his peril. Therefore, petitioner banks are liable to respondent
Filipinas Orient.
In fine, it must be emphasized that the law imposes on the collecting bank the duty to diligently
scrutinize the 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 on
this field, and the law thus holds it to a high standard of conduct.8 Since petitioner banks negligence
was the direct cause of the misappropriation of the checks, they should bear and answer for respondent
Filipinas Orients loss, without prejudice to their filing of an appropriate action against Yu Kio.
_______________

6 G.R. Nos. 107382 and 107612, January 31, 1996, 252 SCRA 620, citing Bank of the Philippine Islands v.
Court of Appeals, G.R. No. 102383, November 26, 1992, 216 SCRA 51.

7 No. L-29432, August 6, 1975, 66 SCRA 29.


8 Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corp., No. L-74917, January 20, 1988,
157 SCRA 188.
564

564
SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. Philippine Bank of Communications
WHEREFORE, we DENY the petitions. The challenged Decision9 and Resolution of the Court of Appeals in
CA-G.R. CV No. 30702 are AFFIRMED. Costs against petitioners. SO ORDERED.
Puno (C.J., Chairperson), Corona, Azcuna and Garcia, JJ., concur.
Petitions denied, judgment and resolution affirmed.
Notes.A managers check is like a cashiers check which, in the commercial world, is regarded
substantially to be as good as the money it represents. (Bank of the Philippine Islands vs. Court of
Appeals, 326 SCRA 641 [2000])
A cashiers check is a primary obligation of the issuing bank and accepted in advance by its mere
issuance, and, by its peculiar character and general use in the commercial world, is regarded
substantially to be as good as the money which it represents. (Tan vs. Court of Appeals, 239 SCRA 310
[1994])
o0o

_______________

9 Penned by Associate Justice B.A. Adefuin-De la Cruz and concurred in by Associate Justice Eugenio S.
Labitoria (retired) and Associate Justice Presbitero J. Velasco, Jr. (now a member of this Court).
565

Copyright 2014 Central Book Supply, Inc. All rights reserved. [Metropolitan Bank and Trust Company
vs. Philippine Bank of Communications, 536 SCRA 556(2007)]

BANK OF AMERICA NT & SA, petitioner, vs. PHILIPPINE RACING CLUB, respondent.
Banks and Banking; Negotiable Instruments Law; If the signatures are genuine, the bank has the
unavoidable legal and contractual duty to pay.Petitioner insists that it merely fulfilled its obligation
under law and contract when it encashed the aforesaid checks. Invoking Sections 126 and 185 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. The genuine signatures of the clients duly authorized signatories affixed on the checks
signify the order for payment. 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.
Same; Same; A material alteration is defined in Section 125 of the Negotiable Instruments Law (NIL) to
be one which changes the date, the sum payable, the time or place of payment, the number or relations
of the parties, the currency in which payment is to be made or one which adds a place of payment
where no place of payment is specified, or any change or addition which alters the effect of the
instrument in any respect.Petitioner maintains that there exists a duty on the drawee bank to inquire
from the drawer before encashing a check only when the check bears a material alteration. A material
alteration is defined in Section 125 of the NIL to be one which changes the date, the sum payable, the
time or place of payment, the number or relations of the parties, the currency in which payment is to be
made or one which adds a place of payment where no place of payment is specified, or any other
change or addition which alters the effect of the instrument in any respect. With respect to the checks
at issue, petitioner points out that they do not contain
_______________

* FIRST DIVISION.
302

302
SUPREME COURT REPORTS ANNOTATED
Bank of America NT & SA vs. Philippine Racing Club
any material alteration. This is a fact which was affirmed by the trial court itself.
Same; It is well-settled that banks are engaged in a business impressed with public interest, and it is
their duty to protect in return their many clients and depositors who transact business with them.It is

well-settled that banks are engaged in a business impressed with public interest, and it is their duty to
protect in return their many clients and depositors who transact business with them. 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.
Same; Every client should be treated equally by a banking institution regardless of the amount of his
deposits and each client has the right to expect that every centavo he entrusts to a bank would be
handled with the same degree of care as the accounts of other clients.Taking this with the testimony
of petitioners operations manager that in case of an irregularity on the face of the check (such as when
blanks were not properly filled out) the bank may or may not call the client depending on how busy the
bank is on a particular day, we are even more convinced that petitioners safeguards to protect clients
from check fraud are arbitrary and subjective. Every client should be treated equally by a banking
institution regardless of the amount of his deposits and each client has the right to expect that every
centavo he entrusts to a bank would be handled with the same degree of care as the accounts of other
clients. Perforce, we find that petitioner plainly failed to adhere to the high standard of diligence
expected of it as a banking institution.
Same; Doctrine of Last Clear Chance; In instances where both parties are at fault, this Court has
consistently applied the doctrine of last clear chance in order to assign liability.Even if we assume that
both parties were guilty of negligent acts that led to the loss, petitioner will still emerge as the party
foremost liable in this case. In instances where both parties are at fault, this Court has consistently
applied the doctrine of last clear chance in order to assign liability. In Westmont Bank v. Ong, 375 SCRA
212 (2002), we ruled: *I+t is petitioner *bank+ which had the last clear chance to stop the fraudulent
encashment of the subject checks had it exercised due diligence
303

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Bank of America NT & SA vs. Philippine Racing Club
and followed the proper and regular banking procedures in clearing checks. As we had earlier ruled, the
one who had a last clear opportunity to avoid the impending harm but failed to do so is chargeable with
the consequences thereof.
Damages; 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.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.
Attorneys Fees; An adverse decision does not ipso facto justify an award of attorneys fees to the
winning party.We find that the awards of attorneys fees and litigation expenses in favor of
respondent are not justified under the circumstances and, thus, must be deleted. The power of the
court to award attorneys fees and litigation expenses under Article 2208 of the NCC demands factual,
legal, and equitable justification. An adverse decision does not ipso facto justify an award of attorneys
fees to the winning party. Even when a claimant is compelled to litigate with third persons or to incur
expenses to protect his rights, still attorneys fees may not be awarded where no sufficient showing of
bad faith could be reflected in a partys persistence in a case other than an erroneous conviction of the
righteousness of his cause.
PETITION for review on certiorari of the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Sycip, Salazar, Hernandez & Gatmaitan for petitioner.
Reyno, Tiu, Domingo & Santos for respondent.
304

304
SUPREME COURT REPORTS ANNOTATED
Bank of America NT & SA vs. Philippine Racing Club
LEONARDO-DE CASTRO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court from the Decision1
promulgated on July 16, 2001 by the former Second Division of the Court of Appeals (CA), in CA-G.R. CV
No. 45371 entitled Philippine Racing Club, Inc. v. Bank of America NT & SA, affirming the Decision2
dated March 17, 1994 of the Regional Trial Court (RTC) of Makati, Branch 135 in Civil Case No. 89-5650,
in favor of the respondent. Likewise, the present petition assails the Resolution3 promulgated on
September 28, 2001, denying the Motion for Reconsideration of the CA Decision.
The facts of this case as narrated in the assailed CA Decision are as follows:
Plaintiff-appellee PRCI is a domestic corporation which maintains several accounts with different banks
in the Metro Manila area. Among the accounts maintained was Current Account No. 58891-012 with
defendant-appellant BA (Paseo de Roxas Branch). The authorized joint signatories with respect to said
Current Account were plaintiff-appellees President (Antonia Reyes) and Vice President for Finance
(Gregorio Reyes).

On or about the 2nd week of December 1988, the President and Vice President of plaintiff-appellee
corporation were scheduled to go out of the country in connection with the corporations business. In
order not to disrupt operations in their absence, they pre-signed several checks relating to Current
Account No. 58891-012. The intention was to insure continuity of plaintiff-appellees operations by
making available cash/money especially to settle obligations that might become due. These checks were
entrusted to the accountant with instruction to make use of the same as the need arose. The internal
arrangement was, in the event there was need to make use of the checks, the accountant would
prepare the corresponding voucher and thereafter complete the entries on the pre-signed checks.
_______________

1 Rollo, pp. 80-87.


2 Id., at pp. 122-126.
3 Id., at p. 89.
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Bank of America NT & SA vs. Philippine Racing Club
It turned out that on December 16, 1988, a John Doe presented to defendant-appellant bank for
encashment a couple of plaintiff-appellee corporations checks (Nos. 401116 and 401117) with the
indicated value of P110,000.00 each. It is admitted that these 2 checks were among those presigned by
plaintiff-appellee corporations authorized signatories.
The two (2) checks had similar entries with similar infirmities and irregularities. 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. Despite the highly irregular entries on the
face of the checks, defendant-appellant bank, without as much as verifying and/or confirming the
legitimacy of the checks considering the substantial amount involved and the obvious infirmity/defect of
the checks on their faces, encashed said checks. A verification process, even by was of a telephone call
to PRCI office, would have taken less than ten (10) minutes. But this was not done by BA. Investigation
conducted by plaintiff-appellee corporation yielded the fact that there was no transaction involving PRCI
that call for the payment of P220,000.00 to anyone. The checks appeared to have come into the hands
of an employee of PRCI (one Clarita Mesina who was subsequently criminally charged for qualified theft)

who eventually completed without authority the entries on the pre-signed checks. PRCIs demand for
defendant-appellant to pay fell on deaf ears. Hence, the complaint.4
After due proceedings, the trial court rendered a Decision in favor of respondent, the dispositive portion
of which reads:
PREMISES CONSIDERED, judgment is hereby rendered in favor of plaintiff and against the defendant,
and the latter is ordered to pay plaintiff:
(1) The sum of Two Hundred Twenty Thousand (P220,000.00) Pesos, with legal interest to be
computed from date of the filing of the herein complaint;
(2) The sum of Twenty Thousand (P20,000.00) Pesos by way of attorneys fees;
_______________

4 Id., at pp. 81-82.


306

306
SUPREME COURT REPORTS ANNOTATED
Bank of America NT & SA vs. Philippine Racing Club
(3) The sum of Ten Thousand (P10,000.00) Pesos for litigation expenses, and
To pay the costs of suit.
SO ORDERED.5
Petitioner appealed the aforesaid trial court Decision to the CA which, however, affirmed said decision
in toto in its July 16, 2001 Decision. Petitioners Motion for Reconsideration of the CA Decision was
subsequently denied on September 28, 2001.
Petitioner now comes before this Court arguing that:
I. The Court of Appeals gravely erred in holding that the proximate cause of respondents loss was
petitioners encashment of the checks.
A. The Court of Appeals gravely erred in holding that petitioner was liable for the amount of the checks
despite the fact that petitioner was merely fulfilling its obligation under law and contract.

B. The Court of Appeals gravely erred in holding that petitioner had a duty to verify the encashment,
despite the absence of any obligation to do so.
C. The Court of Appeals gravely erred in not applying Section 14 of the Negotiable Instruments Law,
despite its clear applicability to this case;
II. The Court of Appeals gravely erred in not holding that the proximate cause of respondents loss was
its own grossly negligent practice of pre-signing checks without payees and amounts and delivering
these pre-signed checks to its employees (other than their signatories).
III. The Court of Appeals gravely erred in affirming the trial courts award of attorneys fees despite the
absence of any applicable ground under Article 2208 of the Civil Code.
_______________

5 Id., at p. 126.
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Bank of America NT & SA vs. Philippine Racing Club
IV. The Court of Appeals gravely erred in not awarding attorneys fees, moral and exemplary damages,
and costs of suit in favor of petitioner, who clearly deserves them.6
From the discussions of both parties in their pleadings, the key issue to be resolved in the present case is
whether the proximate cause of the wrongful encashment of the checks in question was due to (a)
petitioners failure to make a verification regarding the said checks with the respondent in view of the
misplacement of entries on the face of the checks or (b) the practice of the respondent of pre-signing
blank checks and leaving the same with its employees.
Petitioner insists that it merely fulfilled its obligation under law and contract when it encashed the
aforesaid checks. Invoking Sections 1267 and 1858 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. The genuine signatures of the clients
duly authorized signatories affixed on the checks signify the order for payment. 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

_______________

6 Id., at pp. 55-56.


7 Sec. 126. Bill of exchange defined.A bill of exchange is an unconditional order in writing addressed
by one person to another, signed by the person giving it, requiring the person to whom it is addressed to
pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer.
8 Sec. 185. Check defined.A check is a bill of exchange drawn on a bank payable on demand. Except
as herein otherwise provided, the provisions of this act applicable to a bill of exchange payable on
demand apply to a check.
308

308
SUPREME COURT REPORTS ANNOTATED
Bank of America NT & SA vs. Philippine Racing Club
the corollary, but equally unavoidable legal and contractual, duty not to pay.9
Furthermore, petitioner maintains that there exists a duty on the drawee bank to inquire from the
drawer before encashing a check only when the check bears a material alteration. A material alteration
is defined in Section 125 of the NIL to be one which changes the date, the sum payable, the time or
place of payment, the number or relations of the parties, the currency in which payment is to be made
or one which adds a place of payment where no place of payment is specified, or any other change or
addition which alters the effect of the instrument in any respect. With respect to the checks at issue,
petitioner points out that they do not contain any material alteration.10 This is a fact which was
affirmed by the trial court itself.11
There is no dispute that the signatures appearing on the subject checks were genuine signatures of the
respondents authorized joint signatories; namely, Antonia Reyes and Gregorio Reyes who were
respondents President and Vice President for Finance, respectively. Both pre-signed the said checks
since they were both scheduled to go abroad and it was apparently their practice to leave with the
company accountant checks signed in black to answer for company obligations that might fall due
during the signatories absence. It is likewise admitted that neither of the subject checks contains any
material alteration or erasure.
However, on the blank space of each check reserved for the payee, the following typewritten words
appear: ONE HUNDRED TEN THOUSAND PESOS ONLY. Above the same is the typewritten word,

CASH. On the blank reserved for the amount, the same amount of One Hundred Ten Thousand Pesos
was indicated with the use of a check writer. The pres_______________

9 Rollo, pp. 296-297.


10 Id., at p. 298.
11 Id., at p. 125.
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Bank of America NT & SA vs. Philippine Racing Club
ence of these irregularities in each check should have alerted the petitioner to be cautious before
proceeding to encash them which it did not do.
It is well-settled that banks are engaged in a business impressed with public interest, and it is their duty
to protect in return their many clients and depositors who transact business with them. 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.12
Petitioner asserts that it was not duty-bound to verify with the respondent since the amount below the
typewritten word CASH, expressed in words, is the very same amount indicated in figures by means of
a check writer on the amount portion of the check. The amount stated in words is, therefore, a mere
reiteration of the amount stated in figures. Petitioner emphasizes that a reiteration of the amount in
words is merely a repetition and that a repetition is not an alteration which if present and material
would have enjoined it to commence verification with respondent.13
We do not agree with petitioners myopic view and carefully crafted defense. 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. Also, if the check had been filled
up by the person who customarily accomplishes the checks of respondent, it should
_______________

12 Samsung Construction Company Philippines, Inc. v. Far East Bank and Trust Company, Inc., G.R. No.
129015, August 13, 2004, 436 SCRA 402, 421.
13 Id., at p. 299.
310

310
SUPREME COURT REPORTS ANNOTATED
Bank of America NT & SA vs. Philippine Racing Club
have occurred to petitioners employees that it would be unlikely such mistakes would be made. All
these circumstances should have alerted the bank to the possibility that the holder or the person who is
attempting to encash the checks did not have proper title to the checks or did not have authority to fill
up and encash the same. As noted by the CA, petitioner could have made a simple phone call to its client
to clarify the irregularities and the loss to respondent due to the encashment of the stolen checks would
have been prevented.
In the case at bar, extraordinary diligence demands that petitioner should have ascertained from
respondent the authenticity of the subject checks or the accuracy of the entries therein not only
because of the presence of highly irregular entries on the face of the checks but also of the decidedly
unusual circumstances surrounding their encashment. Respondents witness testified that for checks in
amounts greater than Twenty Thousand Pesos (P20,000.00) it is the companys practice to ensure that
the payee is indicated by name in the check.14 This was not rebutted by petitioner. 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.
Indeed, taking this with the testimony of petitioners operations manager that in case of an irregularity
on the face of
_______________

14 TSN, testimony of Carlos H. Reyes, October 1, 1991, p. 3.

311

VOL. 594, JULY 30, 2009


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Bank of America NT & SA vs. Philippine Racing Club
the check (such as when blanks were not properly filled out) the bank may or may not call the client
depending on how busy the bank is on a particular day,15 we are even more convinced that petitioners
safeguards to protect clients from check fraud are arbitrary and subjective. Every client should be
treated equally by a banking institution regardless of the amount of his deposits and each client has the
right to expect that every centavo he entrusts to a bank would be handled with the same degree of care
as the accounts of other clients. Perforce, we find that petitioner plainly failed to adhere to the high
standard of diligence expected of it as a banking institution.
In defense of its cashier/tellers questionable action, petitioner insists that pursuant to Sections 1416
and 1617 of the
_______________

15 TSN, testimony of Rose Acuban, August 20, 1991, pp. 8-9.


16 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.
17 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
312

312
SUPREME COURT REPORTS ANNOTATED
Bank of America NT & SA vs. Philippine Racing Club
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.18 Petitioner argues that there was indeed
delivery in this case because, following American jurisprudence, the gross negligence of respondents
accountant in safekeeping the subject checks which resulted in their theft should be treated as a
voluntary delivery by the maker who is estopped from claiming non-delivery of the instrument.19
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
_______________

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.

18 Rollo, p. 304.
19 Id., at p. 306.
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VOL. 594, JULY 30, 2009

313
Bank of America NT & SA vs. Philippine Racing Club
incomplete and undelivered instruments thus making Section 1520 of the NIL applicable in this case.
However, we do agree with petitioner that respondents officers practice of pre-signing of blank checks
should be deemed seriously negligent behavior and a highly risky means of purportedly ensuring the
efficient operation of businesses. It should have occurred to respondents officers and managers that
the pre-signed blank checks could fall into the wrong hands as they did in this case where the said
checks were stolen from the company accountant to whom the checks were entrusted.
Nevertheless, even if we assume that both parties were guilty of negligent acts that led to the loss,
petitioner will still emerge as the party foremost liable in this case. In instances where both parties are
at fault, this Court has consistently applied the doctrine of last clear chance in order to assign liability.
In Westmont Bank v. Ong,21 we ruled:
*I+t is petitioner *bank+ which had the last clear chance to stop the fraudulent encashment of the
subject checks had it exercised due diligence and followed the proper and regular banking procedures in
clearing checks. As we had earlier ruled, the one who had a last clear opportunity to avoid the
impending harm but failed to do so is chargeable with the consequences thereof.22 (emphasis ours)
In the case at bar, petitioner cannot evade responsibility for the loss by attributing negligence on the
part of respon_______________

20 Sec. 15. Incomplete instrument not delivered.Where an incomplete instrument has not been
delivered it will not, if completed and negotiated, without authority, be a valid contract in the hands of
any holder, as against any person whose signature was placed thereon before delivery.
21 G.R. No. 132560, January 30, 2002, 375 SCRA 212.
22 Id., at p. 223, citing Philippine Bank of Commerce v. Court of Appeals, G.R. No. 97626, 269 SCRA 695,
707-708.
314

314
SUPREME COURT REPORTS ANNOTATED
Bank of America NT & SA vs. Philippine Racing Club

dent 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, petitioners 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. Failing to make the necessary verification due to the volume of banking transactions on
that particular day is a flimsy and unacceptable excuse, considering that the banking business is so
impressed with public interest where the trust and confidence of the public in general is of paramount
importance such that the appropriate standard of diligence must be a high degree of diligence, if not the
utmost diligence.23 Petitioners negligence has been undoubtedly established and, thus, pursuant to
Art. 1170 of the NCC,24 it must suffer the consequence of said negligence.
In the interest of fairness, however, we believe it is proper to consider respondents own negligence to
mitigate petitioners liability. Article 2179 of the Civil Code provides:
Art. 2179. When the plaintiffs 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 defendants lack of due care, the plaintiff may recover damages, but the
courts shall mitigate the damages to be awarded.
Explaining this provision in Lambert v. Heirs of Ray Castillon,25 the Court held:
_______________

23 Gempesaw v. Court of Appeals, G.R. No. 92244, February 9, 1993, 218 SCRA 682, 697.
24 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.
25 G.R. No. 160709, February 23, 2005, 452 SCRA 285, 293.
315

VOL. 594, JULY 30, 2009


315
Bank of America NT & SA vs. Philippine Racing Club
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

As we previously stated, respondents practice of signing checks in blank whenever its authorized bank
signatories would travel abroad was a dangerous policy, especially considering the lack of evidence on
record that respondent had appropriate safeguards or internal controls to prevent the pre-signed blank
checks from falling into the hands of unscrupulous individuals and being used to commit a fraud against
the company. We cannot believe that there was no other secure and reasonable way to guarantee the
non-disruption of respondents business. As testified to by petitioners expert witness, other
corporations would ordinarily have another set of authorized bank signatories who would be able to
sign checks in the absence of the preferred signatories.26 Indeed, if not for the fortunate happenstance
that the thief failed to properly fill up the subject checks, respondent would expectedly take the blame
for the entire loss since the defense of forgery of a drawers signature(s) would be unavailable to it.
Considering that respondent knowingly took the risk that the pre-signed blank checks might fall into the
hands of wrongdoers, it is but just that respondent shares in the responsibility for the loss.
We also cannot ignore the fact that the person who stole the pre-signed checks subject of this case from
respondents accountant turned out to be another employee, purportedly a clerk in respondents
accounting department. As the employer of the thief, respondent supposedly had control and supervi_______________

26 TSN, testimony of Gerardo Martin, a certified public accountant/auditor from Sycip Gorres & Velayo,
February 25, 1992, p. 6.
316

316
SUPREME COURT REPORTS ANNOTATED
Bank of America NT & SA vs. Philippine Racing Club
sion over its own employee. This gives the Court more reason to allocate part of the loss to respondent.
Following established jurisprudential precedents,27 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.
Finally, we find that the awards of attorneys fees and litigation expenses in favor of respondent are not
justified under the circumstances and, thus, must be deleted. The power of the court to award
attorneys fees and litigation expenses under Article 2208 of the NCC28 demands factual, legal, and
equitable justification.

_______________

27 Philippine Bank of Commerce v. Court of Appeals, G.R. No. 97626, March 14, 1997, 269 SCRA 695;
Consolidated Bank and Trust Corporation v. Court of Appeals, G.R. No. 138569, September 11, 2003, 410
SCRA 562.
28 Art. 2208. In the absence of stipulation, attorneys fees and expenses of litigation, other than
judicial costs, cannot be recovered, except:
(1) When exemplary damages are awarded;
(2) When the defendants act or omission has compelled
the plaintiff to litigate with third persons or to incur
expenses to protect his interest;
(3) In criminal cases of malicious prosecution against the
plaintiff;
(4) In case of a clearly unfounded civil action or proceeding
against the plaintiff;
(5) Where the defendant acted in gross and evident bad
faith in refusing to satisfy the plaintiffs plainly valid,
just and demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household
helpers, laborers and skilled workers;
317

VOL. 594, JULY 30, 2009


317
Bank of America NT & SA vs. Philippine Racing Club

An adverse decision does not ipso facto justify an award of attorneys fees to the winning party.29 Even
when a claimant is compelled to litigate with third persons or to incur expenses to protect his rights, still
attorneys fees may not be awarded where no sufficient showing of bad faith could be reflected in a
partys persistence in a case other than an erroneous conviction of the righteousness of his cause.30
WHEREFORE, the Decision of the Court of Appeals dated July 16, 2001 and its Resolution dated
September 28, 2001 are AFFIRMED with the following MODIFICATIONS: (a) petitioner Bank of America
NT & SA shall pay to respondent Philippine Racing Club sixty percent (60%) of the sum of Two Hundred
Twenty Thousand Pesos (P220,000.00) with legal interest as awarded by the trial court and (b) the
awards of attorneys fees and litigation expenses in favor of respondent are deleted.
Proportionate costs.
SO ORDERED.
Puno (C.J., Chairperson), Carpio, Corona and Bersamin, JJ., concur.
_______________

(8) In actions for indemnity under workmens


compensation and employers liability laws;
(9) In a separate civil action to recover civil liability
arising from a crime;
(10) When at least double judicial costs are awarded;
(11) In any other case where the court deems it just and
equitable that attorneys fees and expenses of
litigation should be recovered.
In all cases, the attorneys fees and expenses of litigation must be reasonable.
29 J Marketing Corp. v. Sia, Jr., G.R. No. 127823, January 29, 1998, 285 SCRA 580, 584.
30 Felsan Realty & Development Corporation v. Commonwealth of Australia, G.R. No. 169656, October
11, 2007, 535 SCRA 618, 632.
Copyright 2014 Central Book Supply, Inc. All rights reserved. [Bank of America NT & SA vs. Philippine
Racing Club, 594 SCRA 301(2009)]

THE INTERNATIONAL CORPORATE BANK, INC., petitioner, vs. COURT OF APPEALS and PHILIPPINE
NATIONAL BANK, respondents.
Appeals; Petitioners may not delegate upon the court the task of determining under which rule the
petition should fall; A petition cannot be subsumed simultaneously under Rule 45 and Rule 65 of the
Rules of Court, and neither may petitioners delegate upon the court the task of determining under
which rule the petition should fall.Respondent asserts that the petition should be dismissed outright
since petitioner availed of a wrong mode of appeal. Respondent cites Ybaez v. Court of Appeals, 253
SCRA 540 (1996), where the Court ruled that a petition cannot be subsumed simultaneously under Rule
45 and Rule 65 of the Rules of Court, and neither may petitioners delegate upon the court the task of
determining under which rule the petition should fall.
Same; Certiorari; The remedies of appeal and certiorari are mutually exclusive and not alternative or
successive; However, this Court may set aside technicality for justifiable reasons and in the interest of
justice, we will treat the petition as having been filed under Rule 45.The remedies of appeal and
certiorari are mutually exclusive and not alternative or successive. However, this Court may set aside
technicality for justifiable reasons. The petition before the Court is clearly meritorious. Further, the
petition was filed on time both under Rules 45 and 65. Hence, in accordance with the liberal spirit which
pervades the Rules of Court and in the interest of justice, we will treat the petition as having been filed
under Rule 45.
Negotiable Instruments Law; Material Alterations; The alteration on the serial number of a check is not a
material alteration.The question on whether an alteration of the serial number of a check is a material
alteration under the Negotiable Instruments Law is already a settled matter. In Philippine National Bank
v. Court of Appeals, 256 SCRA 491 (1996), this Court ruled that the alteration on the serial number of a
check is not a material alteration. Thus:
_______________

* THIRD DIVISION.
21

VOL. 501, SEPTEMBER 5, 2006


21
International Corporate Bank, Inc. vs. Court of Appeals
An alteration is said to be material if it alters the effect of the instrument. It means an unauthorized
change in an instrument that purports to modify in any respect the obligation of a party or an
unauthorized addition of words or numbers or other change to an incomplete instrument relating to the

obligation of a party. In other words, a material alteration is one which changes the items which are
required to be stated under Section 1 of the Negotiable Instrument[s] Law.
Appeals; There are instances when rules of procedure are relaxed in the interest of justice, however, in
this case, respondent did not proffer any explanation for the late filing of the motion of
reconsideration.There are instances when rules of procedure are relaxed in the interest of justice.
However, in this case, respondent did not proffer any explanation for the late filing of the motion for
reconsideration. Instead, there was a deliberate attempt to deceive the Court of Appeals by claiming
that the copy of the 10 October 1991 Decision was received on 22 October 1991 instead of on 16
October 1991. We find no justification for the posture taken by the Court of Appeals in admitting the
motion for reconsideration. Thus, the late filing of the motion for reconsideration rendered the 10
October 1991 Decision final and executory.
Banks and Banking; Material Alterations; Since there were no material alterations on the checks,
respondent as drawee bank has no right to dishonor them and return them to petitioner, the collecting
bank.The Court will not rule on the proper application of Central Bank Circular No. 580 in this case.
Since there were no material alterations on the checks, respondent as drawee bank has no right to
dishonor them and return them to petitioner, the collecting bank. Thus, respondent is liable to
petitioner for the value of the checks, with legal interest from the time of filing of the complaint on 16
March 1982 until full payment. Further, considering that respondents motion for reconsideration was
filed late, the 10 October 1991 Decision, which held respondent liable for the value of the checks
amounting to P1,447,920, had become final and executory.
PETITION for review on certiorari of the amended decision and resolution of the Court of Appeals.

The facts are stated in the opinion of the Court.


22

22
SUPREME COURT REPORTS ANNOTATED
International Corporate Bank, Inc. vs. Court of Appeals
Macalino & Associates for petitioner.
Salvador A. Uy for respondent.
CARPIO, J.:

The Case
Before the Court is a petition for review1 assailing the 9 August 1994 Amended Decision2 and the 16
July 1997 Resolution3 of the Court of Appeals in CA-G.R. CV No. 25209.
The Antecedent Facts
The case originated from an action for collection of sum of money filed on 16 March 1982 by the
International Corporate Bank, Inc.4 (petitioner) against the Philippine National Bank (respondent).
The case was raffled to the then Court of First Instance (CFI) of Manila, Branch 6. The complaint was
amended on 19 March 1982. The case was eventually reraffled to the Regional Trial Court of Manila,
Branch 52 (trial court).
The Ministry of Education and Culture issued 15 checks5 drawn against respondent which petitioner
accepted for deposit on various dates. The checks are as follows:
_______________

1 Petitioner denominated the petition as filed under both Rule 45 and Rule 65 of the 1997 Rules of Civil
Procedure.
2 Penned by Associate Justice Serafin V.C. Guingona with Associate Justices Jorge S. Imperial and Justo P.
Torres, Jr., concurring. Rollo, pp. 25-34.
3 Penned by Associate Justice Jorge S. Imperial with Associate Justices Ramon U. Mabutas, Jr. and
Hilarion L. Aquino, concurring. Rollo, p. 23.
4 Now the Union Bank of the Philippines.
5 The first 14 checks were the subject of the complaint while the last check was included in the
amended complaint.
23

VOL. 501, SEPTEMBER 5, 2006


23
International Corporate Bank, Inc. vs. Court of Appeals
Check Number
Date

Payee
Amount
7-3694621-4
7-20-81
Trade Factors, Inc.
P 97,500.00
7-3694609-6
7-27-81
Romero D. Palmares
98,500.50
7-3666224-4
8-03-81
Trade Factors, Inc.
99,800.00
7-3528348-4
8-07-81
Trade Factors, Inc.
98,600.00
7-3666225-5
8-10-81
Antonio Lisan
98,900.00
7-3688945-6
8-10-81
Antonio Lisan

97,700.00
7-4535674-1
8-21-81
Golden City Trading
95,300.00
7-4535675-2
8-21-81
Red Arrow Trading
96,400.00
7-4535699-5
8-24-81
Antonio Lisan
94,200.00
7-4535700-6
8-24-81
Antonio Lisan
95,100.00
7-4697902-2
9-18-81
Ace Enterprises, Inc.
96,000.00
7-4697925-6
9-18-81
Golden City Trading
93,030.00

7-4697011-6
10-02-81
Wintrade Marketing
90,960.00
7-4697909-4
10-02-81
ABC Trading, Inc.
99,300.00
7-4697922-3
10-05-81
Golden Enterprises
96,630.00
The checks were deposited on the following dates for the following accounts:
Check Number
Date Deposited
Account Deposited
7-3694621-4
7-23-81
CA 0060 02360 3
7-3694609-6
7-28-81
CA 0060 02360 3
7-3666224-4
8-4-81
CA 0060 02360 3

7-3528348-4
8-11-81
CA 0060 02360 3
7-3666225-5
8-11-81
SA 0061 32331 7
7-3688945-6
8-17-81
CA 0060 30982 5
7-4535674-1
8-26-81
CA 0060 02360 3
7-4535675-2
8-27-81
CA 0060 02360 3
7-4535699-5
8-31-81
CA 0060 30982 5
7-4535700-6
8-24-81
SA 0061 32331 7
7-4697902-2
9-23-81
CA 0060 02360 3
7-4697925-6

9-23-81
CA 0060 30982 5
7-4697011-6
10-7-81
CA 0060 02360 3
7-4697909-4
10-7-81
CA 0060 30982 56
_______________

6 The deposit slip of Check No. 7-4697922-3 was not presented before the trial court.
24

24
SUPREME COURT REPORTS ANNOTATED
International Corporate Bank, Inc. vs. Court of Appeals
After 24 hours from submission of the checks to respondent for clearing, petitioner paid the value of the
checks and allowed the withdrawals of the deposits. However, on 14 October 1981, respondent
returned all the checks to petitioner without clearing them on the ground that they were materially
altered. Thus, petitioner instituted an action for collection of sums of money against respondent to
recover the value of the checks.
The Ruling of the Trial Court
The trial court ruled that respondent is expected to use reasonable business practices in accepting and
paying the checks presented to it. Thus, respondent cannot be faulted for the delay in clearing the
checks considering the ingenuity in which the alterations were effected. The trial court observed that
there was no attempt from petitioner to verify the status of the checks before petitioner paid the value
of the checks or allowed withdrawal of the deposits. According to the trial court, petitioner, as collecting
bank, could have inquired by telephone from respondent, as drawee bank, about the status of the
checks before paying their value. Since the immediate cause of petitioners loss was the lack of caution

of its personnel, the trial court held that petitioner is not entitled to recover the value of the checks
from respondent.
The dispositive portion of the trial courts Decision reads:
WHEREFORE, judgment is hereby rendered dismissing both the complaint and the counterclaim. Costs
shall, however be assessed against the plaintiff.
SO ORDERED.7
Petitioner appealed the trial courts Decision before the Court of Appeals.
_______________

7 Rollo, p. 295.
25

VOL. 501, SEPTEMBER 5, 2006


25
International Corporate Bank, Inc. vs. Court of Appeals
The Ruling of the Court of Appeals
In its 10 October 1991 Decision,8 the Court of Appeals reversed the trial courts Decision. Applying
Section 4(c) of Central Bank Circular No. 580, series of 1977,9 the Court of Ap-peals held that checks that
have been materially altered shall be returned within 24 hours after discovery of the alteration.
However, the Court of Appeals ruled that even if the drawee bank returns a check with material
alterations after discovery of the alteration, the return would not relieve the drawee bank from any
liability for its failure to return the checks within the 24-hour clearing period. The Court of Appeals
explained:
_______________

8 Penned by Associate Justice Serafin V.C. Guingona with Associate Justices Luis A. Javellana and Jorge S.
Imperial, concurring. Rollo, pp. 47-58.
9 Section 4(c) provides:
SECTION 4. Clearing Procedures.

xxxx
(c) Procedure for Returned Items
Items which should be returned for any reason whatsoever shall be presented not later than the next
regular clearing for local exchanges. Out-of-town exchanges shall be returned within the period
specified in the Memorandum to Authorized Agent Banks announcing the opening of clearing facilities in
each of the authorized regional clearing centers. x x x
Items which have been the subject of a material alteration or items bearing a forged endorsement when
such endorsement is necessary for negotiation shall be returned within twenty-four (24) hours after
discovery of the alteration or the forgery but in no event beyond the period fixed or provided by law for
filing of a legal action by the returning bank/branch, institution or entity against the bank/branch,
institution or entity sending the same.
xxxx
26

26
SUPREME COURT REPORTS ANNOTATED
International Corporate Bank, Inc. vs. Court of Appeals
Does this mean that, as long as the drawee bank returns a check with material alteration within 24
hour[s] after discovery of such alteration, such return would have the effect of relieving the bank of any
liability whatsoever despite its failure to return the check within the 24-hour clearing house rule?
We do not think so.
Obviously, such bank cannot be held liable for its failure to return the check in question not later than
the next regular clearing. However, this Court is of the opinion and so holds that it could still be held
liable if it fails to exercise due diligence in verifying the alterations made. In other words, such bank
would still be expected, nay required, to make the proper verification before the 24-hour regular
clearing period lapses, or in cases where such lapses may be deemed inevitable, that the required
verification should be made within a reasonable time.
The implication of the rule that a check shall be returned within the 24-hour clearing period is that if the
collecting bank paid the check before the end of the aforesaid 24-hour clearing period, it would be
responsible therefor such that if the said check is dishonored and returned within the 24-hour clearing
period, the drawee bank cannot be held liable. Would such an implication apply in the case of materially
altered checks returned within 24 hours after discovery? This Court finds nothing in the letter of the
above-cited C.B. Circular that would justify a negative answer. Nonetheless, the drawee bank could still

be held liable in certain instances. Even if the return of the check/s in question is done within 24 hours
after discovery, if it can be shown that the drawee bank had been patently negligent in the performance
of its verification function, this Court finds no reason why the said bank should be relieved of liability.
Although banking practice has it that the presumption of clearance is conclusive when it comes to the
application of the 24-hour clearing period, the same principle may not be applied to the 24-hour period
vis--vis material alterations in the sense that the drawee bank which returns materially altered checks
within 24 hours after discovery would be conclusively relieved of any liability thereon. This is because
there could well be various intervening events or factors that could affect the rights and obligations of
the parties in cases such as the instant one including patent negligence on the part of the drawee bank
resulting in an unreasonable delay in detecting the alterations. While it is true that the pertinent proviso
27

VOL. 501, SEPTEMBER 5, 2006


27
International Corporate Bank, Inc. vs. Court of Appeals
in C.B. Circular No. 580 allows the drawee bank to return the altered check within the period provided
by law for filing a legal action, this does not mean that this would entitle or allow the drawee bank to
be grossly negligent and, in spite thereof, avail itself of the maximum period allowed by the above-cited
Circular. The discovery must be made within a reasonable time taking into consideration the facts and
circumstances of the case. In other words, the aforementioned C.B. Circular does not provide the
drawee bank the license to be grossly negligent on the one hand nor does it preclude the collecting bank
from raising available defenses even if the check is properly returned within the 24-hour period after
discovery of the material alteration.10
The Court of Appeals rejected the trial courts opinion that petitioner could have verified the status of
the checks by telephone call since such imposition is not required under Central Bank rules. The
dispositive portion of the 10 October 1991 Decision reads:
PREMISES CONSIDERED, the decision appealed from is hereby REVERSED and the defendant-appellee
Philippine National Bank is declared liable for the value of the fifteen checks specified and enumerated
in the decision of the trial court (page 3) in the amount of P1,447,920.00.
SO ORDERED.11
Respondent filed a motion for reconsideration of the 10 October 1991 Decision. In its 9 August 1994
Amended Decision, the Court of Appeals reversed itself and affirmed the Decision of the trial court
dismissing the complaint.

In reversing itself, the Court of Appeals held that its 10 October 1991 Decision failed to appreciate that
the rule on the return of altered checks within 24 hours from the discovery of the alteration had been
duly passed by the Central Bank and accepted by the members of the banking system. Until the rule is
repealed or amended, the rule has to be applied.
_______________

10 Rollo, pp. 53-54.


11 Id., at p. 58.
28

28
SUPREME COURT REPORTS ANNOTATED
International Corporate Bank, Inc. vs. Court of Appeals
Petitioner moved for the reconsideration of the Amended Decision. In its 16 July 1997 Resolution, the
Court of Appeals denied the motion for lack of merit.
Hence, the recourse to this Court.
The Issues
Petitioner raises the following issues in its Memorandum:
1. Whether the checks were materially altered;
2. Whether respondent was negligent in failing to recognize within a reasonable period the altered
checks and in not returning the checks within the period; and
3. Whether the motion for reconsideration filed by respondent was out of time thus making the 10
October 1991 Decision final and executory.12
The Ruling of This CourtFiling of the Petition under both Rules 45 and 65
Respondent asserts that the petition should be dismissed outright since petitioner availed of a wrong
mode of appeal. Respondent cites Ybaez v. Court of Appeals,13 where the Court ruled that a petition
cannot be subsumed simultaneously under Rule 45 and Rule 65 of the Rules of Court, and neither may
petitioners delegate upon the court the task of determining under which rule the petition should fall.

The remedies of appeal and certiorari are mutually exclusive and not alternative or successive.14
However, this Court may set aside technicality for justifiable reasons. The petition before the Court is
clearly meritorious. Further, the petition
_______________

12 Id., at pp. 251-252.


13 323 Phil. 643; 253 SCRA 540 (1996).
14 Ligon v. Court of Appeals, 355 Phil. 503; 294 SCRA 73 (1998).
29

VOL. 501, SEPTEMBER 5, 2006


29
International Corporate Bank, Inc. vs. Court of Appeals
was filed on time both under Rules 45 and 65.15 Hence, in accordance with the liberal spirit which
pervades the Rules of Court and in the interest of justice,16 we will treat the petition as having been
filed under Rule 45.
Alteration of Serial Number Not Material
The alterations in the checks were made on their serial numbers.
Sections 124 and 125 of Act No. 2031, otherwise known as the Negotiable Instruments Law, provide:
SEC. 124. Alteration of instrument; effect of.Where a negotiable instrument is materially altered
without the assent of all parties liable thereon, it is avoided, except as against a party who has himself
made, authorized, or assented to the alteration and subsequent indorsers.
But when an instrument has been materially altered and is in the hands of a holder in due course, not a
party to the alteration, he may enforce payment thereof according to its original tenor.
SEC. 125. What constitutes a material alteration.Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;

(d) The number or the relations of the parties;


(e) The medium or currency in which payment is to be made; or which adds a place of payment where
no place of payment is specified, or any other change or addition which alters the effect of the
instrument in any respect, is a material alteration.
The question on whether an alteration of the serial number of a check is a material alteration under the
Negotiable In_______________

15 Nuez v. GSIS Family Bank, G.R. No. 163988, 17 November 2005, 475 SCRA 305.
16 Id.
30

30
SUPREME COURT REPORTS ANNOTATED
International Corporate Bank, Inc. vs. Court of Appeals
struments Law is already a settled matter. In Philippine National Bank v. Court of Appeals, this Court
ruled that the alteration on the serial number of a check is not a material alteration. Thus:
An alteration is said to be material if it alters the effect of the instrument. It means an unauthorized
change in an instrument that purports to modify in any respect the obligation of a party or an
unauthorized addition of words or numbers or other change to an incomplete instrument relating to the
obligation of a party. In other words, a material alteration is one which changes the items which are
required to be stated under Section 1 of the Negotiable Instrument*s+ Law.
Section 1 of the Negotiable Instruments Law provides:
Section 1. Form of negotiable instruments.An instrument to be negotiable must conform to the
following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein
with reasonable certainty.
In his book entitled Pandect of Commercial Law and Jurisprudence, Justice Jose C. Vitug opines that
an innocent alteration (generally, changes on items other than those required to be stated under Sec.
1, N.I.L.) and spoliation (alterations done by a stranger) will not avoid the instrument, but the holder
may enforce it only according to its original tenor.
xxxx
The case at the bench is unique in the sense that what was altered is the serial number of the check in
question, an item which, it can readily be observed, is not an essential requisite for negotiability under
Section 1 of the Negotiable Instruments Law. The aforementioned alteration did not change the
relations between the parties. The name of the drawer and the drawee were not altered. The in31

VOL. 501, SEPTEMBER 5, 2006


31
International Corporate Bank, Inc. vs. Court of Appeals
tended payee was the same. The sum of money due to the payee remained the same. x x x
xxxx
The checks serial number is not the sole indication of its origin. As succinctly found by the Court of
Appeals, the name of the government agency which issued the subject check was prominently printed
therein. The checks issuer was therefore sufficiently identified, rendering the referral to the serial
number redundant and inconsequential. x x x
xxxx
Petitioner, thus cannot refuse to accept the check in question on the ground that the serial number was
altered, the same being an immaterial or innocent one.17
Likewise, in the present case the alterations of the serial numbers do not constitute material alterations
on the checks.
Incidentally, we agree with the petitioners observation that the check in the PNB case appears to
belong to the same batch of checks as in the present case. The check in the PNB case was also issued by
the Ministry of Education and Culture. It was also drawn against PNB, respondent in this case. The serial
number of the check in the PNB case is 7-3666-223-3 and it was issued on 7 August 1981.

Timeliness of Filing of Respondents Motion for Reconsideration


Respondent filed its motion for reconsideration of the 10 October 1991 Decision on 6 November 1991.
Respondents motion for reconsideration states that it received a copy of the 10 October 1991 Decision
on 22 October 1991.18 Thus, it appears that the motion for reconsideration was filed on time. However,
the Registry Return Receipt shows that counsel for respondent or his agent received a copy of the 10
October
_______________

17 326 Phil. 504; 256 SCRA 491 (1996), 511-516; pp. 497-501.
18 CA Rollo, p. 86.
32

32
SUPREME COURT REPORTS ANNOTATED
International Corporate Bank, Inc. vs. Court of Appeals
1991 Decision on 16 October 1991,19 not on 22 October 1991 as respondent claimed. Hence, the Court
of Appeals is correct when it noted that the motion for reconsideration was filed late. Despite its late
filing, the Court of Appeals resolved to admit the motion for reconsideration in the interest of
substantial justice.20
There are instances when rules of procedure are relaxed in the interest of justice. However, in this case,
respondent did not proffer any explanation for the late filing of the motion for reconsideration. Instead,
there was a deliberate attempt to deceive the Court of Appeals by claiming that the copy of the 10
October 1991 Decision was received on 22 October 1991 instead of on 16 October 1991. We find no
justification for the posture taken by the Court of Appeals in admitting the motion for reconsideration.
Thus, the late filing of the motion for reconsideration rendered the 10 October 1991 Decision final and
executory.
The 24-Hour Clearing Time
The Court will not rule on the proper application of Central Bank Circular No. 580 in this case. Since
there were no material alterations on the checks, respondent as drawee bank has no right to dishonor
them and return them to petitioner, the collecting bank.21 Thus, respondent is liable to petitioner for
the value of the checks, with legal interest from the time of filing of the complaint on 16 March 1982
until full payment.22 Further, considering that respondents motion for reconsideration was filed late,

the 10 October 1991 Decision, which held respondent liable for the value of the checks amounting to
P1,447,920, had become final and executory.
_______________

19 Id., at p. 73.
20 Id., at p. 90.
21 Philippine National Bank v. Court of Appeals, supra note 17.
22 Article 2209, Civil Code.
33

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33
International Corporate Bank, Inc. vs. Court of Appeals
WHEREFORE, we SET ASIDE the 9 August 1994 Amended Decision and the 16 July 1997 Resolution of the
Court of Appeals. We rule that respondent Philippine National Bank is liable to petitioner International
Corporate Bank, Inc. for the value of the checks amounting to P1,447,920, with legal interest from 16
March 1982 until full payment. Costs against respondent.
SO ORDERED.
Quisumbing (Chairperson), Carpio-Morales, Tinga and Velasco, Jr., JJ., concur.
Amended decision and resolution set aside.
Notes.The petitioners are mandated to state categorically in their petition the rule under which the
same is filed, and not merely leave the matter for the Courts determination. (Morato vs. Court of
Appeals, 436 SCRA 438 [2004])
In determining whether the proper remedy is a special civil action for certiorari or a petition for review,
the nature of the questions intended to be raised on appeal is of no consequence. (Heirs of Lourdes
Potenciano Padilla vs. Court of Appeals, 425 SCRA 236 [2004])
o0o

34

Copyright 2014 Central Book Supply, Inc. All rights reserved. [International Corporate Bank, Inc. vs.
Court of Appeals, 501 SCRA 20(2006)]

PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS, CAPITOL CITY DEVELOPMENT BANK,
PHILIPPINE BANK OF COMMUNICATIONS, and F. ABANTE MARKETING, respondents.
Banks and Banking; Negotiable Instruments Law (Act No. 2031); Checks; Words and Phrases; An
alteration is said to be material if it alters the effect of the instrument.We shall first deal with the
effect of the alteration of the serial number on the negotiability of the check in question. Petitioner
anchors its position on Section 125 of the Negotiable Instruments Law (ACT No. 2031). Petitioner alleges
that there is no hard and fast rule in the interpretation of the aforequoted provision of the Negotiable
Instruments Law. It maintains that under Section 125(f), any change that alters the effect of the
instrument is a material alteration. We do not agree. An alteration is said to be material if it alters the
effect of the instrument. It means an unauthorized change in an instrument that purports to modify in
any respect the obligation of a party or an unauthorized addition of words or numbers or other change
to an incomplete instrument relating to the obligation of a party. In other
______________

* FIRST DIVISION.
492

492
SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Court of Appeals
words, a material alteration is one which changes the items which are required to be stated under
Section 1 of the Negotiable Instruments Law.
Same; Same; Same; The drawee bank cannot refuse to accept a check on the ground that the serial
number of said check was altered, since the serial number is an item which is not an essential requisite
for negotiability under Section 1 of the Negotiable Instruments Law.The case at bench is unique in the
sense that what was altered is the serial number of the check in question, an item which, it can readily
be observed, is not an essential requisite for negotiability under Section 1 of the Negotiable Instruments
Law. The aforementioned alteration did not change the relations between the parties. The name of the
drawer and the drawee were not altered. The intended payee was the same. The sum of money due to

the payee remained the same. The checks serial number is not the sole indication of its origin. As
succinctly found by the Court of Appeals, the name of the government agency which issued the subject
check was prominently printed therein. The checks issuer was therefore sufficiently identified,
rendering the referral to the serial number redundant and inconsequential. Petitioner, thus cannot
refuse to accept the check in question on the ground that the serial number was altered, the same being
an immaterial or innocent one.
Damages; Attorneys Fees; Where the lower courts fail to explicitly state the rationale for the award of
attorneys fees, the same shall be disallowed.The amount of P10,000.00 as attorneys fees is hereby
deleted. In their respective decisions, the trial court and the Court of Appeals failed to explicitly state
the rationale for the said award. The foregoing is in conformity with the guiding principles laid down in a
long line of cases and reiterated recently in Consolidated Bank & Trust Corporation (Solidbank) v. Court
of Appeals: The award of attorneys fees lies within the discretion of the court and depends upon the
circumstances of each case. However, the discretion of the court to award attorneys fees under Article
2208 of the Civil Code of the Philippines demands factual, legal and equitable justification, without
which the award is a conclusion without a premise and improperly left to speculation and conjecture. It
becomes a violation of the proscription against the imposition of a penalty on the right to litigate
(Universal Shipping Lines, Inc. v. Intermediate Appellate Court, 188 SCRA 170 [1990]). The reason for the
award must be stated in the text of the courts decision. If it is
493

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Philippine National Bank vs. Court of Appeals
stated only in the dispositive portion of the decision, the same shall be disallowed. As to the award of
attorneys fees being an exception rather than the rule, it is necessary for the court to make findings of
fact and law that would bring the case within the exception and justify the grant of the award
(Refractories Corporation of the Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989]).
PETITION for review on certiorari of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.


Monsod, Tamargo, Valencia & Associates for private respondent Capitol City Development Bank.
Siguion Reyna, Montecillo & Ongsiako for private respondent Philippine Bank of Communications.
KAPUNAN, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the decision dated
April 29, 1992 of respondent Court of Appeals in CA-G.R. CV No. 24776 and its resolution dated
September 16, 1992, denying petitioner Philippine National Banks motion for reconsideration of said
decision.
The facts of the case are as follows:
A check with serial number 7-3666-223-3, dated August 7, 1981 in the amount of P97,650.00 was issued
by the Ministry of Education and Culture (now Department of Education, Culture and Sports [DECS])
payable to F. Abante Marketing. This check was drawn against Philippine National Bank (herein
petitioner).
On August 11, 1981, F. Abante Marketing, a client of Capitol City Development Bank (Capitol), deposited
the questioned check in its savings account with said bank. In turn, Capitol deposited the same in its
account with the Philippine Bank of Communications (PBCom) which, in turn, sent the check to
petitioner for clearing.
494

494
SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Court of Appeals
Petitioner cleared the check as good and, thereafter, PBCom credited Capitols account for the amount
stated in the check. However, on October 19, 1981, petitioner returned the check to PBCom and debited
PBComs account for the amount covered by the check, the reason being that there was a material
alteration of the check number.
PBCom, as collecting agent of Capitol, then proceeded to debit the latters account for the same
amount, and subsequently, sent the check back to petitioner. Petitioner, however, returned the check to
PBCom.
On the other hand, Capitol could not, in turn, debit F. Abante Marketings account since the latter had
already withdrawn the amount of the check as of October 15, 1981. Capitol sought clarification from
PBCom and demanded the recrediting of the amount. PBCom followed suit by requesting an explanation
and re-crediting from petitioner.
Since the demands of Capitol were not heeded, it filed a civil suit with the Regional Trial Court of Manila
against PBCom which, in turn, filed a third-party complaint against petitioner for

reimbursement/indemnity with respect to the claims of Capitol. Petitioner, on its part, filed a fourthparty complaint against F. Abante Marketing.
On October 3, 1989, the Regional Trial Court rendered its decision the dispositive portion of which
reads:
WHEREFORE, judgment is hereby rendered as follows:
1.) On plaintiffs complaint, defendant Philippine Bank of Communications is ordered to re-credit or
reimburse plaintiff Capitol City Development Bank the amount of P97,650.00, plus interest of 12 percent
thereto from October 19, 1981 until the amount is fully paid;
2.) On Philippine Bank of Communications third-party complaint, third-party defendant PNB is ordered
to reimburse and indemnify Philippine Bank of Communications for whatever amount PBCom pays to
plaintiff;
3.) On Philippine National Banks fourth-party complaint, F. Abante Marketing is ordered to reimburse
and indemnify PNB for whatever amount PNB pays to PBCom;
495

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Philippine National Bank vs. Court of Appeals
4.) On attorneys fees, Philippine Bank of Communications is ordered to pay Capitol City Development
Bank attorneys fees in the amount of Ten Thousand (P10,000.00) Pesos; but PBCom is entitled to
reimbursement/indemnity from PNB; and Philippine National Bank to be, in turn, reimbursed or
indemnified by F. Abante Marketing for the same amount;
5.) The Counterclaims of PBCom and PNB are hereby dismissed;
6.) No pronouncement as to costs.
SO ORDERED.1
An appeal was interposed before the respondent Court of Appeals which rendered its decision on April
29, 1992, the decretal portion of which reads:
WHEREFORE, the judgment appealed from is modified by exempting PBCom from liability to plaintiffappellee for attorneys fees and ordering PNB to honor the check for P97,650.00, with interest as
declared by the trial court, and pay plaintiff-appellee attorneys fees of P10,000.00. After the check shall

have been honored by PNB, PBCom shall re-credit plaintiff-appellees account with it with the amount.
No pronouncement as to costs.
SO ORDERED.2
A motion for reconsideration of the decision was denied by the respondent Court in its resolution dated
September 16, 1992 for lack of merit.3
Hence, petitioner filed the instant petition which raises the following issues:
I

WHETHER OR NOT AN ALTERATION OF THE SERIAL NUMBER OF A CHECK IS A MATERIAL ALTERATION


UNDER THE NEGOTIABLE INSTRUMENTS LAW.
_____________

1 CA Rollo, p. 28.
2 Rollo, pp. 21-28.
3 Id., at 30-31.
496

496
SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Court of Appeals
II

WHETHER OR NOT A CERTIFICATION HEREIN ISSUED BY THE MINISTRY OF EDUCATION CAN BE GIVEN
WEIGHT IN EVIDENCE.
III

WHETHER OR NOT A DRAWEE BANK WHO FAILED TO RETURN A CHECK WITHIN THE TWENTY FOUR (24)
HOUR CLEARING PERIOD MAY RECOVER THE VALUE OF THE CHECK FROM THE COLLECTING BANK.
IV

WHETHER OR NOT IN THE ABSENCE OF MALICE OR ILL WILL PETITIONER PNB MAY BE HELD LIABLE FOR
ATTORNEYS FEES.4
We find no merit in the petition.
We shall first deal with the effect of the alteration of the serial number on the negotiability of the check
in question.
Petitioner anchors its position on Section 125 of the Negotiable Instruments Law (ACT No. 2031)5 which
provides:
Section 125. What constitutes a material alteration.Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
______________

4 Id., at 10-11.
5 The Negotiable Instruments Law of the Philippines was patterned after the draft approved by the
Commissioner on Uniform State Laws in the United States. (Agbayani, Commentaries and Jurisprudence
on the COMMERCIAL LAWS OF THE PHILIPPINES, Vol. 1, pp. 99-100.)
497

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Philippine National Bank vs. Court of Appeals

(f) Or which adds a place of payment where no place of payment is specified, or any other change or
addition which alters the effect of the instrument in any respect, is a material alteration.
Petitioner alleges that there is no hard and fast rule in the interpretation of the aforequoted provision of
the Negotiable Instruments Law. It maintains that under Section 125(f), any change that alters the effect
of the instrument is a material alteration.6
We do not agree.
An alteration is said to be material if it alters the effect of the instrument.7 It means an unauthorized
change in an instrument that purports to modify in any respect the obligation of a party or an
unauthorized addition of words or numbers or other change to an incomplete instrument relating to the
obligation of a party.8 In other words, a material alteration is one which changes the items which are
required to be stated under Section 1 of the Negotiable Instruments Law.
Section 1 of the Negotiable Instruments Law provides:
Section 1.Form of negotiable instruments. An instrument to be negotiable must conform to the
following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein
with reasonable certainty.
_____________

6 Rollo, p. 11.
7 Agbayani, Commentaries and Jurisprudence on the COMMERCIAL LAWS OF THE PHILIPPINES, Vol. 1,
1992 ed., p. 403.
8 Nickles, Negotiable Instruments and other related Commercial Paper, 1993 2nd ed., p. 168.
498

498

SUPREME COURT REPORTS ANNOTATED


Philippine National Bank vs. Court of Appeals
In his book entitled Pandect of Commercial Law and Jurisprudence, Justice Jose C. Vitug opines that
an innocent alteration (generally, changes on items other than those required to be stated under Sec.
1, N.I.L.) and spoliation (alterations done by a stranger) will not avoid the instrument, but the holder
may enforce it only accordingly to its original tenor.9
Reproduced hereunder are some examples of material and immaterial alterations:
A. Material Alterations:

(1) Substituting the words or bearer for order.


(2) Writing protest waived above blank indorsements.
(3) A change in the date from which interest is to run.
(4) A check was originally drawn as follows: Iron County Bank, Crystal Falls, Mich. Aug. 5, 1901. Pay to
G.L. or order $9 fifty cents CTR. The insertion of the figure 5 before the figure 9, the instrument being
otherwise unchanged.
(5) Adding the words with interest with or without a fixed rate.
(6) An alteration in the maturity of a note, whether the time for payment is thereby curtailed or
extended.
(7) An instrument was payable First Natl. Bank, the plaintiff added the word Marion.
(8) Plaintiff, without consent of the defendant, struck out the name of the defendant as payee and
inserted the name of the maker of the original note.
(9) Striking out the name of the payee and substituting that of the person who actually discounted the
note.
(10) Substituting the address of the maker for the name of a co-maker.10
______________

9 Vitug, Pandect of Commercial Law and Jurisprudence, 1990 ed., p. 55.


10 Agbayani, Commentaries & Jurisprudence on the COMMERCIAL LAWS OF THE PHILIPPINES, Vol. 1,
1992 ed., pp. 403-404.

499

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Philippine National Bank vs. Court of Appeals
B. Immaterial Alterations:

(1) Changing I promise to pay to We promise to pay, where there are two makers.
(2) Adding the word annual after the interest clause.
(3) Adding the date of maturity as a marginal notation.
(4) Filling in the date of actual delivery where the makers of a note gave it with the date in blank, July . .
. .
(5) An alteration of the marginal figures of a note where the sum stated in words in the body remained
unchanged.
(6) The insertion of the legal rate of interest where the note had a provision for interest at . . . . . . . per
cent.
(7) A printed form of promissory note had on the margin the printed words, Extended to . . . . The
holder on or after maturity wrote in the blank space the words May 1, 1913, as a reference
memorandum of a promise made by him to the principal maker at the time the words were written to
extend the time of payment.
(8) Where there was a blank for the place of payment, filling in the blank with the place desired.
(9) Adding to an indorsees name the abbreviation Cash when it had been agreed that the draft should
be discounted by the trust company of which the indorsee was cashier.
(10) The indorsement of a note by a stranger after its delivery to the payee at the time the note was
negotiated to the plaintiff.
(11) An extension of time given by the holder of a note to the principal maker, without the consent of a
surety co-maker.11
The case at bench is unique in the sense that what was altered is the serial number of the check in
question, an item which, it can readily be observed, is not an essential requisite for negotiability under
Section 1 of the Negotiable Instruments Law. The aforementioned alteration did not change the

relations between the parties. The name of the drawer and the drawee were not altered. The intended
payee was the same. The sum of money due to the payee remained the same. Despite these findings,
however, petitioner insists, that:
______________

11 Id., at 404-405.
500

500
SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Court of Appeals
x x x.
It is an accepted concept, besides being a negotiable instrument itself, that a TCAA check by its very
nature is the medium of exchange of governments (sic) instrumentalities or agencies. And as (a) safety
measure, every government office o(r) agency (is) assigned TCAA checks bearing different number
series.
A concrete example is that of the disbursements of the Ministry of Education and Culture. It is issued by
the Bureau of Treasury sizeable bundles of checks in booklet form with serial numbers different from
other government office or agency. Now, for fictitious payee to succeed in its malicious intentions to
defraud the government, all it need do is to get hold of a TCAA Check and have the serial numbers of
portion (sic) thereof changed or altered to make it appear that the same was issued by the MEC.
Otherwise, stated, it is through the serial numbers that (a) TCAA Check is determined to have been
issued by a particular office or agency of the government.12
xxx
Petitioners arguments fail to convince. The checks serial number is not the sole indication of its origin.
As succinctly found by the Court of Appeals, the name of the government agency which issued the
subject check was prominently printed therein. The checks issuer was therefore sufficiently identified,
rendering the referral to the serial number redundant and inconsequential. Thus, we quote with favor
the findings of the respondent court:
xxx

If the purpose of the serial number is merely to identify the issuing government office or agency, its
alteration in this case had no material effect whatsoever on the integrity of the check. The identity of
the issuing government office or agency was not changed thereby and the amount of the check was not
charged against the account of another government office or agency which had no liability under the
check. The owner and issuer of the check is boldly and clearly printed on its face, second line from the
top: MINISTRY OF EDUCATION AND CULTURE, and below the name of the payee
______________

12 Rollo, p. 78.
501

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501
Philippine National Bank vs. Court of Appeals
are the rubber-stamped words: Ministry of Educ. & Culture. These words are not alleged to have been
falsely or fraudulently intercalated into the check. The ownership of the check is established without the
necessity of recourse to the serial number. Neither is there any proof that the amount of the check was
erroneously charged against the account of a government office or agency other than the Ministry of
Education and Culture. Hence, the alteration in the number of the check did not affect or change the
liability of the Ministry of Education and Culture under the check and, therefore, is immaterial. The
genuineness of the amount and the signatures therein of then Deputy Minister of Education
Hermenegildo C. Dumlao and of the resident Auditor, Penomio C. Alvarez are not challenged. Neither is
the authenticity of the different codes appearing therein questioned x x x.13 (Italics ours.)
Petitioner, thus cannot refuse to accept the check in question on the ground that the serial number was
altered, the same being an immaterial or innocent one.
We now go to the second issue. It is petitioners submission that the certification issued by Minrado C.
Batonghinog, Cashier III of the MEC clearly shows that the check was altered. Said certification reads:
July 22, 1985
TO WHOM IT MAY CONCERN:
This is to certify that according to the records of this Office, TCAA PNB Check No. SN7-3666223-3 dated
August 7, 1981 drawn in favor of F. Abante Marketing in the amount of NINETY (S)EVEN THOUSAND SIX
HUNDRED FIFTY PESOS ONLY (P97,650.00) was not issued by this Office nor released to the payee

concerned. The series number of said check was not included among those requisition by this Office
from the Bureau of Treasury.
Very truly yours,
(SGD.) MINRADO C. BATONGHINOG
Cashier III.14
______________

13 Rollo, pp. 21-28.


14 Rollo, p. 26.
502

502
SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Court of Appeals
Petitioner claims that even if the author of the certification issued by the Ministry of Education and
Culture (MEC) was not presented, still the best evidence of the material alteration would be the
disputed check itself and the serial number thereon. Petitioner thus assails the refusal of respondent
court to give weight to the certification because the author thereof was not presented to identify it and
to be cross-examined thereon.15
We agree with the respondent court.
The one who signed the certification was not presented before the trial court to prove that the said
document was really the document he prepared and that the signature below the said document is his
own signature. Neither did petitioner present an eyewitness to the execution of the questioned
document who could possibly identify it.16 Absent this proof, we cannot rule on the authenticity of the
contents of the certification. Moreover, as we previously emphasized, there was no material alteration
on the check, the change of its serial number not being substantial to its negotiability.
Anent the third issuewhether or not the drawee bank may still recover the value of the check from the
collecting bank even if it failed to return the check within the twenty-four (24) hour clearing period
because the check was tamperedsuffice it to state that since there is no material alteration in the
check, petitioner has no right to dishonor it and return it to PBCom, the same being in all respects
negotiable.

______________

15 Ibid.
16 R.J. Francisco, Evidence, 1993 ed., p. 505.
The due execution of a document could be proved through the testimony of (1) the person who
executed it; (2) the person before whom its execution was acknowledged; or (3) any person who was
present and saw it executed and delivered, or who, after its execution and delivery, saw it and
recognized the signatures, or by a person to whom the parties to the instrument had previously
confessed the execution thereof . . . .
503

VOL. 256, APRIL 25, 1996


503
Philippine National Bank vs. Court of Appeals
However, the amount of P10,000.00 as attorneys fees is hereby deleted. In their respective decisions,
the trial court and the Court of Appeals failed to explicitly state the rationale for the said award. The trial
court merely ruled as follows:
With respect to Capitols claim for damages consisting of alleged loss of opportunity, this Court finds
that Capitol failed to adequately substantiate its claim. What Capitol had presented was a self-serving,
unsubstantiated and speculative computation of what it allegedly could have earned or realized were it
not for the debit made by PBCom which was triggered by the return and debit made by PNB. However,
this Court finds that it would be fair and reasonable to impose interest at 12% per annum on the
principal amount of the check computed from October 19, 1981 (the date PBCom debited Capitols
account) until the amount is fully paid and reasonable attorneys fees.17 (Italics ours.)
And contrary to the Court of Appeals resolution, petitioner unambiguously questioned before it the
award of attorneys fees, assigning the latter as one of the errors committed by the trial court.18
The foregoing is in conformity with the guiding principles laid down in a long line of cases and reiterated
recently in Consolidated Bank & Trust Corporation (Solidbank) v. Court of Appeals:19
The award of attorneys fees lies within the discretion of the court and depends upon the circumstances
of each case. However, the discretion of the court to award attorneys fees under Article 2208 of the
Civil Code of the Philippines demands factual, legal and equitable justification, without which the award
is a conclusion without a premise and improperly left to speculation and conjecture. It becomes a

violation of the proscription against the imposition of a penalty on the right to litigate (Universal
Shipping Lines, Inc. v.
_______________

17 CA Rollo, Decision of RTC, p. 5.


18 CA Rollo, Brief of Appellant PNB, pp. 15-16.
19 246 SCRA 193 (1995); See also, Toyota Shaw, Inc. v. CA, 244 SCRA 320 (1995).
504

504
SUPREME COURT REPORTS ANNOTATED
Philippine National Bank vs. Court of Appeals
Intermediate Appellate Court, 188 SCRA 170 [1990]). The reason for the award must be stated in the
text of the courts decision. If it is stated only in the dispositive portion of the decision, the same shall be
disallowed. As to the award of attorneys fees being an exception rather than the rule, it is necessary for
the court to make findings of fact and law that would bring the case within the exception and justify the
grant of the award (Refractories Corporation of the Philippines v. Intermediate Appellate Court, 176
SCRA 539 [1989]).
WHEREFORE, premises considered, except for the deletion of the award of attorneys fees, the decision
of the Court of Appeals is hereby AFFIRMED.
SO ORDERED.
Padilla (Chairman), Bellosillo, Vitug and Hermosisima, Jr., JJ., concur.
Judgment affirmed.
Notes.The award of attorneys fees must be disallowed where the award of exemplary damages is
eliminated. (Albenson Enterprises Corporation vs. Court of Appeals, 217 SCRA 16 [1993])
Where a party had been paying his indebtedness in checks even when the amount was only P6,350.00,
with more reason then should he be expected to pay in checks when the amount involved was
P95,730.00. (Rubio vs. Court of Appeals, 246 SCRA 255 [1995])
o0o

505

VOL. 256, APRIL 25, 1996


505
People vs. Alba
Copyright 2014 Central Book Supply, Inc. All rights reserved. [Philippine National Bank vs. Court of
Appeals, 256 SCRA 491(1996)]

G.R. No. 138074. August 15, 2003.*


CELY YANG, petitioner, vs. HON. COURT OF APPEALS, PHILIPPINE COMMERCIAL INTERNATIONAL BANK,
FAR EAST BANK & TRUST CO., EQUITABLE BANKING CORPORATION, PREM CHANDIRAMANI and
FERNANDO DAVID, respondents.
Negotiable Instrument Law; Every holder of a negotiable instrument is deemed prima facie a holder in
due course; Definition of a holder in due course; Presumption rebuttable.Every holder of a negotiable
instrument is deemed prima facie a holder in due course. However, this presumption arises only in favor
of a person who is a holder as defined in Section 191 of the Negotiable Instruments Law, meaning a
payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. In the present
case, it is not disputed that David was the payee of the checks in question. The weight of authority
sustains the view that a payee may be a holder in due course. Hence, the presumption that he is a prima
facie holder in due course applies in his favor. However, said presumption may be rebutted. Hence,
what is vital to the resolution of this issue is whether David took possession of the checks under the
conditions provided for in Section 52 of the Negotiable Instruments Law. All the requisites provided for
in Section 52 must concur in Davids case; otherwise he cannot be deemed a holder in due course.
Same; Section 24 of the Negotiable Instruments Law creates a presumption that every party to an
instrument acquired the same for a consideration or for value; Petitioner must present convincing
evidence to overthrow the presumption.With respect to consideration, Section 24 of the Negotiable
Instruments Law creates a presumption that every party to an instrument acquired the same for a
consideration or for value. Thus, the law itself creates a presumption in Davids favor that he gave
valuable
_______________

* SECOND DIVISION.

160

160
SUPREME COURT REPORTS ANNOTATED
Yang vs. Court of Appeals
consideration for the checks in question. In alleging otherwise, the petitioner has the onus to prove that
David got hold of the checks absent said consideration. In other words, the petitioner must present
convincing evidence to overthrow the presumption. Our scrutiny of the records, however, shows that
the petitioner failed to discharge her burden of proof. The petitioners averment that David did not give
valuable consideration when he took possession of the checks is unsupported, devoid of any concrete
proof to sustain it.
Same; Court has taken judicial cognizance of the practice that a check with two parallel lines in the
upper left hand corner means that it could only be deposited and not converted into cash.The
Negotiable Instruments Law is silent with respect to crossed checks, although the Code of Commerce
makes reference to such instruments. Nonetheless, this Court has taken judicial cognizance of the
practice that a check with two parallel lines in the upper left hand corner means that it could only be
deposited and not converted into cash. The effects of crossing a check, thus, 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.
PETITION for review on certiorari of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.


Don P. Porciuncula for petitioner.
Victor N. Alimurong and Siguion Reyna, Monticillo & Ongsiako and Curato, Divina & Associates for
FEBTC Bank.
Recto Law Offices for private respondent Chandiramani.
Fortun, Narvasa & Salazar for respondent David.
Pacis, Ramirez & Bacorro Law Offices for respondent PCI Bank.
QUISUMBING, J.:

For review on certiorari is the decision1 of the Court of Appeals, dated March 25, 1999, in CA-G.R. CV
No. 52398, which affirmed with modification the joint decision of the Regional Trial Court (RTC) of Pasay
City, Branch 117, dated July 4, 1995, in Civil Cases
_______________

1 Penned by Associate Justice Bernardo P. Abesamis with Associate Justices Jainal D. Rasul and Conchita
Carpio Morales (now a member of this Court) concurring. See Rollo, pp. 95-108.
161

VOL. 409, AUGUST 15, 2003


161
Yang vs. Court of Appeals
Nos. 54792 and 5492.3 The trial court dismissed the complaint against herein respondents Far East Bank
& Trust Company (FEBTC), Equitable Banking Corporation (Equitable), and Philippine Commercial
International Bank (PCIB) and ruled in favor of respondent Fernando David as to the proceeds of the two
cashiers checks, including the earnings thereof pendente lite. Petitioner Cely Yang was ordered to pay
David moral damages of P100,000.00 and attorneys fees also in the amount of P100,000.00.
The facts of this case are not disputed, to wit:
On or before December 22, 1987, petitioner Cely Yang and private respondent Prem Chandiramani
entered into an agreement whereby the latter was to give Yang a PCIB managers check in the amount
of P4.2 million in exchange for two (2) of Yangs managers checks, each in the amount of P2.087 million,
both payable to the order of private respondent Fernando David. Yang and Chandiramani agreed that
the difference of P26,000.00 in the exchange would be their profit to be divided equally between them.
Yang and Chandiramani also further agreed that the former would secure from FEBTC a dollar draft in
the amount of US$200,000.00, payable to PCIB FCDU Account No. 4195-01165-2, which Chandiramani
would exchange for another dollar draft in the same amount to be issued by Hang Seng Bank Ltd. of
Hong Kong.
Accordingly, on December 22, 1987, Yang procured the following:
a) Equitable Cashiers Check No. CCPS 14-009467 in the sum of P2,087,000.00, dated December 22,
1987, payable to the order of Fernando David;
b) FEBTC Cashiers Check No. 287078, in the amount of P2,087,000.00, dated December 22, 1987,
likewise payable to the order of Fernando David; and

c) FEBTC Dollar Draft No. 4771, drawn on Chemical Bank, New York, in the amount of US$200,000.00,
dated December 22, 1987, payable to PCIB FCDU Account No. 4195-01165-2.
_______________

2 The case is entitled Cely Yang v. Equitable Banking Corporation, Prem Chandiramani and Fernando
David. See Rollo, pp. 38-41.
3 Entitled Cely Yang v. Far East Bank & Trust Company, Philippine Commercial and International Bank,
Prem Chandiramani and Fernando David. See Rollo, pp. 42-46.
162

162
SUPREME COURT REPORTS ANNOTATED
Yang vs. Court of Appeals
At about one oclock in the afternoon of the same day, Yang gave the aforementioned cashiers checks
and dollar drafts to her business associate, Albert Liong, to be delivered to Chandiramani by Liongs
messenger, Danilo Ranigo. Ranigo was to meet Chandiramani at Philippine Trust Bank, Ayala Avenue,
Makati City, Metro Manila where he would turn over Yangs cashiers checks and dollar draft to
Chandiramani who, in turn, would deliver to Ranigo a PCIB managers check in the sum of P4.2 million
and a Hang Seng Bank dollar draft for US$200,000.00 in exchange.
Chandiramani did not appear at the rendezvous and Ranigo allegedly lost the two cashiers checks and
the dollar draft bought by petitioner. Ranigo reported the alleged loss of the checks and the dollar draft
to Liong at half past four in the afternoon of December 22, 1987. Liong, in turn, informed Yang, and the
loss was then reported to the police.
It transpired, however, that the checks and the dollar draft were not lost, for Chandiramani was able to
get hold of said instruments, without delivering the exchange consideration consisting of the PCIB
managers check and the Hang Seng Bank dollar draft.
At three oclock in the afternoon or some two (2) hours after Chandiramani and Ranigo were to meet in
Makati City, Chandiramani delivered to respondent Fernando David at China Banking Corporation
branch in San Fernando City, Pampanga, the following: (a) FEBTC Cashiers Check No. 287078, dated
December 22, 1987, in the sum of P2.087 million; and (b) Equitable Cashiers Check No. CCPS 14-009467,
dated December 22, 1987, also in the amount of P2.087 million. In exchange, Chandiramani got
US$360,000.00 from David, which Chandiramani deposited in the savings account of his wife, Pushpa
Chandiramani; and his mother, Rani Reynandas, who held FCDU Account No. 124 with the United

Coconut Planters Bank branch in Greenhills, San Juan, Metro Manila. Chandiramani also deposited
FEBTC Dollar Draft No. 4771, dated December 22, 1987, drawn upon the Chemical Bank, New York for
US$200,000.00 in PCIB FCDU Account No. 4195-01165-2 on the same date.
Meanwhile, Yang requested FEBTC and Equitable to stop payment on the instruments she believed to be
lost. Both banks complied with her request, but upon the representation of PCIB, FEBTC subsequently
lifted the stop payment order on FEBTC
163

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163
Yang vs. Court of Appeals
Dollar Draft No. 4771, thus enabling the holder of PCIB FCDU Account No. 4195-01165-2 to receive the
amount of US$200,000.00.
On December 28, 1987, herein petitioner Yang lodged a Complaint4 for injunction and damages against
Equitable, Chandiramani, and David, with prayer for a temporary restraining order, with the Regional
Trial Court of Pasay City. The Complaint was docketed as Civil Case No. 5479. The Complaint was
subsequently amended to include a prayer for Equitable to return to Yang the amount of P2.087 million,
with interest thereon until fully paid.5
On January 12, 1988, Yang filed a separate case for injunction and damages, with prayer for a writ of
preliminary injunction against FEBTC, PC1B, Chandiramani and David, with the RTC of Pasay City,
docketed as Civil Case No. 5492. This complaint was later amended to include a prayer that defendants
therein return to Yang the amount of P2.087 million, the value of FEBTC Dollar Draft No. 4771, with
interest at 18% annually until fully paid.6
On February 9, 1988, upon the filing of a bond by Yang, the trial court issued a writ of preliminary
injunction in Civil Case No. 5479. A writ of preliminary injunction was subsequently issued in Civil Case
No. 5492 also.
Meanwhile, herein respondent David moved for dismissal of the cases against him and for
reconsideration of the Orders granting the writ of preliminary injunction, but these motions were
denied. David then elevated the matter to the Court of Appeals in a special civil action for certiorari
docketed as CA-G.R. SP No. 14843, which was dismissed by the appellate court.
As Civil Cases Nos. 5479 and 5492 arose from the same set of facts, the two cases were consolidated.
The trial court then conducted pre-trial and trial of the two cases, but the proceedings had to be
suspended after a fire gutted the Pasay City Hall and destroyed the records of the courts.

After the records were reconstituted, the proceedings resumed and the parties agreed that the money
in dispute be invested in Treasury Bills to be awarded in favor of the prevailing side. It was
_______________

4 Records, Vol. I, pp. 1-4.


5 Id., at p. 8.
6 Id., at p. 141.
164

164
SUPREME COURT REPORTS ANNOTATED
Yang vs. Court of Appeals
also agreed by the parties to limit the issues at the trial to the following:
1. Who, between David and Yang, is legally entitled to the proceeds of Equitable Banking Corporation
(EBC) Cashiers Check No. CCPS 14-009467 in the sum of P2,087,000.00 dated December 22, 1987, and
Far East Bank and Trust Company (FEBTC) Cashiers Check No. 287078 in the sum of P2,087,000.00
dated December 22, 1987, together with the earnings derived therefrom pendente lite?
2. Are the defendants FEBTC and PCIB solidarily liable to Yang for having allowed the encashment of
FEBTC Dollar Draft No. 4771, in the sum of US$200,000.00 plus interest thereon despite the stop
payment order of Cely Yang?7
On July 4, 1995, the trial court handed down its decision in Civil Cases Nos. 5479 and 5492, to wit:
WHEREFORE, the Court renders judgment in favor of defendant Fernando David against the plaintiff
Cely Yang and declaring the former entitled to the proceeds of the two (2) cashiers checks, together
with the earnings derived therefrom pendente lite; ordering the plaintiff to pay the defendant Fernando
David moral damages in the amount of P100,000.00; attorneys fees in the amount of P100,000.00 and
to pay the costs. The complaint against Far East Bank and Trust Company (FEBTC), Philippine
Commercial International Bank (PCIB) and Equitable Banking Corporation (EBC) is dismissed. The
decision is without prejudice to whatever action plaintiff Cely Yang will file against defendant Prem
Chandiramani for reimbursement of the amounts received by him from defendant Fernando David.
SO ORDERED.8
In finding for David, the trial court ratiocinated:

The evidence shows that defendant David was a holder in due course for the reason that the cashiers
checks were complete on their face when they were negotiated to him. They were not yet overdue
when he became the holder thereof and he had no notice that said checks were previously dishonored;
he took the cashiers checks in good faith and for value. He parted some $200,000.00 for the two (2)
cashiers checks which were given to defendant Chandiramani; he had also no notice of any infirmity in
the cashiers checks or defect in the title of the drawer. As a matter of fact, he
_______________

7 Rollo, p. 84.
8 CA Rollo, p. 131.
165

VOL. 409, AUGUST 15, 2003


165
Yang vs. Court of Appeals
asked the manager of the China Banking Corporation to inquire as to the genuineness of the cashiers
checks (tsn, February 5, 1988, p. 21, September 20, 1991, pp. 13-14). Another proof that defendant
David is a holder in due course is the fact that the stop payment order on *the+ FEBTC cashiers check
was lifted upon his inquiry at the head office (tsn, September 20, 1991, pp. 24-25). The apparent reason
for lifting the stop payment order was because of the fact that FEBTC realized that the checks were not
actually lost but indeed reached the payee defendant David.9
Yang then moved for reconsideration of the RTC judgment, but the trial court denied her motion in its
Order of September 20, 1995.
In the belief that the trial court misunderstood the concept of a holder in due course and
misapprehended the factual milieu, Yang seasonably filed an appeal with the Court of Appeals, docketed
as CA-G.R. CV No. 52398.
On March 25, 1999, the appellate court decided CA-G.R. CV No. 52398 in this wise:
WHEREFORE, this court AFFIRMS the judgment of the lower court with modification and hereby orders
the plaintiff-appellant to pay defendant-appellant PCIB the amount of Twenty-Five Thousand Pesos
(P25,000.00).
SO ORDERED.10

In affirming the trial courts judgment with respect to herein respondent David, the appellate court
found that:
In this case, defendant-appellee had taken the necessary precautions to verify, through his bank, China
Banking Corporation, the genuineness of whether (sic) the cashiers checks he received from
Chandiramani. As no stop payment order was made yet (at) the time of the inquiry, defendant-appellee
had no notice of what had transpired earlier between the plaintiff-appellant and Chandiramani. All he
knew was that the checks were issued to Chandiramani with whom he was he had (sic) a transaction.
Further on, David received the checks in question in due course because Chandiramani, who at the time
the checks were delivered to David, was acting as Yangs agent.
David had no notice, real or constructive, cogent for him to make further inquiry as to any infirmity in
the instrument(s) and defect of title of
_______________

9 Id., at pp. 195-196.


10 Id., at p. 462.
166

166
SUPREME COURT REPORTS ANNOTATED
Yang vs. Court of Appeals
the holder. To mandate that each holder inquire about every aspect on how the instrument came about
will unduly impede commercial transactions, Although negotiable instruments do not constitute legal
tender, they often take the place of money as a means of payment.
The mere fact that David and Chandiramani knew one another for a long time is not sufficient to
establish that they connived with each other to defraud Yang. There was no concrete proof presented
by Yang to support her theory.11
The appellate court awarded P25,000.00 in attorneys fees to PCIB as it found the action filed by Yang
against said bank to be clearly unfounded and baseless. Since PCIB was compelled to litigate to protect
itself, then it was entitled under Article 220812 of the Civil Code to attorneys fees and litigation
expenses.
_______________

11 Id., at p. 456.
12 ART. 2208. In the absence of stipulation, attorneys fees and expenses of litigation, other than judicial
costs, cannot be recovered, except:
(1) When exemplary damages are awarded;
(2) When the defendants act or omission has compelled the plaintiff to litigate with third persons or to
incur expenses to protect his interest;
(3) In criminal cases of malicious prosecution against the plaintiff;
(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;
(5) Where the defendant acted in gross and evident bad faith in refusing the plaintiffs plainly valid, just,
and demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household helpers, laborers, and skilled workers;
(8) In actions for indemnity under workmens compensation and employers liability laws;
(9) In a separate civil action to recover civil liability arising from a crime;
(10) When at least double judicial costs are awarded;
(11) In any other case where the court deems it just and equitable that attorneys fees and expenses of
litigation should be recovered.
In all cases, the attorneys fees and expenses of litigation must be reasonable.
167

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167
Yang vs. Court of Appeals
Hence, the instant recourse wherein petitioner submits the following issues for resolution:
a. WHETHER THE CHECKS WERE ISSUED TO PREM CHANDIRAMANI BY PETITIONER;

b. WHETHER THE ALLEGED TRANSACTION BETWEEN PREM CHANDIRAMANI AND FERNANDO DAVID IS
LEGITIMATE OR A SCHEME BY BOTH PRIVATE RESPONDENTS TO SWINDLE PETITIONER;
c. WHETHER FERNANDO DAVID GAVE PREM CHANDIRAMANI US$360,000.00 OR JUST A FRACTION OF
THE AMOUNT REPRESENTING HIS SHARE OF THE LOOT;
d. WHETHER PRIVATE RESPONDENTS FERNANDO DAVID AND PCIB ARE ENTITLED TO DAMAGES AND
ATTORNEYS FEES.13
At the outset, we must stress that this is a petition for review under Rule 45 of the 1997 Rules of Civil
Procedure. It is basic that in petitions for review under Rule 45, the jurisdiction of this Court is limited to
reviewing questions of law, questions of fact are not entertained absent a showing that the factual
findings complained of are totally devoid of support in the record or are glaringly erroneous.14 Given
the facts in the instant case, despite petitioners formulation, we find that the following are the
pertinent issues to be resolved:
a) Whether the Court of Appeals erred in holding herein respondent Fernando David to be a holder in
due course; and
b) Whether the appellate court committed a reversible error in awarding damages and attorneys fees
to David and PCIB.
On the first issue, petitioner Yang contends that private respondent Fernando David is not a holder in
due course of the checks in question. While it is true that he was named the payee thereof, David failed
to inquire from Chandiramani about how the latter acquired possession of said checks. Given his failure
to do so, it cannot be said that David was unaware of any defect or infirmity in the title of Chandiramani
to the checks at the time of their nego_______________

13 Rollo, p. 230.
14 Producers Bank of the Phil. v. Court of Appeals, 417 Phil. 646, 656; 365 SCRA 326 (2001).
168

168
SUPREME COURT REPORTS ANNOTATED
Yang vs. Court of Appeals

tiation. Moreover, inasmuch as the checks were crossed, then David should have, pursuant to our ruling
in Bataan Cigar & Cigarette Factory, Inc. v. Court of Appeals, G.R. No. 93048, March 3, 1994, 230 SCRA
643, been put on guard that the checks were issued for a definite purpose and accordingly, made
inquiries to determine if he received the checks pursuant to that purpose. His failure to do so negates
the finding in the proceedings below that he was a holder in due course.
Finally, the petitioner argues that there is no showing whatsoever that David gave Chandiramani any
consideration of value in exchange for the aforementioned checks.
Private respondent Fernando David counters that the evidence on record shows that when he received
the checks, he verified their genuineness with his bank, and only after said verification did he deposit
them. David stresses that he had no notice of previous dishonor or any infirmity that would have
aroused his suspicions, the instruments being complete and regular upon their face. David stresses that
the checks in question were cashiers checks. From the very nature of cashiers checks, it is highly
unlikely that he would have suspected that something was amiss. David also stresses negotiable
instruments are presumed to have been issued for valuable consideration, and he who alleges otherwise
must controvert the presumption with sufficient evidence. The petitioner failed to discharge this
burden, according to David. He points out that the checks were delivered to him as the payee, and he
took them as holder and payee thereof. Clearly, he concludes, he should be deemed to be their holder
in due course.
We shall now resolve the first issue.
Every holder of a negotiable instrument is deemed prima facie a holder in due course. However, this
presumption arises only in favor of a person who is a holder as defined in Section 191 of the Negotiable
Instruments Law,15 meaning a payee or indorsee of a bill or note, who is in possession of it, or the
bearer thereof.
In the present case, it is not disputed that David was the payee of the checks in question. The weight of
authority sustains the view that a payee may be a holder in due course.16 Hence, the presump_______________

15 Fossum v. Fernandez Hermanos, 44 Phil. 713, 716 (1923).


16 Merchants National Bank v. Smith, 59 Mont. 280, 196 p. 523, 15 ALR 430; Boston Steel & Iron Co. v.
Steur, 183 Mass. 140, 66 NE 646.
169

VOL. 409, AUGUST 15, 2003

169
Yang vs. Court of Appeals
tion that he is a prima facie holder in due course applies in his favor. However, said presumption may be
rebutted. Hence, what is vital to the resolution of this issue is whether David took possession of the
checks under the conditions provided for in Section 5217 of the Negotiable Instruments Law. All the
requisites provided for in Section 52 must concur in Davids case; otherwise he cannot be deemed a
holder in due course.
We find that the petitioners challenge to Davids status as a holder in due course hinges on two
arguments: (1) the lack of proof to show that David tendered any valuable consideration for the
disputed checks; and (2) Davids failure to inquire from Chandiramani as to how the latter acquired
possession of the checks, thus resulting in Davids intentional ignorance tantamount to bad faith. In
sum, petitioner posits that the last two requisites of Section 52 are missing, thereby preventing David
from being considered a holder in due course. Unfortunately for the petitioner, her arguments on this
score are less than meritorious and far from persuasive.
First, with respect to consideration, Section 2418 of the Negotiable Instruments Law creates a
presumption that every party to an instrument acquired the same for a consideration19 or for
_______________

17 SEC. 52. What constitutes a holder in due course.A holder in due course is a holder who has taken
the instrument under the following conditions:
(a) That it is complete and regular 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 of the title of the person negotiating it.
18 SEC. 24. Presumption of consideration.Every negotiable instrument is deemed prima facie to have
been issued for valuable consideration; and every person whose signature appears thereon to have
become a party thereto, for value.
19 SEC. 25. Value; What constitutes.Value is any consideration sufficient to support a simple contract.
An antecedent or pre-existing debt constitutes value, and is deemed such whether the instrument is
payable on demand or at a future date.
170

170
SUPREME COURT REPORTS ANNOTATED
Yang vs. Court of Appeals
value.20 Thus, the law itself creates a presumption in Davids favor that he gave valuable consideration
for the checks in question. In alleging otherwise, the petitioner has the onus to prove that David got
hold of the checks absent said consideration. In other words, the petitioner must present convincing
evidence to overthrow the presumption. Our scrutiny of the records, however, shows that the petitioner
failed to discharge her burden of proof. The petitioners averment that David did not give valuable
consideration when he took possession of the checks is unsupported, devoid of any concrete proof to
sustain it. Note that both the trial court and the appellate court found that David did not receive the
checks gratis, but instead gave Chandiramani US$360,000.00 as consideration for the said instruments.
Factual findings of the Court of Appeals are conclusive on the parties and not reviewable by this Court;
they carry great weight when the factual findings of the trial court are affirmed by the appellate
court.21
Second, petitioner fails to point any circumstance which should have put David on inquiry as to the why
and wherefore of the possession of the checks by Chandiramani. David was not privy to the transaction
between petitioner and Chandiramani. Instead, Chandiramani and David had a separate dealing in which
it was precisely Chandiramanis duty to deliver the checks to David as payee. The evidence shows that
Chandiramani performed said task to the letter. Petitioner admits that David took the step of asking the
manager of his bank to verify from FEBTC and Equitable as to the genuineness of the checks and only
accepted the same after being assured that there was nothing wrong with said checks. At that time,
David was not aware of any stop payment order. Under these circumstances, David thus had no
obligation to ascertain from Chandiramani what the nature of the latters title to the checks was, if any,
or the nature of his possession. Thus, we cannot hold him guilty of gross neglect amounting to legal
absence of good faith, absent any showing that there was something amiss about Chandiramanis
acquisition or possession of the checks. David did
_______________

20 SEC. 191. Definitions and meaning of terms.In this Act, unless the context otherwise requires:
xxx
Value means valuable consideration.
21 See Fernandez v. Fernandez, 416 Phil. 322, 337; 363 SCRA 811 (2001).
171

VOL. 409, AUGUST 15, 2003


171
Yang vs. Court of Appeals
not close his eyes deliberately to the nature or the particulars of a fraud allegedly committed by
Chandiramani upon the petitioner, absent any knowledge on his part that the action in taking the
instruments amounted to bad faith.22
Belatedly, and we say belatedly since petitioner did not raise this matter in the proceedings below,
petitioner now claims that David should have been put on alert as the instruments in question were
crossed checks. Pursuant to Bataan Cigar & Cigarette Factory, Inc. v. Court of Appeals, David should at
least have inquired as to whether he was acquiring said checks for the purpose for which they were
issued, according to petitioners submission.
Petitioners reliance on the Bataan Cigar case, however, is misplaced. The facts in the present case are
not on all fours with Bataan Cigar. In the latter case, the crossed checks were negotiated and sold at a
discount by the payee, while in the instant case, the payee did not negotiate further the checks in
question but promptly deposited them in his bank account.
The Negotiable Instruments Law is silent with respect to crossed checks, although the Code of
Commerce23 makes reference to such instruments. Nonetheless, this Court has taken judicial
cognizance of the practice that a check with two parallel lines in the upper left hand corner means that
it could only be deposited and not converted into cash.24 The effects of crossing a check, thus, 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 Bataan Cigar, the rediscounting of the check by the
payee knowingly violated the avowed intention of crossing the check. Thus, in accepting the cross
checks and paying cash for them, despite the warning of the crossing, the subsequent holder could not
be considered in good faith and thus, not a holder
_______________

22 See Ozark Motor Co. v. Horton, 196 SW 395. See also Davis v. First National Bank, 26 Ariz. 621, 229 p.
391.
23 ART. 541. The maker or any legal holder of a check shall be entitled to indicate therein that it be paid
to a certain banker or institution, which he shall do by writing across the face the name of said banker or
institution, or only the words and company.
24 State Investment House v. Intermediate Appellate Court, G.R. No. 72764, 13 July 1989, 175 SCRA 310,
315.

172

172
SUPREME COURT REPORTS ANNOTATED
Yang vs. Court of Appeals
in due course. Our ruling in Bataan Cigar reiterates that in De Ocampo & Co. v. Gatchalian.25
The factual circumstances in De Ocampo and in Bataan Cigar are not present in this case. For here, there
is no dispute that the crossed checks were delivered and duly deposited by David, the payee named
therein, in his bank account. In other words, the purpose behind the crossing of the checks was satisfied
by the payee.
Proceeding to the issue of damages, petitioner merely argues that respondents David and PCIB are not
entitled to damages, attorneys fees, and costs of suit as both acted in bad faith towards her, as shown
by her version of the facts which gave rise to the instant case.
Respondent David counters that he was maliciously and unceremoniously dragged into this suit for
reasons which have nothing to do with him at all, but which arose from petitioners failure to receive her
share of the profit promised her by Chandiramani. Moreover, in filing this suit which has lasted for over
a decade now, the petitioner deprived David of the rightful enjoyment of the two checks, to which he is
entitled, under the law, compelled him to hire the services of counsel to vindicate his rights, and
subjected him to social humiliation and besmirched reputation, thus harming his standing as a person of
good repute in the business community of Pampanga. David thus contends that it is but proper that
moral damages, attorneys fees, and costs of suit be awarded him.
For its part, respondent PCIB stresses that it was established by both the trial court and the appellate
court that it was needlessly dragged into this case. Hence, no error was committed by the appellate
court in declaring PCIB entitled to attorneys fees as it was compelled to litigate to protect itself.
_______________

25 113 Phil. 574 (1961). We held that under the following circumstances: (1) the drawer had no account
with the payee; (2) the check was crossed; (3) the crossed check was used to pay an obligation which did
not correspond to the amount of the check; and (4) the holder did not show or tell the payee why he
had the check in his possession and why he was using to pay his personal account, then the payee had
the duty to ascertain from the holder what the nature of the latters title to the check was or the nature
of his possession.
173

VOL. 409, AUGUST 15, 2003


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Yang vs. Court of Appeals
We have thoroughly perused the records of this case and find no reason to disagree with the finding of
the trial court, as affirmed by the appellate court, that:
[D]efendant David is entitled to [the] award of moral damages as he has been needlessly and
unceremoniously dragged into this case which should have been brought only between the plaintiff and
defendant Chandiramani.26
A careful reading of the findings of facts made by both the trial court and appellate court clearly shows
that the petitioner, in including David as a party in these proceedings, is barking up the wrong tree. It is
apparent from the factual findings that David had no dealings with the petitioner and was not privy to
the agreement of the latter with Chandiramani. Moreover, any loss which the petitioner incurred was
apparently due to the acts or omissions of Chandiramani, and hence, her recourse should have been
against him and not against David. By needlessly dragging David into this case all because he and
Chandiramani knew each other, the petitioner not only unduly delayed David from obtaining the value
of the checks, but also caused him anxiety and injured his business reputation while waiting for its
outcome. Recall that under Article 221727 of the Civil Code, moral damages include mental anguish,
serious anxiety, besmirched reputation, wounded feelings, social humiliation, and similar injury. Hence,
we find the award of moral damages to be in order.
The appellate court likewise found that like David, PCIB was dragged into this case on unfounded and
baseless grounds. Both were thus compelled to litigate to protect their interests, which makes an award
of attorneys fees justified under Article 2208 (2)28 of the Civil Code. Hence, we rule that the award of
attorneys fees to David and PCIB was proper.
_______________

26 CA Rollo, p. 130.
27 ART. 2217. Moral damages include physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation and similar injury. Though
incapable of pecuniary computation, moral damages may be recovered if they are the proximate result
of the defendants wrongful act or omission.
28 See note 12.
174

174
SUPREME COURT REPORTS ANNOTATED
Camacho vs. Gloria
WHEREFORE, the instant petition is DENIED. The assailed decision of the Court of Appeals, dated March
25, 1999, in CA-G.R. CV No. 52398 is AFFIRMED. Costs against the petitioner.
SO ORDERED.
Bellosillo (Chairman), Austria-Martinez and Tinga, JJ., concur.
Callejo, Sr., J., On leave.
Petition denied, assailed judgment affirmed.
Note.Where a signature is so placed upon the instrument that it is not clear in what capacity the
person making the same intended to sign, he is deemed an indorser (Sapiera vs. Court of Appeals, 314
SCRA 370 [1999])
o0o

Copyright 2014 Central Book Supply, Inc. All rights reserved. [Yang vs. Court of Appeals, 409 SCRA
159(2003)]

CLAUDE P. BAUTISTA, petitioner, vs. AUTO PLUS TRADERS, INCORPORATED and COURT OF APPEALS
(Twenty-First Division), respondents.
Corporation Law; Generally, the stockholders and officers are not personally liable for the obligations of
the corporation except only when the veil of corporate fiction is being used as a cloak or cover for fraud
or illegality, or to work injustice.Juridical entities have personalities separate and distinct from its
officers and the persons composing it. Generally, the stockholders and officers are not personally liable
for the obligations of the corporation except only when the veil of corporate fiction is being used as a
cloak or cover for fraud or illegality, or to work injustice. These situations, however, do not exist in this
case. The evidence shows that it is Cruiser Bus Lines and Transport Corporation that has obligations to
Auto Plus Traders, Inc. for tires. There is no agreement that petitioner shall be held liable for the
corporations obligations in his personal capacity. Hence, he cannot be held liable for the value of the
two checks issued
_______________

* SECOND DIVISION.
224

224
SUPREME COURT REPORTS ANNOTATED
Bautista vs. Auto Plus Traders, Incorporated
in payment for the corporations obligation in the total amount of P248,700.
Negotiable Instruments Law; Words and Phrases; Accommodation Party; Section 29 of the Negotiable
Instruments Law defines an accommodation party as a person who has signed the instrument as maker,
drawer, acceptor, or endorser, without receiving value therefor, and for the purpose of lending his name
to some other person.Contrary to private respondents contentions, petitioner cannot be considered
liable as an accommodation party for Check No. 58832. Section 29 of the Negotiable Instruments Law
defines an accommodation party as a person who has signed the instrument as maker, drawer,
acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some
other person. As gleaned from the text, an accommodation party is one who meets all the three
requisites, viz.: (1) he must be a party to the instrument, signing as maker, drawer, acceptor, or indorser;
(2) he must not receive value therefor; and (3) he must sign for the purpose of lending his name or
credit to some other person. An accommodation party lends his name to enable the accommodated
party to obtain credit or to raise money; he receives no part of the consideration for the instrument but
assumes liability to the other party/ies thereto. The first two elements are present here, however there
is insufficient evidence presented in the instant case to show the presence of the third requisite. All that
the evidence shows is that petitioner signed Check No. 58832, which is drawn against his personal
account. The said check, dated December 15, 2000, corresponds to the value of 24 sets of tires received
by Cruiser Bus Lines and Transport Corporation on August 29, 2000. There is no showing of when
petitioner issued the check and in what capacity. In the absence of concrete evidence it cannot just be
assumed that petitioner intended to lend his name to the corporation. Hence, petitioner cannot be
considered as an accommodation party.
PETITION for review on certiorari of the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Rodolfo B. Ta-asan, Jr. for petitioner.
Bansalan B. Metilla for respondent.
225

VOL. 561, AUGUST 6, 2008


225
Bautista vs. Auto Plus Traders, Incorporated
QUISUMBING, J.:
This petition for review on certiorari assails the Decision1 dated August 10, 2004 of the Court of Appeals
in CA-G.R. CR No. 28464 and the Resolution2 dated October 29, 2004, which denied petitioners motion
for reconsideration. The Court of Appeals affirmed the February 24, 2004 Decision and May 11, 2004
Order of the Regional Trial Court (RTC), Davao City, Branch 16, in Criminal Case Nos. 52633-03 and
52634-03.
The antecedent facts are as follows:
Petitioner Claude P. Bautista, in his capacity as President and Presiding Officer of Cruiser Bus Lines and
Transport Corporation, purchased various spare parts from private respondent Auto Plus Traders, Inc.
and issued two postdated checks to cover his purchases. The checks were subsequently dishonored.
Private respondent then executed an affidavit-complaint for violation of Batas Pambansa Blg. 223
against petitioner. Consequently, two Informations for violation of BP Blg. 22 were filed with the
Municipal Trial Court in Cities (MTCC) of Davao City against the petitioner. These were docketed as
Criminal Case Nos. 102,004-B-2001 and 102,005-B-2001. The Informations4 read:
Criminal Case No. 102,004-B-2001:
The undersigned accuses the above-named accused for violation of Batas Pambansa Bilang 22,
committed as follows:
That on or about December 15, 2000, in the City of Davao, Philippines, and within the jurisdiction of this
Honorable Court, the
_______________

1 Rollo, pp. 36-40. Penned by Associate Justice Estela M. Perlas-Bernabe, with Associate Justices Arturo
A. Tayag and Edgardo G. Camello concurring.
2 Id., at p. 41.
3 AN ACT PENALIZING THE MAKING OR DRAWING AND ISSUANCE OF A CHECK WITHOUT SUFFICIENT
FUNDS OR CREDIT AND FOR OTHER PURPOSES.
4 Rollo, pp. 48-49.

226

226
SUPREME COURT REPORTS ANNOTATED
Bautista vs. Auto Plus Traders, Incorporated
above-mentioned accused, knowing fully well that he had no sufficient funds and/or credit with the
drawee bank, wilfully, unlawfully and feloniously issued and made out Rural Bank of Digos, Inc. Check
No. 058832, dated December 15, 2000, in the amount of P151,200.00, in favor of Auto Plus Traders, Inc.,
but when said check was presented to the drawee bank for encashment, the same was dishonored for
the reason DRAWN AGAINST INSUFFICIENT FUNDS and despite notice of dishonor and demands upon
said accused to make good the check, accused failed and refused to make payment to the damage and
prejudice of herein complainant.
CONTRARY TO LAW.
Criminal Case No. 102,005-B-2001:
The undersigned accuses the above-named accused for violation of Batas Pambansa Bilang 22,
committed as follows:
That on or about October 30, 2000, in the City of Davao, Philippines, and within the jurisdiction of this
Honorable Court, the above-mentioned accused, knowing fully well that he had no sufficient funds
and/or credit with the drawee bank, wilfully, unlawfully and feloniously issued and made out Rural Bank
of Digos, Inc. Check No. 059049, dated October 30, 2000, in the amount of P97,500.00, in favor of Auto
Plus Traders, [Inc.], but when said check was presented to the drawee bank for encashment, the same
was dishonored for the reason DRAWN AGAINST INSUFFICIENT FUNDS and despite notice of dishonor
and demands upon said accused to make good the check, accused failed and refused to make payment,
to the damage and prejudice of herein complainant.
CONTRARY TO LAW.
Petitioner pleaded not guilty. Trial on the merits ensued. After the presentation of the prosecutions
evidence, petitioner filed a demurrer to evidence. On April 21, 2003, the MTCC granted the demurrer,
thus:
WHEREFORE, the demurrer to evidence is granted, premised on reasonable doubt as to the guilt of the
accused. Cruiser Bus Line[s] and Transport Corporation, through the accused is directed to pay the
complainant the sum of P248,700.00 representing the value of the two checks, with interest at the rate
of 12% per annum
227

VOL. 561, AUGUST 6, 2008


227
Bautista vs. Auto Plus Traders, Incorporated
to be computed from the time of the filing of these cases in Court, until the account is paid in full;
ordering further Cruiser Bus Line[s] and Transport Corporation, through the accused, to reimburse
complainant the expense representing filing fees amounting to P1,780.00 and costs of litigation which
this Court hereby fixed at P5,000.00.
SO ORDERED.5
Petitioner moved for partial reconsideration but his motion was denied. Thereafter, both parties
appealed to the RTC. On February 24, 2004, the trial court ruled:
WHEREFORE, the assailed Order dated April 21, 2003 is hereby MODIFIED to read as follows: Accused is
directed to pay and/or reimburse the complainant the following sums: (1) P248,700.00 representing the
value of the two checks, with interest at the rate of 12% per annum to be computed from the time of
the filing of these cases in Court, until the account is paid in full; (2) P1,780.00 for filing fees and
P5,000.00 as cost of litigation.
SO ORDERED.6
Petitioner moved for reconsideration, but his motion was denied on May 11, 2004. Petitioner elevated
the case to the Court of Appeals, which affirmed the February 24, 2004 Decision and May 11, 2004
Order of the RTC:
WHEREFORE, premises considered, the instant petition is DENIED. The assailed Decision of the Regional
Trial Court, Branch 16, Davao City, dated February 24, 2004 and its Order dated May 11, 2004 are
AFFIRMED.
SO ORDERED.7
Petitioner now comes before us, raising the sole issue of whether the Court of Appeals erred in
upholding the RTCs ruling that petitioner, as an officer of the corporation, is per_______________

5 Id., at pp. 87-88.


6 Id., at p. 107.
7 Id., at p. 40.

228

228
SUPREME COURT REPORTS ANNOTATED
Bautista vs. Auto Plus Traders, Incorporated
sonally and civilly liable to the private respondent for the value of the two checks.8
Petitioner asserts that BP Blg. 22 merely pertains to the criminal liability of the accused and that the
corporation, which has a separate personality from its officers, is solely liable for the value of the two
checks.
Private respondent counters that petitioner should be held personally liable for both checks. Private
respondent alleged that petitioner issued two postdated checks: a personal check in his name for the
amount of P151,200 and a corporation check under the account of Cruiser Bus Lines and Transport
Corporation for the amount of P97,500. According to private respondent, petitioner, by issuing his check
to cover the obligation of the corporation, became an accommodation party. Under Section 299 of the
Negotiable Instruments Law, an accommodation party is liable on the instrument to a holder for value.
Private respondent adds that petitioner should also be liable for the value of the corporation check
because instituting another civil action against the corporation would result in multiplicity of suits and
delay.
At the outset, we note that private respondents allegation that petitioner issued a personal check
disputes the factual findings of the MTCC. The MTCC found that the two checks belong to Cruiser Bus
Lines and Transport Corporation while the RTC found that one of the checks was a personal check of the
petitioner. Generally this Court, in a petition for review on certiorari under Rule 45 of the Rules of Court,
has no jurisdiction over questions of facts. But, considering that the
_______________

8 Id., at p. 29.
9 Sec. 29. Liability of accommodation party.An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person. Such a person is liable on the instrument to a holder
for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an
accommodation party.
229

VOL. 561, AUGUST 6, 2008


229
Bautista vs. Auto Plus Traders, Incorporated
findings of the MTCC and the RTC are at variance,10 we are compelled to settle this issue.
A perusal of the two check return slips11 in conjunction with the Current Account Statements12 would
show that the check for P151,200 was drawn against the current account of Claude Bautista while the
check for P97,500 was drawn against the current account of Cruiser Bus Lines and Transport
Corporation. Hence, we sustain the factual finding of the RTC.
Nonetheless, we find the appellate court in error for affirming the decision of the RTC holding petitioner
liable for the value of the checks considering that petitioner was acquitted of the crime charged and that
the debts are clearly corporate debts for which only Cruiser Bus Lines and Transport Corporation should
be held liable.
Juridical entities have personalities separate and distinct from its officers and the persons composing
it.13 Generally, the stockholders and officers are not personally liable for the obligations of the
corporation except only when the veil of corporate fiction is being used as a cloak or cover for fraud or
illegality, or to work injustice.14 These situations, however, do not exist in this case. The evidence shows
that it is Cruiser Bus Lines and Transport Corporation that has obligations to Auto Plus Traders, Inc. for
tires. There is no agreement that petitioner shall be held liable for the corporations obligations in his
personal capacity. Hence, he cannot be held liable for the value of the two checks issued in payment for
the corporations obligation in the total amount of P248,700.
_______________

10 See MEA Builders, Inc. v. Court of Appeals, G.R. No. 121484, January 31, 2005, 450 SCRA 155, 165.
11 Rollo, pp. 70, 71.
12 Id., at pp. 68, 72.
13 Construction & Development Corporation of the Philippines v. Cuenca, G.R. No. 163981, August 12,
2005, 466 SCRA 714, 727.
14 See Jardine Davies, Inc. v. JRB Realty, Inc., G.R. No. 151438, July 15, 2005, 463 SCRA 555, 563.
230

230

SUPREME COURT REPORTS ANNOTATED


Bautista vs. Auto Plus Traders, Incorporated
Likewise, contrary to private respondents contentions, petitioner cannot be considered liable as an
accommodation party for Check No. 58832. Section 29 of the Negotiable Instruments Law defines an
accommodation party as a person who has signed the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for the purpose of lending his name to some other
person. As gleaned from the text, an accommodation party is one who meets all the three requisites,
viz.: (1) he must be a party to the instrument, signing as maker, drawer, acceptor, or indorser; (2) he
must not receive value therefor; and (3) he must sign for the purpose of lending his name or credit to
some other person.15 An accommodation party lends his name to enable the accommodated party to
obtain credit or to raise money; he receives no part of the consideration for the instrument but assumes
liability to the other party/ies thereto.16 The first two elements are present here, however there is
insufficient evidence presented in the instant case to show the presence of the third requisite. All that
the evidence shows is that petitioner signed Check No. 58832, which is drawn against his personal
account. The said check, dated December 15, 2000, corresponds to the value of 24 sets of tires received
by Cruiser Bus Lines and Transport Corporation on August 29, 2000.17 There is no showing of when
petitioner issued the check and in what capacity. In the absence of concrete evidence it cannot just be
assumed that petitioner intended to lend his name to the corporation. Hence, petitioner cannot be
considered as an accommodation party.
Cruiser Bus Lines and Transport Corporation, however, remains liable for the checks especially since
there is no evi_______________

15 Ang v. Associated Bank, G.R. No. 146511, September 5, 2007, 532 SCRA 244, 272-273; Lim v. Saban,
G.R. No. 163720, December 16, 2004, 447 SCRA 232, 244; Crisologo-Jose v. Court of Appeals, G.R. No.
80599, September 15, 1989, 177 SCRA 594, 598.
16 Ang v. Associated Bank, supra at p. 273.
17 Exhibit C, Records, p. 114.
231

VOL. 561, AUGUST 6, 2008


231
Bautista vs. Auto Plus Traders, Incorporated

dence that the debts covered by the subject checks have been paid.
WHEREFORE, the petition is GRANTED. The Decision dated August 10, 2004 and the Resolution dated
October 29, 2004 of the Court of Appeals in CA-G.R. CR No. 28464 are REVERSED and SET ASIDE.
Criminal Case Nos. 52633-03 and 52634-03 are DISMISSED, without prejudice to the right of private
respondent Auto Plus Traders, Inc., to file the proper civil action against Cruiser Bus Lines and Transport
Corporation for the value of the two checks.
No pronouncement as to costs.
SO ORDERED.
Puno (C.J.)** and Brion, J., concur.
Tinga, J., I join J. Velascos dissent.
Velasco, Jr., J., Please see dissenting opinion.
DISSENTING OPINION

VELASCO, JR., J.:


With due respect, I register my dissent to the ponencia of my esteemed colleague. I submit that
petitioner Bautista is civilly liable for the amounts of the two checks he issued; hence, the Court of
Appeals Decision affirming that of the Regional Trial Court should be upheld and the instant petition be
dismissed.
To support its position absolving petitioner from civil liability arising from the bad checks, the ponencia
made the following ratiocination, viz.:
Juridical entities have personalities separate and distinct from its officers and the persons composing it.
Generally, the stock_______________

** In lieu of Associate Justice Conchita Carpio-Morales who inhibited herself.


232

232
SUPREME COURT REPORTS ANNOTATED

Bautista vs. Auto Plus Traders, Incorporated


holders and officers are not personally liable for the obligations of the corporation except only when the
veil of corporate fiction is being used as a cloak or cover for fraud or illegality, or to work injustice. These
situations, however, do not exist in this case. The evidence shows that it is Cruiser Bus Lines and
Transport Corporation that has obligations to Auto Plus Traders, Inc. for tires. There is no agreement
that petitioner shall be held liable for the corporations obligations in his personal capacity. Hence, he
cannot be held liable for the value of the two checks issued in payment for the corporations obligation
in the total amount of P248,700.
I register the view, however, that the drawer of the bounced checks is civilly liable for the amounts of
the checks drawn to pay the said obligations of the corporations for the following reasons:
1. Section 1 of B.P. Blg. 22 is quite unequivocal regarding the liability of the signatory to the check
drawn by a corporation, thus:
x x x Where the check is drawn by a corporation, company or entity, the person who actually signed the
check in behalf of such drawer shall be liable under this Act.
One can contend, however, that the aforequoted section does not clearly say the signatory is both
criminally and civilly liable for the dishonored checks.
This issue of the civil liability of the signatory was squarely resolved in the case of Llamado v. Court of
Appeals1 where it was held:
Petitioners argument that he should not be held personally liable for the amount of the check because
it was a check of the Pan Asia Finance Corporation and he signed the same in his capacity as Treasurer of
the corporation, is also untenable. The third paragraph of Section 1 of BP Blg. 22 states:
_______________

1 G.R. No. 99032, March 26, 1997, 270 SCRA 423, 431.
233

VOL. 561, AUGUST 6, 2008


233
Bautista vs. Auto Plus Traders, Incorporated
Where the check is drawn by a corporation, company or entity, the person or persons who actually
signed the check in behalf of such drawer shall be liable under this Act.

In the case of Lee v. Court of Appeals,2 Lee signed a check in the amount of Php 980,000.00 for the
payment of the loan of a company owned by another. The check was dishonored due to account
closed. Lee was made civilly liable for the check even though he issued the check in payment of the
obligation of a company, thus:
WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the following MODIFICATIONS: The
sentence of imprisonment is deleted. Instead, petitioner [Lee] is ordered to pay a fine of P200,000.00,
subject to subsidiary imprisonment in case of insolvency pursuant to Article 39 of the Revised Penal
Code; and petitioner is ordered to pay the private complainant the amount of P980,000.00 with 12%
legal interest per annum from the date of finality of herein judgment. (Emphasis supplied).
2. The civil aspect is deemed instituted with the criminal case. To require the payee to institute a civil
case against the corporation for the amount of the bad check would lead to multiplicity of suits. In
addition, this will unduly burden the offended party since Rule 141 requires the payment of filing fees
for a crime involving a breach of BP Blg. 22. A second case, this time a civil case against the corporation,
will expose the offended party to the payment of filing fees for the second time.
Lastly, even assuming arguendo that the petitioner is not liable for the obligation of the corporation, yet
he should at least be made liable for the amount of Php 151,200 which was covered by his personal
check according to the ponencia. Responsibility under BP Blg. 22 is personal to the accused and Section
1 of said law is clear that the person who actually signed the bad check is liable.
_______________

2 G.R. No. 145498, January 17, 2005, 448 SCRA 455, 477.
Copyright 2014 Central Book Supply, Inc. All rights reserved. [Bautista vs. Auto Plus Traders,
<br/>Incorporated, 561 SCRA 223(2008)]

G.R. No. 146511. September 5, 2007.*


TOMAS ANG, petitioner, vs. ASSOCIATED BANK AND ANTONIO ANG ENG LIONG, respondents.
Appeals; Assignment of Errors; Pleadings and Practice; It is well within the authority of the Court of
Appeals to raise, if it deems proper under the circumstances obtaining, error/s not assigned on an
appealed casean appellate court has the broad discretionary power to waive the lack of proper
assignment of errors and to consider errors not assigned.Procedurally, it is well within the authority of
the Court of Appeals to raise, if it deems proper under the circumstances obtaining, error/s not assigned
on an appealed case. In Mendoza v. Bautista, 453 SCRA 691 (2005), this Court recognized the broad
discretionary power of an appellate court to waive the lack of proper assignment of errors and to
consider errors not assigned, thus: As a rule, no issue may be raised on appeal unless it has been

brought before the lower tribunal for its consideration. Higher courts are precluded from entertaining
matters neither alleged in the pleadings nor raised during the proceedings below, but ventilated for the
first time only in a motion for reconsideration or on appeal. However, as with most procedural rules, this
maxim is subject to exceptions. Indeed, our rules recognize the broad discretionary power of an
appellate court to waive the lack of proper assignment of errors and to consider errors not assigned.
Section 8 of Rule 51 of the Rules of Court provides: SEC. 8. Questions that may be decided.No error
which does not affect the jurisdiction over the subject matter or the validity of the judgment appealed
from or the proceedings therein will be considered, unless stated in the assignment of errors, or closely
related to or dependent on an assigned error and properly argued in the brief, save as the court may
pass upon plain errors and clerical errors. Thus, an appellate court is clothed with ample authority to
review rulings even if they are not assigned as errors in the appeal in these instances: (a) grounds not
assigned as errors but affecting jurisdiction over the subject matter; (b) matters not assigned as errors
on appeal but are evidently plain or clerical errors within contemplation of law; (c) matters not assigned
as errors on appeal but consideration of which is necessary in arriving at a just
_______________

* FIRST DIVISION.
245

VOL. 532, SEPTEMBER 5, 2007


245
Ang vs. Associated Bank
decision and complete resolution of the case or to serve the interests of justice or to avoid dispensing
piecemeal justice; (d) matters not specifically assigned as errors on appeal but raised in the trial court
and are matters of record having some bearing on the issue submitted which the parties failed to raise
or which the lower court ignored; (e) matters not assigned as errors on appeal but closely related to an
error assigned; and (f) matters not assigned as errors on appeal but upon which the determination of a
question properly assigned is dependent.
Asset Privatization Trust; History.Taking into account the imperative need of formally launching a
program for the rationalization of the government corporate sector, then President Corazon C. Aquino
issued Proclamation No. 50 on December 8, 1986. As one of the twin cornerstones of the program was
to establish the privatization of a good number of government corporations, the proclamation created
the Asset Privatization Trust, which would, for the benefit of the National Government, take title to and
possession of, conserve, provisionally manage and dispose of transferred assets that were identified for
privatization or disposition. In accordance with the provisions of Section 23 of the proclamation, then

President Aquino subsequently issued Administrative Order No. 14 on February 3, 1987, which approved
the identification of and transfer to the National Government of certain assets (consisting of loans,
equity investments, accrued interest receivables, acquired assets and other assets) and liabilities
(consisting of deposits, borrowings, other liabilities and contingent guarantees) of the Development
Bank of the Philippines (DBP) and the Philippine National Bank (PNB). The transfer of assets was
implemented through a Deed of Transfer executed on February 27, 1987 between the National
Government, on one hand, and the DBP and PNB, on the other. In turn, the National Government
designated the Asset Privatization Trust to act as its trustee through a Trust Agreement, whereby the
non-performing accounts of DBP and PNB, including, among others, the DBPs equity with respondent
Bank, were entrusted to the Asset Privatization Trust. As provided for in the Agreement, among the
powers and duties of the Asset Privatization Trust with respect to the trust properties consisting of
receivables was to handle their administration and collection by bringing suit to enforce payment of the
obligations or any installment thereof or settling or compromising any of such obligations or any other
claim or demand which the Govern246

246
SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
ment may have against any person or persons, and to do all acts, institute all proceedings, and to
exercise all other rights, powers, and privileges of ownership that an absolute owner of the properties
would otherwise have the right to do.
Same; Actions; Parties; While a bank held by the Asset Privatization Trust may not appear to be the real
party in interest at the time the action for collection was instituted, the issue had been rendered moot
with the occurrence of a supervening eventthe reacquisition of the bank by its former owner when
the case was still pending in the lower court, thus reclaiming its real and actual interest over the unpaid
promissory notes.Based on the above backdrop, respondent Bank does not appear to be the real
party in interest when it instituted the collection suit on August 28, 1990 against Antonio Ang Eng Liong
and petitioner Tomas Ang. At the time the complaint was filed in the trial court, it was the Asset
Privatization Trust which had the authority to enforce its claims against both debtors. In fact, during the
pre-trial conference, Atty. Roderick Orallo, counsel for the bank, openly admitted that it was under the
trusteeship of the Asset Privatization Trust. The Asset Privatization Trust, which should have been
represented by the Office of the Government Corporate Counsel, had the authority to file and prosecute
the case. The foregoing notwithstanding, this Court can not, at present, readily subscribe to petitioners
insistence that the case must be dismissed. Significantly, it stands without refute, both in the pleadings
as well as in the evidence presented during the trial and up to the time this case reached the Court, that
the issue had been rendered moot with the occurrence of a supervening eventthe buy-back of the

bank by its former owner, Leonardo Ty, sometime in October 1993. By such re-acquisition from the
Asset Privatization Trust when the case was still pending in the lower court, the bank reclaimed its real
and actual interest over the unpaid promissory notes; hence, it could rightfully qualify as a holder
thereof under the NIL.
Negotiable Instruments Law; Accommodation Party; Requisites; Words and Phrases; An accommodation
party is a person who has signed the instrument as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to some other person.Notably,
Section 29 of the NIL defines an accommodation party as a person who has signed the instrument as
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Ang vs. Associated Bank
for, and for the purpose of lending his name to some other person. As gleaned from the text, an
accommodation party is one who meets all the three requisites, viz.: (1) he must be a party to the
instrument, signing as maker, drawer, acceptor, or indorser; (2) he must not receive value therefor; and
(3) he must sign for the purpose of lending his name or credit to some other person. An accommodation
party lends his name to enable the accommodated party to obtain credit or to raise money; he receives
no part of the consideration for the instrument but assumes liability to the other party/ies thereto. The
accommodation party is liable on the instrument to a holder for value even though the holder, at the
time of taking the instrument, knew him or her to be merely an accommodation party, as if the contract
was not for accommodation.
Same; Same; Suretyship; The relation between an accommodation party and the accommodated party is
one of principal and suretythe accommodation party being the surety; Although a contract of
suretyship is in essence accessory or collateral to a valid principal obligation, the suretys liability to the
creditor is immediate, primary and absolutehe is directly and equally bound with the principal.As
petitioner acknowledged it to be, the relation between an accommodation party and the
accommodated party is one of principal and suretythe accommodation party being the surety. As
such, he is deemed an original promisor and debtor from the beginning; he is considered in law as the
same party as the debtor in relation to whatever is adjudged touching the obligation of the latter since
their liabilities are interwoven as to be inseparable. Although a contract of suretyship is in essence
accessory or collateral to a valid principal obligation, the suretys liability to the creditor is immediate,
primary and absolute; he is directly and equally bound with the principal. As an equivalent of a regular
party to the undertaking, a surety becomes liable to the debt and duty of the principal obligor even

without possessing a direct or personal interest in the obligations nor does he receive any benefit
therefrom.
Obligations and Contracts; Suretyship; Article 2080 of the Civil Code does not apply in a contract of
suretyshipArticles 1207 up to 1222 of the Code (on joint and solidary obligations) govern the
relationship.Contrary to petitioners adamant stand, however, Article 2080 of the Civil Code does not
apply in a contract of suretyship. Art. 2047 of the Civil Code states that if a person binds himself
solidarily
248

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SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
with the principal debtor, the provisions of Section 4, Chapter 3, Title I, Book IV of the Civil Code must be
observed. Accordingly, Articles 1207 up to 1222 of the Code (on joint and solidary obligations) shall
govern the relationship of petitioner with the bank.
Negotiable Instruments Law; Accommodation Party; Words and Phrases; The phrase without receiving
value therefor used in Sec. 29 of the Negotiable Instruments Law (NIL) means without receiving value
by virtue of the instrument and not as it is apparently supposed to mean, without receiving payment
for lending his namewhen a third person advances the face value of the note to the accommodated
party at the time of its creation, the consideration for the note as regards its maker is the money
advanced to the accommodated party.In issuing the two promissory notes, petitioner as
accommodating party warranted to the holder in due course that he would pay the same according to
its tenor. It is no defense to state on his part that he did not receive any value therefor because the
phrase without receiving value therefore used in Sec. 29 of the NIL means without receiving value by
virtue of the instrument and not as it is apparently supposed to mean, without receiving payment for
lending his name. Stated differently, when a third person advances the face value of the note to the
accommodated party at the time of its creation, the consideration for the note as regards its maker is
the money advanced to the accommodated party. It is enough that value was given for the note at the
time of its creation. As in the instant case, a sum of money was received by virtue of the notes, hence, it
is immaterial so far as the bank is concerned whether one of the signers, particularly petitioner, has or
has not received anything in payment of the use of his name.
Same; Same; Upon the maturity of the note, a surety may pay the debt, demand the collateral security,
if there be any, and dispose of it to his benefit, or, if applicable, subrogate himself in the place of the
creditor with the right to enforce the guaranty against the other signers of the note for the
reimbursement of what he is entitled to recover from them.Under the law, upon the maturity of the
note, a surety may pay the debt, demand the collateral security, if there be any, and dispose of it to his

benefit, or, if applicable, subrogate himself in the place of the creditor with the right to enforce the
guaranty against the other signers of the note for the reimbursement of what he is entitled to recover
from them. Regrettably, none of these were
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Ang vs. Associated Bank
prudently done by petitioner. When he was first notified by the bank sometime in 1982 regarding his
accountabilities under the promissory notes, he lackadaisically relied on Antonio Ang Eng Liong, who
represented that he would take care of the matter, instead of directly communicating with the bank for
its settlement. Thus, petitioner cannot now claim that he was prejudiced by the supposed extension of
time given by the bank to his co-debtor.
Same; Same; Since the liability of an accommodation party remains not only primary but also
unconditional to a holder for value, even if the accommodated party receives an extension of the period
for payment without the consent of the accommodation party, the latter is still liable for the whole
obligation and such extension does not release him because as far as a holder for value is concerned, he
is a solidary co-debtor; It is a recognized doctrine in the matter of suretyship that with respect to the
surety, the creditor is under no obligation to display any diligence in the enforcement of his rights as a
creditor.Since the liability of an accommodation party remains not only primary but also unconditional
to a holder for value, even if the accommodated party receives an extension of the period for payment
without the consent of the accommodation party, the latter is still liable for the whole obligation and
such extension does not release him because as far as a holder for value is concerned, he is a solidary
co-debtor. In Clark v. Sellner, 42 Phil. 384 (1921), this Court held: x x x The mere delay of the creditor in
enforcing the guaranty has not by any means impaired his action against the defendant. It should not be
lost sight of that the defendants signature on the note is an assurance to the creditor that the collateral
guaranty will remain good, and that otherwise, he, the defendant, will be personally responsible for the
payment. True, that if the creditor had done any act whereby the guaranty was impaired in its value, or
discharged, such an act would have wholly or partially released the surety; but it must be born in mind
that it is a recognized doctrine in the matter of suretyship that with respect to the surety, the creditor is
under no obligation to display any diligence in the enforcement of his rights as a creditor. His mere
inaction indulgence, passiveness, or delay in proceeding against the principal debtor, or the fact that he
did not enforce the guaranty or apply on the payment of such funds as were available, constitute no
defense at all for the surety, unless the contract expressly requires diligence and promptness on the part
of the creditor, which is not the case in the present action.
250

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SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
There is in some decisions a tendency toward holding that the creditors laches may discharge the
surety, meaning by laches a negligent forbearance. This theory, however, is not generally accepted and
the courts almost universally consider it essentially inconsistent with the relation of the parties to the
note. (21 R.C.L., 1032-1034)
PETITION for review on certiorari of the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Breva and Breva Law Firm for petitioner.
Hildegardo F. Iigo for Associated Bank.
Bernardino Bolcan, Jr. for Ang Eng Liong.
AZCUNA, J.:

This petition for certiorari under Rule 45 of the Rules on Civil Procedure seeks to review the October 9,
2000 Decision1 and December 26, 2000 Resolution2 of the Court of Appeals in CA-G.R. CV No. 53413
which reversed and set aside the January 5, 1996 Decision3 of the Regional Trial Court, Branch 16,
Davao City, in Civil Case No. 20,299-90, dismissing the complaint filed by respondents for collection of a
sum of money.
On August 28, 1990, respondent Associated Bank (formerly Associated Banking Corporation and now
known as United Overseas Bank Philippines) filed a collection suit against Antonio Ang Eng Liong and
petitioner Tomas Ang for the two (2) promissory notes that they executed as principal debtor and comaker, respectively.
_______________

1 Penned by Associate Justice Martin S. Villarama, Jr., with Associate Justices Romeo J. Callejo, Sr. (now
retired Supreme Court Associate Justice) and Juan Q. Enriquez, Jr. concurring.
2 CA Rollo, p. 137.
3 Penned by Judge Romeo D. Marasigan.

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Ang vs. Associated Bank
In the Complaint,4 respondent Bank alleged that on October 3 and 9, 1978, the defendants obtained a
loan of P50,000, evidenced by a promissory note bearing PN-No. DVO-78-382, and P30,000, evidenced
by a promissory note bearing PN-No. DVO-78-390. As agreed, the loan would be payable, jointly and
severally, on January 31, 1979 and December 8, 1978, respectively. In addition, subsequent
amendments5 to the promissory notes as well as the disclosure statements6 stipulated that the loan
would earn 14% interest rate per annum, 2% service charge per annum, 1% penalty charge per month
from due date until fully paid, and attorneys fees equivalent to 20% of the outstanding obligation.
Despite repeated demands for payment, the latest of which were on September 13, 1988 and
September 9, 1986, on Antonio Ang Eng Liong and Tomas Ang, respectively, respondent Bank claimed
that the defendants failed and refused to settle their obligation, resulting in a total indebtedness of
P539,638.96 as of July 31, 1990, broken down as follows:

PN-No. DVO-78-382
PN-No. DVO-78-390
Outstanding Balance
P50,000.00
P30,000.00
Add
Past due charges for 4,199 days (from 01-31-79 to 07-31-90)
Past due charges for 4,253 days (from 12-8-78 to 07-31-90)
14% Interest
P203,538.98
P125,334.41
2% Service Charge

P11,663.89
P7,088.34
12% Overdue Charge
P69,983.34
P42,530.00
Total
P285,186.21
P174,952.75
Less: Charges paid
P500.00
None
Amount Due
P334,686.21
P204,952.75
_______________

4 Records, pp. 1-5.


5 Id., at pp. 500, 563.
6 Id., at pp. 501, 564.
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SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
In his Answer,7 Antonio Ang Eng Liong only admitted to have secured a loan amounting to P80,000. He
pleaded though that the bank be ordered to submit a more reasonable computation considering that

there had been no correct and reasonable statement of account sent to him by the bank, which was
allegedly collecting excessive interest, penalty charges, and attorneys fees despite knowledge that his
business was destroyed by fire, hence, he had no source of income for several years.
For his part, petitioner Tomas Ang filed an Answer with Counterclaim and Cross-claim.8 He interposed
the affirmative defenses that: the bank is not the real party in interest as it is not the holder of the
promissory notes, much less a holder for value or a holder in due course; the bank knew that he did not
receive any valuable consideration for affixing his signatures on the notes but merely lent his name as an
accommodation party; he accepted the promissory notes in blank, with only the printed provisions and
the signature of Antonio Ang Eng Liong appearing therein; it was the bank which completed the notes
upon the orders, instructions, or representations of his co-defendant; PN-No. DVO-78-382 was
completed in excess of or contrary to the authority given by him to his co-defendant who represented
that he would only borrow P30,000 from the bank; his signature in PN-No. DVO-78-390 was procured
through fraudulent means when his co-defendant claimed that his first loan did not push through; the
promissory notes did not indicate in what capacity he was intended to be bound; the bank granted his
co-defendant successive extensions of time within which to pay, without his (Tomas Ang) knowledge
and consent; the bank imposed new and additional stipulations on interest, penalties, services charges
and attorneys fees more onerous than the terms of the notes, without his knowledge and consent, in
the absence of legal and factual basis and in violation of the Usury Law; the bank caused the
_______________

7 Id., at pp. 14-16.


8 Id., at pp. 20-26.
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Ang vs. Associated Bank
inclusion in the promissory notes of stipulations such as waiver of presentment for payment and notice
of dishonor which are against public policy; and the notes had been impaired since they were never
presented for payment and demands were made only several years after they fell due when his codefendant could no longer pay them.
Regarding his counterclaim, Tomas Ang argued that by reason of the banks acts or omissions, it should
be held liable for the amount of P50,000 for attorneys fees and expenses of litigation. Furthermore, on
his cross-claim against Antonio Ang Eng Liong, he averred that he should be reimbursed by his co-

defendant any and all sums that he may be adjudged liable to pay, plus P30,000, P20,000 and P50,000
for moral and exemplary damages, and attorneys fees, respectively.
In its Reply,9 respondent Bank countered that it is the real party in interest and is the holder of the
notes since the Associated Banking Corporation and Associated Citizens Bank are its predecessors-ininterest. The fact that Tomas Ang never received any moneys in consideration of the two (2) loans and
that such was known to the bank are immaterial because, as an accommodation maker, he is considered
as a solidary debtor who is primarily liable for the payment of the promissory notes. Citing Section 29 of
the Negotiable Instruments Law (NIL), the bank posited that absence or failure of consideration is not a
matter of defense; neither is the fact that the holder knew him to be only an accommodation party.
Respondent Bank likewise retorted that the promissory notes were completely filled up at the time of
their delivery. Assuming that such was not the case, Sec. 14 of the NIL provides that the bank has the
prima facie authority to complete the blank form. Moreover, it is presumed that one who has signed as
a maker acted with care and had signed the document with full knowledge of its content. The bank
noted that Tomas Ang is a prominent businessman in Davao City who
_______________

9 Id., at pp. 32-46.


254

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SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
has been engaged in the auto parts business for several years, hence, certainly he is not so nave as to
sign the notes without knowing or bothering to verify the amounts of the loans covered by them.
Further, he is already in estoppel since despite receipt of several demand letters there was not a single
protest raised by him that he signed for only one note in the amount of P30,000.
It was denied by the bank that there were extensions of time for payment accorded to Antonio Ang Eng
Liong. Granting that such were the case, it said that the same would not relieve Tomas Ang from liability
as he would still be liable for the whole obligation less the share of his co-debtor who received the
extended term.
The bank also asserted that there were no additional or new stipulations imposed other than those
agreed upon. The penalty charge, service charge, and attorneys fees were reflected in the amendments
to the promissory notes and disclosure statements. Reference to the Usury Law was misplaced as usury

is legally non-existent; at present, interest can be charged depending on the agreement of the lender
and the borrower.
Lastly, the bank contended that the provisions on presentment for payment and notice of dishonor were
expressly waived by Tomas Ang and that such waiver is not against public policy pursuant to Sections 82
(c) and 109 of the NIL. In fact, there is even no necessity therefor since being a solidary debtor he is
absolutely required to pay and primarily liable on both promissory notes.
On October 19, 1990, the trial court issued a preliminary pre-trial order directing the parties to submit
their respective pre-trial guide.10 When Antonio Ang Eng Liong failed to submit his brief, the bank filed
an ex parte motion to declare him in default.11 Per Order of November 23, 1990, the court
_______________

10 Id., at pp. 27-28.


11 Id., at pp. 59-60.
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Ang vs. Associated Bank
granted the motion and set the ex parte hearing for the presentation of the banks evidence.12 Despite
Tomas Angs motion13 to modify the Order so as to exclude or cancel the ex parte hearing based on
then Sec. 4, Rule 18 of the old Rules of Court (now Sec. 3[c.], Rule 9 of the Revised Rules on Civil
Procedure), the hearing nonetheless proceeded.14
Eventually, a decision15 was rendered by the trial court on February 21, 1991. For his supposed bad
faith and obstinate refusal despite several demands from the bank, Antonio Ang Eng Liong was ordered
to pay the principal amount of P80,000 plus 14% interest per annum and 2% service charge per annum.
The overdue penalty charge and attorneys fees were, however, reduced for being excessive, thus:
WHEREFORE, judgment is rendered against defendant Antonio Ang Eng Liong and in favor of plaintiff,
ordering the former to pay the latter:
On the first cause of action:

1) the amount of P50,000.00 representing the principal obligation with 14% interest per annum from
June 27, 1983 with 2% service charge and 6% overdue penalty charges per annum until fully paid;
2) P11,663.89 as accrued service charge; and
3) P34,991.67 as accrued overdue penalty charge.
On the second cause of action:

1) the amount of P50,000.00 (sic) representing the principal account with 14% interest from June 27,
1983 with 2% service charge and 6% overdue penalty charges per annum until fully paid;
2) P7,088.34 representing accrued service charge;
3) P21,265.00 as accrued overdue penalty charge;
4) the amount of P10,000.00 as attorneys fees; and
_______________

12 Id., at p. 62.
13 Id., at pp. 64-66.
14 Id., at pp. 72-73.
15 Id., at pp. 84-86.
256

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SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
5) the amount of P620.00 as litigation expenses and to pay the costs.
SO ORDERED.16
The decision became final and executory as no appeal was taken therefrom. Upon the banks ex parte
motion, the court accordingly issued a writ of execution on April 5, 1991.17

Thereafter, on June 3, 1991, the court set the pre-trial conference between the bank and Tomas Ang,18
who, in turn, filed a Motion to Dismiss19 on the ground of lack of jurisdiction over the case in view of
the alleged finality of the February 21, 1991 Decision. He contended that Sec. 4, Rule 18 of the old Rules
sanctions only one judgment in case of several defendants, one of whom is declared in default.
Moreover, in his Supplemental Motion to Dismiss,20 Tomas Ang maintained that he is released from his
obligation as a solidary guarantor and accommodation party because, by the banks actions, he is now
precluded from asserting his cross-claim against Antonio Ang Eng Liong, upon whom a final and
executory judgment had already been issued.
The court denied the motion as well as the motion for reconsideration thereon.21 Tomas Ang
subsequently filed a petition for certiorari and prohibition before this Court, which, however, resolved
to refer the same to the Court of Appeals.22 In accordance with the prayer of Tomas Ang, the appellate
court promulgated its Decision on January 29, 1992 in CA-G.R. SP No. 26332, which annulled and set
aside the portion of the Order dated November 23, 1990 setting the ex parte presentation of the banks
evidence against Antonio Ang Eng
_______________

16 Id., at p. 86.
17 Id., at pp. 88-90, 144.
18 Id., at p. 91.
19 Id., at pp. 92-94.
20 Id., at pp. 95-96.
21 Id., at pp. 119-120, 123-127, 140.
22 Id., at p. 152.
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Ang vs. Associated Bank
Liong, the Decision dated February 21, 1991 rendered against him based on such evidence, and the Writ
of Execution issued on April 5, 1991.23

Trial then ensued between the bank and Tomas Ang. Upon the latters motion during the pre-trial
conference, Antonio Ang Eng Liong was again declared in default for his failure to answer the cross-claim
within the reglementary period.24
When Tomas Ang was about to present evidence in his behalf, he filed a Motion for Production of
Documents,25 reasoning:
x x x
2. That corroborative to, and/or preparatory or incident to his testimony[,] there is [a] need for him to
examine original records in the custody and possession of plaintiff, viz.:
a. original Promissory Note (PN for brevity) # DVO-78-382 dated October 3, 1978[;]
b. original of Disclosure Statement in reference to PN # DVO-78-382;
c. original of PN # DVO-78-390 dated October 9, 1978;
d. original of Disclosure Statement in reference to PN # DVO-78-390;
e. Statement or Record of Account with the Associated Banking Corporation or its successor, of Antonio
Ang in CA No. 470 (cf. Exh. O) including bank records, withdrawal slips, notices, other papers and
relevant dates relative to the overdraft of Antonio Eng Liong in CA No. 470;
f. Loan Applications of Antonio Ang Eng Liong or borrower relative to PN Nos. DVO-78-382 and DVO-78390 (supra);
g. Other supporting papers and documents submitted by Antonio Ang Eng Liong relative to his loan
application vis--vis PN. Nos. DVO-78-382 and DVO-78-390 such as financial
_______________

23 Id., at pp. 164-170.


24 TSN, January 18, 1993, p. 2.
25 Records, pp. 223-226.
258

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SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank

statements, income tax returns, etc. as required by the Central Bank or bank rules and regulations.
3. That the above matters are very material to the defenses of defendant Tomas Ang, viz.:
the bank is not a holder in due course when it accepted the [PNs] in blank.
The real borrower is Antonio Ang Eng Liong which fact is known to the bank.
That the PAYEE not being a holder in due course and knowing that defendant Tomas Ang is merely an
accommodation party, the latter may raise against such payee or holder or successor-in-interest (of the
notes) PERSONAL and EQUITABLE DEFENSES such as FRAUD in INDUCEMENT, DISCHARGE ON NOTE,
Application of [Articles] 2079, 2080 and 1249 of the Civil Code, NEGLIGENCE in delaying collection
despite Eng Liongs OVERDRAFT in C.A. No. 470, etc.26
In its Order dated May 16, 1994,27 the court denied the motion stating that the promissory notes and
the disclosure statements have already been shown to and inspected by Tomas Ang during the trial, as
in fact he has already copies of the same; the Statements or Records of Account of Antonio Ang Eng
Liong in CA No. 470, relative to his overdraft, are immaterial since, pursuant to the previous ruling of the
court, he is being sued for the notes and not for the overdraft which is personal to Antonio Ang Eng
Liong; and besides its nonexistence in the banks records, there would be legal obstacle for the
production and inspection of the income tax return of Antonio Ang Eng Liong if done without his
consent.
When the motion for reconsideration of the aforesaid Order was denied, Tomas Ang filed a petition for
certiorari and prohibition with application for preliminary injunction and restraining order before the
Court of Appeals docketed as CA-G.R. SP No. 34840.28 On August 17, 1994, however, the Court
_______________

26 Id., at pp. 223-224.


27 Id., at pp. 234-235.
28 Id., at pp. 236-240, 247, 250-275.
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VOL. 532, SEPTEMBER 5, 2007


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Ang vs. Associated Bank
of Appeals denied the issuance of a Temporary Restraining Order.29

Meanwhile, notwithstanding its initial rulings that Tomas Ang was deemed to have waived his right to
present evidence for failure to appear during the pendency of his petition before the Court of Appeals,
the trial court decided to continue with the hearing of the case.30
After the trial, Tomas Ang offered in evidence several documents, which included a copy of the Trust
Agreement between the Republic of the Philippines and the Asset Privatization Trust, as certified by the
notary public, and news clippings from the Manila Bulletin dated May 18, 1994 and May 30, 1994.31 All
the documentary exhibits were admitted for failure of the bank to submit its comment to the formal
offer.32 Thereafter, Tomas Ang elected to withdraw his petition in CA-G.R. SP No. 34840 before the
Court of Appeals, which was then granted.33
On January 5, 1996, the trial court rendered judgment against the bank, dismissing the complaint for
lack of cause of action.34 It held that:
Exh. 9 and its *sub-markings], the Trust Agreement dated 27 February 1987 for the defense shows
that: the Associated Bank as of June 30, 1986 is one of DBPs or Development Bank of the *Philippines+
non-performing accounts for transfer; on February 27, 1987 through Deeds of Transfer executed by and
between the Philippine National Bank and Development Bank of the Philippines and the National
Government, both financial institutions assigned, transferred and conveyed their non-performing assets
to the National Government; the National Government in turn and as TRUSTOR,
_______________

29 Id., at p. 350.
30 Id., at pp. 358, 395, 401-402.
31 Id., at pp. 450, 529-542, 560-561; Exhibit 9 and its submarkings.
32 Id., at p. 487.
33 Rollo, p. 182.
34 Records, pp. 490-493.
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SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank

transferred, conveyed and assigned by way of trust unto the Asset Privatization Trust said nonperforming assets, [which] took title to and possession of, [to] conserve, provisionally manage and
dispose[,] of said assets identified for privatization or disposition; one of the powers and duties of the
APT with respect to trust properties consisting of receivables is to handle the administration, collection
and enforcement of the receivables; to bring suit to enforce payment of the obligations or any
installment thereof or to settle or compromise any of such obligations, or any other claim or demand
which the government may have against any person or persons[.]
The Manila Bulletin news clippings dated May 18, 1994 and May 30, 1994, Exh. 9-A, 9-B, 9-C, and
9-D, show that the Monetary Board of the Bangko Sentral ng Pilipinas approved the rehabilitation plan
of the Associated Bank. One main feature of the rehabilitation plan included the financial assistance for
the bank by the Philippine Deposit Insurance Corporation (PDIC) by way of the purchase of AB Assets
worth P1.3945 billion subject to a buy-back arrangement over a 10 year period. The PDIC had approved
of the rehab scheme, which included the purchase of ABs bad loans worth P1.86 at 25% discount. This
will then be paid by AB within a 10-year period plus a yield comparable to the prevailing market rates x x
x.
Based then on the evidence presented by the defendant Tomas Ang, it would readily appear that at the
time this suit for Sum of Money was filed which was on August [28], 1990, the notes were held by the
Asset Privatization Trust by virtue of the Deeds of Transfer and Trust Agreement, which was empowered
to bring suit to enforce payment of the obligations. Consequently, defendant Tomas Ang has sufficiently
established that plaintiff at the time this suit was filed was not the holder of the notes to warrant the
dismissal of the complaint.35
Respondent Bank then elevated the case to the Court of Appeals. In the appellants brief captioned,
ASSOCIATED BANK, Plaintiff-Appellant versus ANTONIO ANG ENG LIONG and TOMAS ANG, Defendants,
TOMAS ANG, Defendant-Appellee, the following errors were alleged:
_______________

35 Id., at pp. 492-493.


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I.

THE LOWER COURT ERRED IN NOT HOLDING DEFENDANT ANTONIO ANG ENG LIONG AND DEFENDANTAPPELLEE TOMAS ANG LIABLE TO PLAINTIFF-APPELLANT ON THEIR UNPAID LOANS DESPITE THE
LATTERS DOCUMENTARY EXHIBITS PROVING THE SAID OBLIGATIONS.
II.

THE LOWER COURT ERRED IN DISMISSING PLAINTIFF-APPELLANTS COMPLAINT ON THE BASIS OF


NEWSPAPER CLIPPINGS WHICH WERE COMPLETELY HEARSAY IN CHARACTER AND IMPROPER FOR
JUDICIAL NOTICE.36
The bank stressed that it has established the causes of action outlined in its Complaint by a
preponderance of evidence. As regards the Deed of Transfer and Trust Agreement, it contended that the
same were never authenticated by any witness in the course of the trial; the Agreement, which was not
even legible, did not mention the promissory notes subject of the Complaint; the bank is not a party to
the Agreement, which showed that it was between the Government of the Philippines, acting through
the Committee on Privatization represented by the Secretary of Finance as trustor and the Asset
Privatization Trust, which was created by virtue of Proclamation No. 50; and the Agreement did not
reflect the signatures of the contracting parties. Lastly, the bank averred that the news items appearing
in the Manila Bulletin could not be the subject of judicial notice since they were completely hearsay in
character.37
On October 9, 2000, the Court of Appeals reversed and set aside the trial courts ruling. The dispositive
portion of the Decision38 reads:
_______________

36 CA Rollo, p. 23.
37 Id., at pp. 27-30.
38 Id., at pp. 79-84.
262

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SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank

WHEREFORE, premises considered, the Decision of the Regional Trial Court of Davao City, Branch 16, in
Civil Case No. 20,299-90 is hereby REVERSED AND SET ASIDE and another one entered ordering
defendant-appellee Tomas Ang to pay plaintiff-appellant Associated Bank the following:
1. P50,000.00 representing the principal amount of the loan under PN-No. DVO-78-382 plus 14%
interest thereon per annum computed from January 31, 1979 until the full amount thereof is paid;
2. P30,000.00 representing the principal amount of the loan under PN-No. DVO-78-390 plus 14%
interest thereon per annum computed from December 8, 1978 until the full amount thereof is paid;
All other claims of the plaintiff-appellant are DISMISSED for lack of legal basis. Defendant-appellees
counterclaim is likewise DISMISSED for lack of legal and factual bases.
No pronouncement as to costs.
SO ORDERED.39
The appellate court disregarded the banks first assigned error for being irrelevant in the final
determination of the case and found its second assigned error as not meritorious. Instead, it posed
for resolution the issue of whether the trial court erred in dismissing the complaint for collection of sum
of money for lack of cause of action as the bank was said to be not the holder of the notes at the time
the collection case was filed.
In answering the lone issue, the Court of Appeals held that the bank is a holder under Sec. 191 of the
NIL. It concluded that despite the execution of the Deeds of Transfer and Trust Agreement, the Asset
Privatization Trust cannot be declared as the holder of the subject promissory notes for the reason
that it is neither the payee or indorsee of the notes in possession thereof nor is it the bearer of said
notes. The Court of Appeals observed that the bank, as the payee, did not indorse
_______________

39 Id., at p. 83.
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Ang vs. Associated Bank

the notes to the Asset Privatization Trust despite the execution of the Deeds of Transfer and Trust
Agreement and that the notes continued to remain with the bank until the institution of the collection
suit.
With the bank as the holder of the promissory notes, the Court of Appeals held that Tomas Ang is
accountable therefor in his capacity as an accommodation party. Citing Sec. 29 of the NIL, he is liable to
the bank in spite of the latters knowledge, at the time of taking the notes, that he is only an
accommodation party. Moreover, as a co-maker who agreed to be jointly and severally liable on the
promissory notes, Tomas Ang cannot validly set up the defense that he did not receive any
consideration therefor as the fact that the loan was granted to the principal debtor already constitutes a
sufficient consideration.
Further, the Court of Appeals agreed with the bank that the experience of Tomas Ang in business
rendered it implausible that he would just sign the promissory notes as a comaker without even
checking the real amount of the debt to be incurred, or that he merely acted on the belief that the first
loan application was cancelled. According to the appellate court, it is apparent that he was negligent in
falling for the alibi of Antonio Ang Eng Liong and such fact would not serve to exonerate him from his
responsibility under the notes.
Nonetheless, the Court of Appeals denied the claims of the bank for service, penalty and overdue
charges as well as attorneys fees on the ground that the promissory notes made no mention of such
charges/fees.
In his motion for reconsideration,40 Tomas Ang raised for the first time the assigned errors as follows:
x x x
2) Related to the above jurisdictional issues, defendant-appellee Tomas Ang has recently discovered that
upon the filing of
_______________

40 Id., at pp. 89-133.


264

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SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank

the complaint on August 28, 1990, under the jurisdictional rule laid down in BP Blg. 129, appellant bank
fraudulently failed to specify the amount of compounded interest at 14% per annum, service charges at
2% per annum and overdue penalty charges at 12% per annum in the prayer of the complaint as of the
time of its filing, paying a total of only P640.00(!!!) as filing and court docket fees although the total sum
involved as of that time was P647,566.75 including 20% attorneys fees. In fact, the stated interest in the
body of the complaint alone amount to P328,373.39 (which is actually compounded and capitalized) in
both causes of action and the total service and overdue penalties and charges and attorneys fees
further amount to P239,193.36 in both causes of action, as of July 31, 1990, the time of filing of the
complaint. Significantly, appellant fraudulently misled the Court, describing the 14% imposition as
interest, when in fact the same was capitalized as principal by appellant bank every month to earn more
interest, as stated in the notes. In view thereof, the trial court never acquired jurisdiction over the case
and the same may not be now corrected by the filing of deficiency fees because the causes of action had
already prescribed and more importantly, the jurisdiction of the Municipal Trial Court had been
increased to P100,000.00 in principal claims last March 20, 1999, pursuant to SC Circular No. 21-99,
section 5 of RA No. 7691, and section 31, Book I of the 1987 Administrative Code. In other words, as of
today, jurisdiction over the subject falls within the exclusive jurisdiction of the MTC, particularly if the
bank foregoes capitalization of the stipulated interest.
3) BY FAILING TO GIVE NOTICE OF ITS APPEAL AND APPEAL BRIEF TO APPELLEE ANG ENG LIONG, THE
APPEALED JUDGMENT OF THE TRIAL COURT WHICH LEFT OUT TOMAS ANGS CROSS-CLAIM AGAINST
ENG LIONG (BECAUSE IT DISMISSED THE MAIN CLAIM), HAD LONG BECOME FINAL AND EXECUTORY, AS
AGAINST ENG LIONG. Accordingly, Tomas Angs right of subrogation against Ang Eng Liong, expressed in
his cross-claim, is now SEVERAL TIMES foreclosed because of the fault or negligence of appellant bank
since 1979 up to its insistence of an ex parte trial, and now when it failed to serve notice of appeal and
appellants brief upon him. Accordingly, appellee Tomas Ang should be released from his suretyship
obligation pursuant to Art. 2080 of the Civil Code. The above is related to the issues abovestated.
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Ang vs. Associated Bank
4) This Court may have erred in ADDING or ASSIGNING its own bill of error for the benefit of appellant
bank which defrauded the judiciary by the payment of deficient docket fees.41
Finding no cogent or compelling reason to disturb the Decision, the Court of Appeals denied the motion
in its Resolution dated December 26, 2000.42
Petitioner now submits the following issues for resolution:

1. Is [A]rticle 2080 of the Civil Code applicable to discharge petitioner Tomas Ang as accommodation
maker or surety because of the failure of [private] respondent bank to serve its notice of appeal upon
the principal debtor, respondent Eng Liong?
2. Did the trial court have jurisdiction over the case at all?
3. Did the Court of Appeals [commit] error in assigning its own error and raising its own issue?
4. Are petitioners other real and personal defenses such as successive extensions coupled with
fraudulent collusion to hide Eng Liongs default, the payees grant of additional burdens, coupled with
the insolvency of the principal debtor, and the defense of incomplete but delivered instrument,
meritorious?43
Petitioner allegedly learned after the promulgation of the Court of Appeals decision that, pursuant to
the parties agreement on the compounding of interest with the principal amount (per month in case of
default), the interest on the promissory notes as of July 31, 1990 should have been only P81,647.22 for
PN No. DVO-78-382 (instead of P203,538.98) and P49,618.33 for PN No. DVO-78-390 (instead of
P125,334.41) while the principal debt as of said date should increase to P647,566.75 (instead of
P539,638.96). He submits that the bank carefully and shrewdly hid the fact by describing the amounts as
interest instead of being part of either the principal or penalty in order to pay a lesser amount of docket
_______________

41 Id., at pp. 90-91.


42 Id., at p. 137.
43 Rollo, pp. 33-34.
266

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SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
fees. According to him, the total fees that should have been paid at the time of the filing of the
complaint on August 28, 1990 was P2,216.30 and not P614.00 or a shortage of 71%. Petitioner contends
that the bank may not now pay the deficiency because the last demand letter sent to him was dated
September 9, 1986, or more than twenty years have elapsed such that prescription had already set in.
Consequently, the banks claim must be dismissed as the trial court loses jurisdiction over the case.

Petitioner also argues that the Court of Appeals should not have assigned its own error and raised it as
an issue of the case, contending that no question should be entertained on appeal unless it has been
advanced in the court below or is within the issues made by the parties in the pleadings. At any rate, he
opines that the appellate courts decision that the bank is the real party in interest because it is the
payee named in the note or the holder thereof is too simplistic since: (1) the power and control of Asset
Privatization Trust over the bank are clear from the explicit terms of the duly certified trust documents
and deeds of transfer and are confirmed by the newspaper clippings; (2) even under P.D. No. 902-A or
the General Banking Act, where a corporation or a bank is under receivership, conservation or
rehabilitation, it is only the representative (liquidator, receiver, trustee or conservator) who may
properly act for said entity, and, in this case, the bank was held by Asset Privatization Trust as trustee;
and (3) it is not entirely accurate to say that the payee who has not indorsed the notes in all cases is the
real party in interest because the rights of the payee may be subject of an assignment of incorporeal
rights under Articles 1624 and 1625 of the Civil Code.
Lastly, petitioner maintains that when respondent Bank served its notice of appeal and appellants brief
only on him, it rendered the judgment of the trial court final and executory with respect to Antonio Ang
Eng Liong, which, in effect, released him (Antonio Ang Eng Liong) from any and all liability under the
promissory notes and, thereby, foreclosed peti267

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Ang vs. Associated Bank
tioners cross-claims. By such act, the bank, even if it be the holder of the promissory notes, allegedly
discharged a simple contract for the payment of money (Sections 119 [d] and 122, NIL [Act No. 2031]),
prevented a surety like petitioner from being subrogated in the shoes of his principal (Article 2080, Civil
Code), and impaired the notes, producing the effect of payment (Article 1249, Civil Code).
The petition is unmeritorious.
Procedurally, it is well within the authority of the Court of Appeals to raise, if it deems proper under the
circumstances obtaining, error/s not assigned on an appealed case. In Mendoza v. Bautista,44 this Court
recognized the broad discretionary power of an appellate court to waive the lack of proper assignment
of errors and to consider errors not assigned, thus:
As a rule, no issue may be raised on appeal unless it has been brought before the lower tribunal for its
consideration. Higher courts are precluded from entertaining matters neither alleged in the pleadings
nor raised during the proceedings below, but ventilated for the first time only in a motion for
reconsideration or on appeal.

However, as with most procedural rules, this maxim is subject to exceptions. Indeed, our rules recognize
the broad discretionary power of an appellate court to waive the lack of proper assignment of errors
and to consider errors not assigned. Section 8 of Rule 51 of the Rules of Court provides:
SEC. 8. Questions that may be decided.No error which does not affect the jurisdiction over the subject
matter or the validity of the judgment appealed from or the proceedings therein will be considered,
unless stated in the assignment of errors, or closely related to or dependent on an assigned error and
properly argued in the brief, save as the court may pass upon plain errors and clerical errors.
Thus, an appellate court is clothed with ample authority to review rulings even if they are not assigned
as errors in the appeal in these instances: (a) grounds not assigned as errors but affecting
_______________

44 G.R. No. 143666, March 18, 2005, 453 SCRA 691.


268

268
SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
jurisdiction over the subject matter; (b) matters not assigned as errors on appeal but are evidently plain
or clerical errors within contemplation of law; (c) matters not assigned as errors on appeal but
consideration of which is necessary in arriving at a just decision and complete resolution of the case or
to serve the interests of justice or to avoid dispensing piecemeal justice; (d) matters not specifically
assigned as errors on appeal but raised in the trial court and are matters of record having some bearing
on the issue submitted which the parties failed to raise or which the lower court ignored; (e) matters not
assigned as errors on appeal but closely related to an error assigned; and (f) matters not assigned as
errors on appeal but upon which the determination of a question properly assigned is dependent.
(Citations omitted)45
To the Courts mind, even if the Court of Appeals regarded petitioners two assigned errors as
irrelevant and not meritorious, the issue of whether the trial court erred in dismissing the complaint
for collection of sum of money for lack of cause of action (on the ground that the bank was not the
holder of the notes at the time of the filing of the action) is in reality closely related to and
determinant of the resolution of whether the lower court correctly ruled in not holding Antonio Ang Eng
Liong and petitioner Tomas Ang liable to the bank on their unpaid loans despite documentary exhibits
allegedly proving their obligations and in dismissing the complaint based on newspaper clippings. Hence,
no error could be ascribed to the Court of Appeals on this point.

Now, the more relevant question is: who is the real party in interest at the time of the institution of the
complaint, is it the bank or the Asset Privatization Trust?
To answer the query, a brief history on the creation of the Asset Privatization Trust is proper.
Taking into account the imperative need of formally launching a program for the rationalization of the
government corporate sector, then President Corazon C. Aquino
_______________

45 Id., at pp. 702-703.


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Ang vs. Associated Bank
issued Proclamation No. 5046 on December 8, 1986. As one of the twin cornerstones of the program
was to establish the privatization of a good number of government corporations, the proclamation
created the Asset Privatization Trust, which would, for the benefit of the National Government, take title
to and possession of, conserve, provisionally manage and dispose of transferred assets that were
identified for privatization or disposition.47
In accordance with the provisions of Section 2348 of the proclamation, then President Aquino
subsequently issued Administrative Order No. 14 on February 3, 1987, which
_______________

46 PROCLAIMING AND LAUNCHING APROGRAM FOR THE EXPEDITIOUS DISPOSITION AND


PRIVATIZATION OF CERTAIN GOVERNMENT CORPORATIONS AND/OR THE ASSETS THEREOF AND
CREATING THE COMMITTEE ON PRIVATIZATION AND THE ASSET PRIVATIZATION TRUST.
47 Sec. 3, Art. II and Sec. 9, Art. III of Proclamation No. 50. In addition, the term assets is defined under
Sec. 2 (1) of the Proclamation as:
1) Assets shall include (i) receivables and other obligations due to government institutions under credit,
lease, indemnity and other agreements together with all collateral security and other rights (including
but not limited to rights in relation to shares of stock in corporations such as voting rights as well as
rights to appoint directors of corporations or otherwise engage in the management thereof) granted to

such institutions by contract or operation of law to secure or enforce the right of payment of such
obligations; (ii) real and personal property of any kind owned or held by the government institutions,
including shares of stock in corporations, obtained by such government institutions, whether directly or
indirectly, through foreclosure or other means, in settlement of such obligations; (iii) shares of stock and
other investments held by government institutions; and (iv) the government institutions themselves,
whether as parent or subsidiary corporations.
48 Sec. 23 of the Proclamation reads:
SEC. 23. Mechanics of Transfer of Assets.As soon as practicable, but not later than six months from
the date of the issuance of this Proclamation, the President, acting through
270

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SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
approved the identification of and transfer to the National Government of certain assets (consisting of
loans, equity investments, accrued interest receivables, acquired assets and other assets) and liabilities
(consisting of deposits, borrowings, other liabilities and contingent guarantees) of the De_______________

the Committee on Privatization, shall identify such assets of government institutions as appropriate for
privatization and divestment in an appropriate instrument describing such assets or identifying the loan
or other transactions giving rise to the receivables, obligations and other property constituting assets to
be transferred.
The Committee shall, from the list of assets deemed appropriate for divestment, identify assets to be
transferred to the Trust or to be referred to the government institutions in an appropriate instrument,
which upon execution by the Committee shall constitute as the operative act of transfer or referral of
the assets described therein, and the Trust or the government institution may thereupon proceed with
the divestment in accordance with the provisions of this Proclamation and guidelines issued by the
Committee.
Nothing in this Proclamation shall:
(1) Affect the rights of the National Government to pursue the enforcement of any claim of a
government institution in respect of or in relation to any asset transferred hereunder;

(2) In relation to any debt hereby assigned and transferred to the National Government of which a
government institution is the original creditor, give rise to any novation or requirement to obtain the
consent of the debtor; and
(3) In relation to any share of stock or any interest therein, give rise to any claim by any other
stockholder for enforcement of rights of pre-emption or of first refusal or other similar rights, the
provision of any law to the contrary notwithstanding.
Where the contractual rights of creditors of any of the government institutions involved may be affected
by the exercise of the Committee or the Trust of the powers granted herein, the Committee or the Trust
shall see to it that such rights are not impaired.
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Ang vs. Associated Bank
velopment Bank of the Philippines (DBP) and the Philippine National Bank (PNB). The transfer of assets
was implemented through a Deed of Transfer executed on February 27, 1987 between the National
Government, on one hand, and the DBP and PNB, on the other. In turn, the National Government
designated the Asset Privatization Trust to act as its trustee through a Trust Agreement, whereby the
nonperforming accounts of DBP and PNB, including, among others, the DBPs equity with respondent
Bank, were entrusted to the Asset Privatization Trust.49 As provided for in the Agreement, among the
powers and duties of the Asset Privatization Trust with respect to the trust properties consisting of
receivables was to handle their administration and collection by bringing suit to enforce payment of the
obligations or any installment thereof or settling or compromising any of such obligations or any other
claim or demand which the Government may have against any person or persons, and to do all acts,
institute all proceedings, and to exercise all other rights, powers, and privileges of ownership that an
absolute owner of the properties would otherwise have the right to do.50 Incidentally, the existence of
the Asset Privatization Trust would have expired five (5) years from the date of issuance of Proclamation
No. 50.51 However, its original term was extended from December 8, 1991 up to August 31, 1992,52
and again from December 31, 1993 until June 30, 1995,53 and then from July 1, 1995 up to December
31, 1999,54 and further from January 1, 2000 until December 31, 2000.55 Thenceforth, the Privatization
and Management Office was established and
_______________

49 Records, pp. 529-533, 543.

50 Id., at p. 530.
51 Sec. 9, Art. III of Proclamation No. 50.
52 Sec. 1 of Republic Act (R.A.) No. 7181.
53 Sec. 1 of R.A. No. 7661.
54 Sec. 1 of R.A. No. 7886.
55 Sec. 1 of R.A. No. 8758.
272

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SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
took over, among others, the powers, duties and functions of the Asset Privatization Trust under the
proclamation.56
Based on the above backdrop, respondent Bank does not appear to be the real party in interest when it
instituted the collection suit on August 28, 1990 against Antonio Ang Eng Liong and petitioner Tomas
Ang. At the time the complaint was filed in the trial court, it was the Asset Privatization Trust which had
the authority to enforce its claims against both debtors. In fact, during the pre-trial conference, Atty.
Roderick Orallo, counsel for the bank, openly admitted that it was under the trusteeship of the Asset
Privatization Trust.57 The Asset Privatization Trust, which should have been represented by the Office of
the Government Corporate Counsel, had the authority to file and prosecute the case.
The foregoing notwithstanding, this Court can not, at present, readily subscribe to petitioners insistence
that the case must be dismissed. Significantly, it stands without refute, both in the pleadings as well as
in the evidence presented during the trial and up to the time this case reached the Court, that the issue
had been rendered moot with the occurrence of a supervening eventthe buy-back of the bank by its
former owner, Leonardo Ty, sometime in October 1993. By such re-acquisition from the Asset
Privatization Trust when the case was still pending in the lower court, the bank reclaimed its real and
actual interest over the unpaid promissory notes; hence, it could rightfully qualify as a holder58
thereof under the NIL.
Notably, Section 29 of the NIL defines an accommodation party as a person who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value there_______________

56 Sec. 2, Art. III of Executive Order No. 323, Series of 2000.


57 TSN, January 18, 1993, p. 7.
58 A Holder is defined under Sec. 191 of the NIL, as:
Holder means the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof.
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Ang vs. Associated Bank
for, and for the purpose of lending his name to some other person. As gleaned from the text, an
accommodation party is one who meets all the three requisites, viz.: (1) he must be a party to the
instrument, signing as maker, drawer, acceptor, or indorser; (2) he must not receive value therefor; and
(3) he must sign for the purpose of lending his name or credit to some other person.59 An
accommodation party lends his name to enable the accommodated party to obtain credit or to raise
money; he receives no part of the consideration for the instrument but assumes liability to the other
party/ies thereto.60 The accommodation party is liable on the instrument to a holder for value even
though the holder, at the time of taking the instrument, knew him or her to be merely an
accommodation party, as if the contract was not for accommodation.61
As petitioner acknowledged it to be, the relation between an accommodation party and the
accommodated party is one of principal and suretythe accommodation party being the surety.62 As
such, he is deemed an original promisor and
_______________

59 Lim v. Saban, G.R. No. 163720, December 16, 2004, 447 SCRA 232, 244 and Crisologo-Jose v. Court of
Appeals, G.R. No. 80599, September 15, 1989, 177 SCRA 594, 598.
60 Spouses Gardose v. Tarroza, 352 Phil. 797, 807; 290 SCRA 186, 195-196 (1998) citing Philippine Bank
of Commerce v. Aruego, G.R. Nos. L-25836-37, January 31, 1981, 102 SCRA 530, 539-540.
61 Lim v. Saban, supra at p. 244; Garcia v. Llamas, G.R. No. 154127, December 8, 2003, 417 SCRA 292,
304-305; Spouses Gardose v. Tarroza, supra at p. 807; p. 196; Travel-On, Inc. v. Court of Appeals, G.R.

No. 56169, June 26, 1992, 210 SCRA 351, 357; and Ang Tiong v. Ting, 130 Phil. 741, 744; 22 SCRA 713,
716 (1968).
62 Garcia v. Llamas, supra at p. 305; Agro Conglomerates, Inc. v. Court of Appeals, 401 Phil. 644, 654655; 348 SCRA 450, 457-458 (2000); Spouses Gardose v. Tarroza, supra at p. 807; p. 196; Caneda, Jr. v.
Court of Appeals, G.R. No. 81322, February 5, 1990, 181 SCRA 762, 772; Crisologo-Jose v. Court of
Appeals, supra at p. 598; Prudencio v. Court of Appeals, 227 Phil. 7, 12; 143 SCRA 7, 14 (1986); and
Philippine Bank of Commerce v. Aruego, supra at p. 539.
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SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
debtor from the beginning;63 he is considered in law as the same party as the debtor in relation to
whatever is adjudged touching the obligation of the latter since their liabilities are interwoven as to be
inseparable.64 Although a contract of suretyship is in essence accessory or collateral to a valid principal
obligation, the suretys liability to the creditor is immediate, primary and absolute; he is directly and
equally bound with the principal.65 As an equivalent of a regular party to the undertaking, a surety
becomes liable to the debt and duty of the principal obligor even without possessing a direct or personal
interest in the obligations nor does he receive any benefit therefrom.66
Contrary to petitioners adamant stand, however, Article 208067 of the Civil Code does not apply in a
contract of suretyship.68 Art. 2047 of the Civil Code states that if a person binds
_______________

63 Garcia v. Llamas, supra at p. 305.


64 Trade & Investment Development Corp. v. Roblett Industrial Construction Corp., G.R. No. 139290,
November 11, 2005, 474 SCRA 510, 531.
65 International Finance Corporation v. Imperial Textile Mills, Inc., G.R. No. 160324, November 15, 2005,
475 SCRA 149, 160; Trade & Investment Development Corp. v. Roblett Industrial Construction Corp., Id.,
at p. 531; Garcia v. Llamas, supra at p. 305; Agro Conglomerates, Inc. v. Court of Appeals, supra at p.
655; p. 458; and Philippine Bank of Commerce v. Aruego, supra at p. 540.
66 International Finance Corporation v. Imperial Textile Mills, Inc., Id., at pp. 160-161 and Trade &
Investment Development Corp. v. Roblett Industrial Construction Corp., Id., at p. 531.

67 Art. 2080 of the Civil Code provides:


Art. 2080. The guarantors, even though they be solidary, are released from their obligation whenever by
some act of the creditor they cannot be subrogated to the rights, mortgages, and preferences of the
latter.
68 E. Zobel, Inc. v. Court of Appeals, 352 Phil. 608, 618; 290 SCRA 1, 10 (1998); Inciong, Jr. v. Court of
Appeals, 327 Phil. 364, 372-373; 257 SCRA 578, 586 (1996); and Bicol Savings & Loan Association v.
Guinhawa, G.R. No. 62415, August 20, 1990, 188 SCRA 642, 647.
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Ang vs. Associated Bank
himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I, Book IV of the
Civil Code must be observed. Accordingly, Articles 1207 up to 1222 of the Code (on joint and solidary
obligations) shall govern the relationship of petitioner with the bank.
The case of Inciong, Jr. v. CA69 is illuminating:
Petitioner also argues that the dismissal of the complaint against Naybe, the principal debtor, and
against Pantanosas, his comaker, constituted a release of his obligation, especially because the dismissal
of the case against Pantanosas was upon the motion of private respondent itself. He cites as basis for his
argument, Article 2080 of the Civil Code which provides that:
The guarantors, even though they be solidary, are released from their obligation whenever by come act
of the creditor, they cannot be subrogated to the rights, mortgages, and preferences of the latter.
It is to be noted, however, that petitioner signed the promissory note as a solidary co-maker and not as
a guarantor. This is patent even from the first sentence of the promissory note which states as follows:
Ninety one (91) days after date, for value received, I/we, JOINTLY and SEVERALLY promise to pay to the
PHILIPPINE BANK OF COMMUNICATIONS at its office in the City of Cagayan de Oro, Philippines the sum
of FIFTY THOUSAND ONLY (P50,000.00) Pesos, Philippine Currency, together with interest x x x at the
rate of SIXTEEN (16) percent per annum until fully paid.
A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation,
and each creditor is entitled to demand the whole obligation. On the other hand, Article 2047 of the
Civil Code states:

By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I
of this Book shall be
_______________

69 327 Phil. 364; 257 SCRA 578 (1996).


276

276
SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
observed. In such a case the contract is called a suretyship. (Italics supplied.)
While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is
different from that of a solidary debtor. Thus, Tolentino explains:
A guarantor who binds himself in solidum with the principal debtor under the provisions of the second
paragraph does not become a solidary co-debtor to all intents and purposes. There is a difference
between a solidary co-debtor, and a fiador in solidum (surety). The later, outside of the liability he
assumes to pay the debt before the property of the principal debtor has been exhausted, retains all the
other rights, actions and benefits which pertain to him by reason of rights of the fiansa; while a solidary
co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of
the Civil Code.
Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several obligations.
Under Art. 1207 thereof, when there are two or more debtors in one and the same obligation, the
presumption is that obligation is joint so that each of the debtors is liable only for a proportionate part
of the debt. There is a solidarily liability only when the obligation expressly so states, when the law so
provides or when the nature of the obligation so requires.
Because the promissory note involved in this case expressly states that the three signatories therein are
jointly and severally liable, any one, some or all of them may be proceeded against for the entire
obligation. The choice is left to the solidary creditor to determine against whom he will enforce
collection. (Citations omitted)70

In the instant case, petitioner agreed to be jointly and severally liable under the two promissory notes
that he cosigned with Antonio Ang Eng Liong as the principal debtor. This being so, it is completely
immaterial if the bank would opt to proceed only against petitioner or Antonio Ang Eng Liong or both of
them since the law confers upon the creditor the prerogative to choose whether to enforce the entire
obligation against any one, some or all of the debtors. Nonetheless, petitioner, as an accommodation
party, may seek reimburse_______________

70 Id., at pp. 372-374; pp. 586-588.


277

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277
Ang vs. Associated Bank
ment from Antonio Ang Eng Liong, being the party accommodated.71
It is plainly mistaken for petitioner to say that just because the bank failed to serve the notice of appeal
and appellants brief to Antonio Ang Eng Liong, the trial courts judgment, in effect, became final and
executory as against the latter and, thereby, bars his (petitioners) cross-claims against him: First,
although no notice of appeal and appellants brief were served to Antonio Ang Eng Liong, he was
nonetheless impleaded in the case since his name appeared in the caption of both the notice and the
brief as one of the defendants-appellees;72 Second, despite including in the caption of the appellees
brief his co-debtor as one of the defendants-appellees, petitioner did not also serve him a copy
thereof;73 Third, in the caption of the Court of Appeals decision, Antonio Ang Eng Liong was expressly
named as one of the defendants-appellees;74 and Fourth, it was only in his motion for reconsideration
from the adverse judgment of the Court of Appeals that petitioner belatedly chose to serve notice to the
counsel of his co-defendant-appellee.75
Likewise, this Court rejects the contention of Antonio Ang Eng Liong, in his special appearance through
counsel, that the Court of Appeals, much less this Court, already lacked jurisdiction over his person or
over the subject matter relating to him because he was not a party in CA-G.R. CV No. 53413. Stress must
be laid of the fact that he had twice put himself in defaultone, in not filing a pre-trial brief and
another, in not filing his answer to petitioners cross-claims. As a matter of course, Antonio Ang Eng
Liong, being a party declared in
_______________

71 Lim v. Saban, supra at p. 244; Agro Conglomerates, Inc. v. Court of Appeals, supra at p. 654; p. 457;
and Caneda, Jr. v. Court of Appeals, supra at p. 772.
72 CA Rollo, p. 21.
73 Id., at pp. 40, 75.
74 Id., at p. 79.
75 Id., at p. 133.
278

278
SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
default, already waived his right to take part in the trial proceedings and had to contend with the
judgment rendered by the court based on the evidence presented by the bank and petitioner.
Moreover, even without considering these default judgments, Antonio Ang Eng Liong even categorically
admitted having secured a loan totaling P80,000. In his Answer to the complaint, he did not deny such
liability but merely pleaded that the bank be ordered to submit a more reasonable computation
instead of collecting excessive interest, penalty charges, and attorneys fees. For failing to tender an
issue and in not denying the material allegations stated in the complaint, a judgment on the pleadings76
would have also been proper since not a single issue was generated by the Answer he filed.
As the promissory notes were not discharged or impaired through any act or omission of the bank,
Sections 119 (d)77
_______________

76 Sec. 1, Rule 34 of the 1997 Revised Rules on Civil Procedure states:


Section 1. Judgment on the pleadings.Where an answer fails to tender an issue, or otherwise admits
the material allegations of the adverse partys pleading, the court may, on motion of that party, direct
judgment on such pleading. However, in actions for declaration of nullity or annulment of marriage or
for legal separation, the material facts alleged in the complaint shall always be proved.
77 Sec. 119 of the NIL provides:

SECTION 119. Instrument; how discharged.A negotiable instrument is discharged:


(a.) By payment in due course by or on behalf of the principal debtor;
(b.) By payment in due course by the party accommodated, where the instrument is made or accepted
for his accommodation;
(c.) By the intentional cancellation thereof by the holder;
(d.) By any other act which will discharge a simple contract for the payment of money;
279

VOL. 532, SEPTEMBER 5, 2007


279
Ang vs. Associated Bank
and 12278 of the NIL as well as Art. 124979 of the Civil Code would necessarily find no application.
Again, neither was petitioners right of reimbursement barred nor was the banks right to proceed
against Antonio Ang Eng Liong expressly renounced by the omission to serve notice of appeal and
appellants brief to a party already declared in default.
Consequently, in issuing the two promissory notes, petitioner as accommodating party warranted to the
holder in due course that he would pay the same according to its tenor.80 It is no defense to state on his
part that he did not receive any
_______________

(e.) When the principal debtor becomes the holder of the instrument at or after maturity in his own
right. (Emphasis ours)
78 Sec. 122 of the NIL states:
SECTION 122. Renunciation by holder.The holder may expressly renounce his rights against any party
to the instrument before, at, or after its maturity. An absolute and unconditional renunciation of his
rights against the principal debtor made at or after the maturity of the instrument discharges the
instrument. But a renunciation does not affect the rights of a holder in due course without notice. A
renunciation must be in writing unless the instrument is delivered up to the person primarily liable
thereon.
79 Art. 1249 of the Civil Code provides:

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not
possible to deliver such currency, then in the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents
shall produce the effect of payment only when they have been cashed, or when through the fault of the
creditor they have been impaired. (Emphasis ours)
80 Travel-On, Inc. v. Court of Appeals, supra at p. 357.
280

280
SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
value therefor81 because the phrase without receiving value therefor used in Sec. 29 of the NIL means
without receiving value by virtue of the instrument and not as it is apparently supposed to mean,
without receiving payment for lending his name.82 Stated differently, when a third person advances
the face value of the note to the accommodated party at the time of its creation, the consideration for
the note as regards its maker is the money advanced to the accommodated party. It is enough that
value was given for the note at the time of its creation.83 As in the instant case, a sum of money was
received by virtue of the notes, hence, it is immaterial so far as the bank is concerned whether one of
the signers, particularly petitioner, has or has not received anything in payment of the use of his
name.84
Under the law, upon the maturity of the note, a surety may pay the debt, demand the collateral
security, if there be any, and dispose of it to his benefit, or, if applicable, subrogate himself in the place
of the creditor with the right to enforce the guaranty against the other signers of the note for the
reimbursement of what he is entitled to recover from them.85 Regrettably, none of these were
prudently done by petitioner. When he was first notified by the bank sometime in 1982 regarding his
accountabilities under the promissory notes, he lackadaisically relied on Antonio Ang Eng Liong, who
represented that he would take care of the matter, instead of directly communicating with the bank for
its settlement.86 Thus, petitioner cannot now claim that he was prejudiced by the
_______________

81 Caneda, Jr. v. Court of Appeals, supra at p. 772; Crisologo-Jose v. Court of Appeals, supra at p. 598;
and Ang Tiong v. Ting, supra at p. 744; p. 716.
82 Clark v. Sellner, 42 Phil. 384, 386 (1921).

83 Caneda, Jr. v. Court of Appeals, supra at p. 772.


84 Clark v. Sellner, supra at p. 386.
85 Id., at pp. 386-387.
86 TSN, February 21, 1995, p. 27 and TSN, April 4, 1995, p. 15.
281

VOL. 532, SEPTEMBER 5, 2007


281
Ang vs. Associated Bank
supposed extension of time given by the bank to his co-debtor.
Furthermore, since the liability of an accommodation party remains not only primary but also
unconditional to a holder for value, even if the accommodated party receives an extension of the period
for payment without the consent of the accommodation party, the latter is still liable for the whole
obligation and such extension does not release him because as far as a holder for value is concerned, he
is a solidary co-debtor.87 In Clark v. Sellner,88 this Court held:
x x x The mere delay of the creditor in enforcing the guaranty has not by any means impaired his action
against the defendant. It should not be lost sight of that the defendants signature on the note is an
assurance to the creditor that the collateral guaranty will remain good, and that otherwise, he, the
defendant, will be personally responsible for the payment.
True, that if the creditor had done any act whereby the guaranty was impaired in its value, or
discharged, such an act would have wholly or partially released the surety; but it must be born in mind
that it is a recognized doctrine in the matter of suretyship that with respect to the surety, the creditor is
under no obligation to display any diligence in the enforcement of his rights as a creditor. His mere
inaction indulgence, passiveness, or delay in proceeding against the principal debtor, or the fact that he
did not enforce the guaranty or apply on the payment of such funds as were available, constitute no
defense at all for the surety, unless the contract expressly requires diligence and promptness on the part
of the creditor, which is not the case in the present action. There is in some decisions a tendency toward
holding that the creditors laches may discharge the surety, meaning by laches a negligent forbearance.
This theory, however, is not generally accepted and the courts almost universally consider it essentially
inconsistent with the relation of the parties to the note. (21 R.C.L., 1032-1034)89
_______________

87 Prudencio v. Court of Appeals, supra at pp. 12-13; p. 14.


88 42 Phil. 384 (1921).
89 Id., at pp. 387-388.
282

282
SUPREME COURT REPORTS ANNOTATED
Ang vs. Associated Bank
Neither can petitioner benefit from the alleged insolvency of Antonio Ang Eng Liong for want of clear
and convincing evidence proving the same. Assuming it to be true, he also did not exercise diligence in
demanding security to protect himself from the danger thereof in the event that he (petitioner) would
eventually be sued by the bank. Further, whether petitioner may or may not obtain security from
Antonio Ang Eng Liong cannot in any manner affect his liability to the bank; the said remedy is a matter
of concern exclusively between themselves as accommodation party and accommodated party. The fact
that petitioner stands only as a surety in relation to Antonio Ang Eng Liong is immaterial to the claim of
the bank and does not a whit diminish nor defeat the rights of the latter as a holder for value. To
sanction his theory is to give unwarranted legal recognition to the patent absurdity of a situation where
a co-maker, when sued on an instrument by a holder in due course and for value, can escape liability by
the convenient expedient of interposing the defense that he is a merely an accommodation party.90
In sum, as regards the other issues and errors alleged in this petition, the Court notes that these were
the very same questions of fact raised on appeal before the Court of Appeals, although at times couched
in different terms and explained more lengthily in the petition. Suffice it to say that the same, being
factual, have been satisfactorily passed upon and considered both by the trial and appellate courts. It is
doctrinal that only errors of law and not of fact are reviewable by this Court in petitions for review on
certiorari under Rule 45 of the Rules of Court. Save for the most cogent and compelling reason, it is not
our function under the rule to examine, evaluate or weigh the probative value of the evidence
presented by the parties all over again.91
_______________

90 Ang Tiong v. Ting, supra at p. 744; p. 716.


91 Batangas State University v. Bonifacio, G.R. No. 167762, December 15, 2005, 478 SCRA 142, 147-148
and Local Superior of the Servants of Charity (Guanellians), Inc. v. Jody King Construction &
283

VOL. 532, SEPTEMBER 5, 2007


283
Ang vs. Associated Bank
WHEREFORE, the October 9, 2000 Decision and December 26, 2000 Resolution of the Court of Appeals
in CA-G.R. CV No. 53413 are AFFIRMED. The petition is DENIED for lack of merit.
No costs.
SO ORDERED.
Puno (C.J., Chairperson), Sandoval-Gutierrez, Corona and Garcia, JJ., concur.
Judgment and resolution affirmed, petition denied.
Notes.Payment is a mode of extinguishing an obligationit should be made to the person in whose
favor the obligation has been constituted, or his successor-in-interest, or any person authorized to
receive it. (Culaba vs. Court of Appeals, 427 SCRA 721 [2004])
Payment of the entire obligation by one or some of the solidary debtors results in a corresponding
obligation of the other debtors to reimburse the paying debtor. (Republic Glass Corporation vs. Qua, 435
SCRA 480 [2004])
o0o

_______________

Development Corporation, G.R. No. 141715, October 12, 2005, 472 SCRA 445, 451.
284

Copyright 2014 Central Book Supply, Inc. All rights reserved. [Ang vs. Associated Bank, 532 SCRA
244(2007)]

G.R. No. 156294. November 29, 2006.*

MELVA THERESA ALVIAR GONZALES, petitioner, vs. RIZAL COMMERCIAL BANKING CORPORATION,
respondent.
Negotiable Instruments; Checks; A subsequent party which caused the defect in the instrument cannot
have any recourse against any of the prior endorsers in good faith.The dollar-check 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 P17,500.00 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 P17,500.00
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
_______________

* SECOND DIVISION.
460

460
SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Rizal Commercial Banking Corporation
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 Alviars and the petitioners liability to subsequent holders of the foreign check is governed by
the Negotiable Instruments Law.
Same; Same; Equity; 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; Courts of law, being also courts of equity, may not countenance grossly unfair
results without doing violence to their solemn obligation to administer fair and equal justice for all.
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, 302 SCRA 718 (1999), 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.
461

VOL. 508, NOVEMBER 29, 2006


461
Gonzales vs. Rizal Commercial Banking Corporation
PETITION for review on certiorari of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.


Jinky Rose L. Go for petitioner.
Siguion Reyna, Montecillo & Ongsiako for respondent.
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. 881502, 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 attorneys
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 checks value without awaiting the clearing period, Gonzales presented the foreign check to
Olivia Gomez, the RCBCs Head of Retail Banking. After examining this, Olivia Gomez
_______________

1 Penned by Associate Justice Roberto A. Barrios, with Associate Justices Bienvenido L. Reyes and
Edgardo F. Sundiam, concurring; Rollo, pp. 2938.
462

462
SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Rizal Commercial Banking Corporation
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 P17,500.00 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
P155,270.85.
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 x x x
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 P12,822.20 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 latters husband Gino Gonzales. The spouses Gonzales
filed an Answer with Counterclaim praying for the dismissal of the complaint as well as
463

VOL. 508, NOVEMBER 29, 2006


463
Gonzales vs. Rizal Commercial Banking Corporation
payment of P10,822.20 as actual damages, P20,000.00 as moral damages, P20,000.00 as exemplary
damages, and P20,000.00 as attorneys 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 P142,648.65 (P155,270.85 less the amount of P12,622.20, 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 P40,000.00 as and for attorneys fees; and to
3. Pay the costs of this suit.
SO ORDERED.
On appeal, the CA, except for the award of attorneys fees, affirmed the RTC judgment.
Hence, this recourse by the petitioner on her submission that the CA erred

X X X IN FINDING [PETITIONER], AN ACCOMMODATION PARTY TO A CHECK SUBSEQUENTLY ENDORSED


PARTIALLY, LIABLE TO RCBC AS GUARANTOR;
X X X 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;
_______________

2 Id., at pp. 130132.


464

464
SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Rizal Commercial Banking Corporation
X X X 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 P17,500.00 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 P17,500.00 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 Alviars and
the petitioners liability to subsequent holders of the foreign check is governed by the Negotiable
Instruments Law as follows:

_______________

3 Exhibits J and J-1; Id., at p. 48.


465

VOL. 508, NOVEMBER 29, 2006


465
Gonzales vs. Rizal Commercial Banking Corporation
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 P17,500.00 only) of Olivia Gomez, who is the
466

466
SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Rizal Commercial Banking Corporation
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
_______________

4 362 Phil. 332; 302 SCRA 718 (1999).


467

VOL. 508, NOVEMBER 29, 2006


467

Gonzales vs. Rizal Commercial Banking Corporation


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 petitioners counterclaim against RCBC for the amount of P12,822.20 which it admittedly
deducted from petitioners salary, the Court must order the return thereof to the petitioner, with legal
interest of 12% per annum, notwithstanding the petitioners 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 petitioners 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 attorneys fees by way of damages, in the amount of P20,000.00 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. Petitioners counter_______________

5 Valderama v. Macalde, G.R. No. 165005, September 16, 2005, 470 SCRA 168.
468

468
SUPREME COURT REPORTS ANNOTATED
Gonzales vs. Rizal Commercial Banking Corporation
claim is GRANTED, ordering the respondent RCBC to reimburse petitioner the amount P12,822.20, with
legal interest computed from the time of salary deduction up to actual payment, and to pay petitioner
the total amount of P60,000.00 as moral and exemplary damages, and attorneys fees.
Costs against the respondent.

SO ORDERED.
Puno (Chairperson), Sandoval-Gutierrez, Corona and Azcuna, JJ., concur.
Assailed decision reversed and set aside, complaint dismissed.
Notes.Where what was stamped on the check is DAUD meaning drawn against uncollected deposits,
the bank may still honor the check at its discretion in favor of favored clients, in which case there would
be no violation of B.P. 22. (Tan vs. People, 349 SCRA 777 [2001])
The mere fact that the forgery was committed by a drawerpayors confidential employee or agent, who
by virtue of his position had unusual facilities for perpetrating the fraud and imposing the forged paper
upon the bank, does not entitle the bank to shift the loss to the drawer-payor, in the absence of some
circumstances raising estoppel against the drawer. (Philippine Commercial International Bank vs. Court
of Appeals, 350 SCRA 446 [2001])
o0o

469

Copyright 2014 Central Book Supply, Inc. All rights reserved. [Gonzales vs. Rizal Commercial Banking
Corporation, 508 SCRA 459(2006)]

METROPOLITAN BANK AND TRUST COMPANY (formerly ASIANBANK CORPORATION), petitioner, vs. BA
FINANCE CORPORATION and MALAYAN INSURANCE CO., INC., respondents.
Negotiable Instruments Law; Checks; Where an instrument is payable to the order of two or more
payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to
indorse for the others.Section 41 of the Negotiable Instruments Law provides: Where an instrument is
payable to the order of two or more payees or indorsees who are not partners, all must indorse unless
the one indorsing has authority to indorse for the others. Bitanga alone endorsed the crossed check, and
petitioner allowed the deposit and release of the proceeds thereof, despite the absence of authority of
Bitangas co-payee BA Finance to endorse it on its behalf.
Same; Same; The payment of an instrument over a missing indorsement is the equivalent of payment on
a forged indorsement or an unauthorized indorsement in itself in the case of joint payees.Petitioners
argument that since there was neither forgery, nor unauthorized indorsement because Bitanga was a
co-payee in the subject check, the dictum in Associated Bank v. CA does not apply in the present case
fails. The payment of an instrument over a missing indorsement is the equivalent of payment on a
forged indorsement or an unauthorized indorsement in itself in the case of joint payees. Clearly,

petitioner, through its employee, was negligent when it allowed the deposit of the crossed check,
despite the lone endorsement of Bitanga, ostensibly ignoring the fact that the check did not, it bears
repeating, carry the indorsement of BA Finance.
Same; Same; Banks and Banking; One who credits the proceeds of a check to the account of the
indorsing payee is liable in conversion to the non-indorsing payee for the entire amount of the check.
The provisions of the Negotiable Instruments Law and underlying jurisprudential teachings on the blackletter law provide definitive justification for petitioners full liability on the value of the check. To be
sure, a collecting bank, Asianbank in this case, where a check is deposited and which indorses the check
upon presentment with the drawee bank, is an indorser. This is because in indorsing a check to the
drawee bank, a collecting bank stamps the back of the check with the
_______________

* FIRST DIVISION.
621

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621
Metropolitan Bank and Trust Company vs. BA Finance Corporation
phrase all prior endorsements and/or lack of endorsement guaranteed and, for all intents and
purposes, treats the check as a negotiable instrument, hence, assumes the warranty of an indorser.
Without Asianbanks warranty, the drawee bank (China Bank in this case) would not have paid the value
of the subject check. Petitioner, as the collecting bank or last indorser, generally suffers the loss because
it has the duty to ascertain the genuineness of all prior indorsements 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 prior indorsements. Accordingly, one who credits the
proceeds of a check to the account of the indorsing payee is liable in conversion to the non-indorsing
payee for the entire amount of the check.
Same; Same; Same; When the maker dishonors the instrument, the holder thereof can turn to those
secondarily liablethe indorserfor recovery.Granting petitioners appeal for partial liability would
run counter to the existing principles on the liabilities of parties on negotiable instruments, particularly
on Section 68 of the Negotiable Instruments Law which instructs that joint payees who indorse are
deemed to indorse jointly and severally. Recall that when the maker dishonors the instrument, the
holder thereof can turn to those secondarily liablethe indorserfor recovery. And since the law
explicitly mandates a solidary liability on the part of the joint payees who indorse the instrument, the

holder thereof (assuming the check was further negotiated) can turn to either Bitanga or BA Finance for
full recompense.
Same; Quasi-Delicts; Damages; Words and Phrases; In quasi-delict, exemplary damages may be granted
if the defendant acted with gross negligence; Gross negligence implies a want or absence of or failure
to exercise even slight care or diligence, or the entire absence of care, evincing a thoughtless disregard
of consequences without exerting any effort to avoid them.Petitioners liability is based not on
contract or quasi-contract but on quasi-delict since there is no pre-existing contractual relation between
the parties. Article 2231 of the Civil Code, which provides that in quasi-delict, exemplary damages may
be granted if the defendant acted with gross negligence, thus applies. For gross negligence implies a
want or absence of or failure to exercise even slight care or diligence, or the entire absence of care,
evincing a thoughtless disregard of consequences without exerting any effort to avoid them. x x x The
law allows the grant of exemplary damages to set an example for the public good. The business of a
bank is affected with public interest; thus it makes a sworn profession of diligence and meticulousness in
giving irreproachable service. For this reason, the bank should guard against in
622

622
SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. BA Finance Corporation
injury attributable to negligence or bad faith on its part. The award of exemplary damages is proper as a
warning to [the petitioner] and all concerned not to recklessly disregard their obligation to exercise the
highest and strictest diligence in serving their depositors.
Same; Banks and Banking; Agency; Interest Rates; The nature of the relationship between the payee of a
check and the collecting bank is one of agencythe obligation of the bank does not arise out of a loan
or forbearance of money, goods or credit, thus the legal interest should be 6%, not 12%, per annum.
The Court takes exception, however, to the appellate courts affirmance of the trial courts grant of
legal interest of 12% per annum on the value of the check. For the obligation in this case did not arise
out of a loan or forbearance of money, goods or credit. While Article 1980 of the Civil Code provides
that: Fixed savings, and current deposits of money in banks and similar institutions shall be governed by
the provisions concerning simple loan, said provision does not find application in this case since the
nature of the relationship between BA Finance and petitioner is one of agency whereby petitioner, as
collecting bank, is to collect for BA Finance the corresponding proceeds from the check. Not being a loan
or forbearance of money, the interest should be 6% per annum computed from the date of extrajudicial
demand on September 25, 1992 until finality of judgment; and 12% per annum from finality of judgment
until payment, conformably with Eastern Shipping Lines, Inc. v. Court of Appeals, 234 SCRA 78 (1994).
PETITION for review on certiorari of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.


Carlo Magno J. Verzo and Lemuel D. Lopez for petitioner.
Domingo M. Navarro for BA Finance Corporation.
Francisco J. Farolan for Malayan Insurance Company, Inc.
CARPIO-MORALES, J.:
Lamberto Bitanga (Bitanga) obtained from respondent BA Finance Corporation (BA Finance) a P329,2801
loan to secure which, he mort_______________

1 Exhibit A, Records, pp. 210-211.


623

VOL. 607, DECEMBER 4, 2009


623
Metropolitan Bank and Trust Company vs. BA Finance Corporation
gaged his car to respondent BA Finance.2 The mortgage contained the following stipulation:
The MORTGAGOR covenants and agrees that he/it will cause the property(ies) hereinabove mortgaged
to be insured against loss or damage by accident, theft and fire for a period of one year from date
hereof with an insurance company or companies acceptable to the MORTGAGEE in an amount not less
than the outstanding balance of mortgage obligations and that he/it will make all loss, if any, under such
policy or policies, payable to the MORTGAGEE or its assigns as its interest may appear x x x.3 (emphasis
and underscoring supplied)
Bitanga thus had the mortgaged car insured by respondent Malayan Insurance Co., Inc. (Malayan
Insurance)4 which issued a policy stipulating that, inter alia,
Loss, if any shall be payable to BA FINANCE CORP. as its interest may appear. It is hereby expressly
understood that this policy or any renewal thereof, shall not be cancelled without prior notification and
conformity by BA FINANCE CORPORATION.5 (emphasis and underscoring supplied)
The car was stolen. On Bitangas claim, Malayan Insurance issued a check payable to the order of B.A.
Finance Corporation and Lamberto Bitanga for P224,500, drawn against China Banking Corporation
(China Bank). The check was crossed with the notation For Deposit Payees Account Only.6

Without the indorsement or authority of his co-payee BA Finance, Bitanga deposited the check to his
account with the Asianbank Corporation (Asianbank), now merged with herein petitioner Metropolitan
Bank and Trust Company (Metrobank). Bitanga subsequently withdrew the entire proceeds of the check.
_______________

2 Exhibit B, Id., at pp. 212-215.


3 Id., at p. 213.
4 Exhibit D, Id., at p. 217.
5 Exhibit D-1, Ibid.
6 Exhibit F, Id., at p. 219.
624

624
SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. BA Finance Corporation
In the meantime, Bitangas loan became past due, but despite demands, he failed to settle it.
BA Finance eventually learned of the loss of the car and of Malayan Insurances issuance of a crossed
check payable to it and Bitanga, and of Bitangas depositing it in his account at Asianbank and
withdrawing the entire proceeds thereof.
BA Finance thereupon demanded the payment of the value of the check from Asianbank7 but to no
avail, prompting it to file a complaint before the Regional Trial Court (RTC) of Makati for sum of money
and damages against Asianbank and Bitanga,8 alleging that, inter alia, it is entitled to the entire
proceeds of the check.
In its Answer with Counterclaim,9 Asianbank alleged that BA Finance instituted *the+ complaint in bad
faith to coerce [it] into paying the whole amount of the CHECK knowing fully well that its rightful claim,
if any, is against Malayan *Insurance+.10
Asianbank thereafter filed a cross-claim against Bitanga,11 alleging that he fraudulently induced its
personnel to release to him the full amount of the check; and that on being later informed that the
entire amount of the check did not belong to Bitanga, it took steps to get in touch with him but he had
changed residence without leaving any forwarding address.12

And Asianbank filed a third-party complaint against Malayan Insurance,13 alleging that Malayan
Insurance was grossly negligent in issuing the check payable to both Bitanga and BA Finance and
delivering it to Bitanga without the consent of BA Finance.14
Bitanga was declared in default in Asianbanks cross-claim.15
_______________

7 Exhibits H, Id., at pp. 221-222.


8 Id., at pp. 1-4.
9 Id., at pp. 40-45.
10 Id., at p. 43.
11 Id., at pp. 53-63.
12 Id., at pp. 60-61.
13 Id., at pp. 69-72.
14 Id., at p. 82.
15 Id., at pp. 142-143; Order of May 23, 1994.
625

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625
Metropolitan Bank and Trust Company vs. BA Finance Corporation
Branch 137 of the Makati RTC, finding that Malayan Insurance was not privy to the contract between BA
Finance and Bitanga, and noting the claim of Malayan Insurance that it is its policy to issue checks to
both the insured and the financing company, held that Malayan Insurance cannot be faulted for
negligence for issuing the check payable to both BA Finance and Bitanga.
The trial court, holding that Asianbank was negligent in allowing Bitanga to deposit the check to his
account and to withdraw the proceeds thereof, without his co-payee BA Finance having either indorsed
it or authorized him to indorse it in its behalf,16 found Asianbank and Bitanga jointly and severally liable
to BA Finance following Section 41 of the Negotiable Instruments Law and Associated Bank v. Court of
Appeals.17

Thus the trial court disposed:


WHEREFORE, premises considered, judgment is hereby rendered ordering defendants Asian Bank
Corporation and Lamberto Bitanga:
1) To pay plaintiff jointly and severally the sum of P224,500.00 with interest thereon at the rate of 12%
from September 25, 1992 until fully paid;
2) To pay plaintiff the sum of P50,000.00 as exemplary damages; P20,000.00 as actual damages;
P30,000.00 as attorneys fee; and
3) To pay the costs of suit.
Asianbanks and Bitangas *sic+ counterclaims are dismissed.
The third party complaint of defendant/third party plaintiff against third-party defendant Malayan
Insurance, Co., Inc. is hereby dismissed. Asianbank is ordered to pay Malayan attorneys fee of
P50,000.00 and a per appearance fee of P500.00.
On the cross-claim of defendant Asianbank, co-defendant Lamberto Bitanga is ordered to pay the
former the amounts the latter is ordered to pay the plaintiff in Nos. 1, 2 and 3 above-mentioned.
SO ORDERED.18 (emphasis and underscoring supplied)
_______________

16 Id., at p. 306.
17 G.R. No. 89802, May 7, 1992, 208 SCRA 465.
18 Records, p. 307.
626

626
SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. BA Finance Corporation
Before the Court of Appeals, Asianbank, in its Appellants Brief, submitted the following issues for
consideration:
3.01.1.1 Whether BA Finance has a cause of action against Asianbank.

3.01.1.2 Assuming that BA Finance has a valid cause of action, may it claim from Asianbank more than
one-half of the value of the check considering that it is a mere co-payee or joint payee of the check?
3.01.1.3 Whether BA Finance is liable to Asianbank for actual and exemplary damages for wrongfully
bringing the case to court.
3.01.1.4 Whether Malayan is liable to Asianbank for reimbursement of any sum of money which this
Honorable Court may award to BA Finance in this case.19 (underscoring supplied)

And it proffered the following arguments:


A. BA Finance has no cause of action against Asianbank as it has no legal right and title to the check
considering that the check was not delivered to BA Finance. Hence, BA Finance is not a holder thereof
under the Negotiable Instruments Law.
B. Asianbank, as collecting bank, is not liable to BA Finance as there was no privity of contract between
them.
C. Asianbank, as collecting bank, is not liable to BA Finance, considering that, as the intermediary
between the payee and the drawee Chinabank, it merely acted on the instructions of drawee Chinabank
to pay the amount of the check to Bitanga, hence, the consequent damage to BA Finance was due to the
negligence of Chinabank.
D. Malayans act of issuing and delivering the check solely to Bitanga in violation of the loss payee
clause in the Policy, is the proximate cause of the alleged damage to BA Finance.
E. Assuming Asianbank is liable, BA Finance can claim only his proportionate interest on the check as it
is a joint payee thereof.
F. Bitanga alone is liable for the amount to BA Finance on the ground of unjust enrichment or solutio
indebiti.
_______________

19 CA Rollo, pp. 39-40.


627

VOL. 607, DECEMBER 4, 2009


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Metropolitan Bank and Trust Company vs. BA Finance Corporation


G. BA Finance is liable to pay Asianbank actual and exemplary damages.20 (underscoring supplied)
The appellate court, summarizing the errors attributed to the trial court by Asianbank to be
whetherBA Finance has a cause of action against [it] even if the subject check had not been delivered
toBA Finance by the issuer itself, held in the affirmative and accordingly affirmed the trial courts
decision but deleted the award of P20,000 as actual damages.21Hence, the present Petition for Review
on Certiorari22 filed by Metrobank (hereafter petitioner) to which Asianbank was, as earlier stated,
merged, faulting the appellate court

I. x x x in applying the case of Associated Bank v. Court of Appeals, in the absence of factual similarity
and of the legal relationships necessary for the application of the desirable shortcut rule. x x x
II. x x x in not finding that x x x the general rule that the payee has no cause of action against the
collecting bank absent delivery to him must be applied.
III. x x x in finding that all the elements of a cause of action by BA Finance Corporation against
Asianbank Corporation are present.
IV.

x x in finding that Article 1208 of the Civil Code is not applicable.

V. x x x in awarding of exemplary damages even in the absence of moral, temperate, liquidated or


compensatory damages and a finding of fact that Asianbank acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner.
xxxx
VII. x x x in dismissing Asianbanks counterclaim and Third Party complaint [against Malayan
Insurance].23 (italics in the original; underscoring supplied)
_______________

20 Id., at pp. 40-41.


21 Decision of May 18, 2007, penned by Court of Appeals Associate Justice Ramon M. Bato, Jr. with the
concurrence of Associate Justices Andres B. Reyes, Jr. and Jose C. Mendoza.
22 Rollo, pp. 10-57.
23 Id., at pp. 20-22.
628

628
SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. BA Finance Corporation
Petitioner proffers the following arguments against the application of Associated Bank v. CA to the case:
x x x [T]he rule established in the Associated Bank case has provided a speedier remedy for the payee
to recover from erring collecting banks despite the absence of delivery of the negotiable instrument.
However, the application of the rule demands careful consideration of the factual settings and issues
raised in the case x x x.
One of the relevant circumstances raised in Associated Bank is the existence of forgery or unauthorized
indorsement. x x x
xxxx
In the case at bar, Bitanga is authorized to indorse the check as the drawer names him as one of the
payees. Moreover, his signature is not a forgery nor has he or anyone forged the signature of the
representative of BA Finance Corporation. No unauthorized indorsement appears on the check.
xxxx
Absent the indispensable fact of forgery or unauthorized indorsement, the desirable shortcut rule
cannot be applied,24 (underscoring supplied)
The petition fails.
Section 41 of the Negotiable Instruments Law provides:
Where an instrument is payable to the order of two or more payees or indorsees who are not partners,
all must indorse unless the one indorsing has authority to indorse for the others. (emphasis and
underscoring supplied)
Bitanga alone endorsed the crossed check, and petitioner allowed the deposit and release of the
proceeds thereof, despite the absence of authority of Bitangas co-payee BA Finance to endorse it on its
behalf.25
_______________

24 Id., at pp. 23-25.

25 TSN, May 30, 1995, pp. 7-8; The testimony of John Agbayani, vice president of BA Finance, reads as
follows:

Q Thereafter what happened next, if you know?


A Upon further verification, we were informed by Malayan Insurance Company that in deed a check, a
cross check
629

VOL. 607, DECEMBER 4, 2009


629
Metropolitan Bank and Trust Company vs. BA Finance Corporation
Denying any irregularity in accepting the check, petitioner maintains that it followed normal banking
procedure. The testimony of Imelda Cruz, Asianbanks then accounting head, shows otherwise,
however, viz:
Q Now, could you be familiar with a particular policy of the bank with respect to checks with joined
(sic) payees?
A Yes, sir.
Q And what would be the particular policy of the bank regarding this transaction?
A The bank policy and procedure regarding the joint checks. Once it is deposited to a single account,
we are not accepting joint checks for single account, depositing to a single account (sic).
Q What happened to the bank employee who allowed this particular transaction to occur?
A Once the branch personnel, the bank personnel (sic) accepted it, he is liable.
Q What do you mean by the branch personnel being held liable?
A Because since (sic) the bank policy, we are not supposed to accept joint checks to a [single] account,
so we mean that
_______________

was issued to BA Finance Corporation and Lamberto Bitanga and the check was delivered to Lamberto
Bitanga.

Q So, after the said check was delivered to Mr. Lamberto Bitanga, do you have any knowledge Mr.
witness, if you know, what happened to the check?
A Yes, sir, the check was deposited into the personal account of Mr. Lamberto Bitanga only, with Asian
Savings Bank without the knowledge and endorsement of the joint payee of the said check, which is the
plaintiff here, BA Finance.
xxxx
We immediately send a formal letter communication to Asian Bank in order to discuss the possibility of
reimbursement of banking on the premise that our check was irregular accepted for deposit into the
personal account of Lamberto Bitanga without our endorsement.

630

630
SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. BA Finance Corporation
personnel would be held liable in the sense that (sic) once it is withdrawn or encashed, it will not be
allowed.
Q In your experience, have you encountered any bank employee who was subjected to disciplinary
action by not following bank policies?
A The one that happened in that case, since I really dont know who that personnel is, he is no longer
connected with the bank.
Q What about in general, do you know of any disciplinary action, Madam witness?
A Since theres a negligence on the part of the bank personnel, it will be a ground for his separation
[from] the bank.26 (emphasis, italics and underscoring supplied)
Admittedly, petitioner dismissed the employee who allowed the deposit of the check in Bitangas
account.
Petitioners argument that since there was neither forgery, nor unauthorized indorsement because
Bitanga was a co-payee in the subject check, the dictum in Associated Bank v. CA does not apply in the
present case fails. The payment of an instrument over a missing indorsement is the equivalent of
payment on a forged indorsement27 or an unauthorized indorsement in itself in the case of joint
payees.28

Clearly, petitioner, through its employee, was negligent when it allowed the deposit of the crossed
check, despite the lone endorsement of Bitanga, ostensibly ignoring the fact that the check did not, it
bears repeating, carry the indorsement of BA Finance.29
As has been repeatedly emphasized, the banking business is imbued with public interest such that the
highest degree of diligence
_______________

26 TSN, October 18, 1995, pp. 5-7.


27 Kelly v. Central Bank and Trust Co. (Colo App), 794 P2d 1037, 12 UCCRS2d 1089; Humberto
Decorators, Inc. v. Plaza Natl Bank, 180 NJ Super 170, 434 A2d 618, 32 UCCRS 494; Vide: 11 Am Jur 2d,
Bills and Notes, 224, at p. 557.
28 Beyer v. First Natl Bank, 188 Mont 208, 612 P2d 1285, 29 UCCRS 563; Vide: 11 Am Jur 2d, Bills and
Notes, 224, at p. 557.
29 Gempesaw v. Court of Appeals, G.R. No. 92244, Feb. 9, 1993, 218 SCRA 682, 695.
631

VOL. 607, DECEMBER 4, 2009


631
Metropolitan Bank and Trust Company vs. BA Finance Corporation
and highest standards of integrity and performance are expected of banks in order to maintain the trust
and confidence of the public in general in the banking sector.30 Undoubtedly, BA Finance has a cause of
action against petitioner.
Is petitioner liable to BA Finance for the full value of the check?
Petitioner, at all events, argue that its liability to BA Finance should only be one-half of the amount
covered by the check as there is no indication in the check that Bitanga and BA Finance are solidary
creditors to thus make them presumptively joint creditors under Articles 1207 and 1208 of the Civil
Code which respectively provide:
Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same
obligation does not imply that each one of the former has a right to demand, or that each one of the
latter is bound to render, entire compliance with the prestations. There is a solidary liability only when
the obligation expressly so states, or when the law or the nature of the obligation requires solidarity.

Art. 1208. If from the law, or the nature or wording of the obligations to which the preceding article
refers to the contrary does not appear, the credit or debt shall be presumed to be divided into as many
equal shares as there are creditors or debtors, the debts or credits being considered distinct from one
another, subject to the Rules of Court governing the multiplicity of suits.
Petitioners argument is flawed.
The provisions of the Negotiable Instruments Law and underlying jurisprudential teachings on the blackletter law provide definitive justification for petitioners full liability on the value of the check.
To be sure, a collecting bank, Asianbank in this case, where a check is deposited and which indorses the
check upon presentment with the drawee bank, is an indorser.31 This is because in indorsing a check to
the drawee bank, a collecting bank stamps the back of the
_______________

30 Philippine Commercial International Bank v. Court of Appeals, G.R. No. 121413, January 29, 2001, 350
SCRA 446.
31 Associated Bank v. Court of Appeals, 322 Phil. 677, 697; 252 SCRA 620, 630 (1996).
632

632
SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. BA Finance Corporation
check with the phrase all prior endorsements and/or lack of endorsement guaranteed32 and, for all
intents and purposes, treats the check as a negotiable instrument, hence, assumes the warranty of an
indorser.33 Without Asianbanks warranty, the drawee bank (China Bank in this case) would not have
paid the value of the subject check.Petitioner, as the collecting bank or last indorser, generally suffers
the loss because it has the duty to ascertain the genuineness of all prior indorsements 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 prior indorsements.34
_______________

32 Section 17 of the Philippine Clearing House Corporation Rules states that: BANK GUARANTEE. All
checks cleared through the PCHC shall bear the guarantee affixed thereto by the Presenting

Bank/Branch which shall read as follows: Cleared thru the Philippine Clearing House Corporation. All
prior endorsements and/or lack of endorsement guaranteed.
33 Banco de Oro v. Equitable Banking Corp., 241 Phil. 187, 196-197; 157 SCRA 188, 197 (1988).
34 Sections 65 and 66 of the Negotiable Instruments Law state that:
Sec. 65.Every person negotiating an instrument by delivery or by a qualified indorsement warrants:
(a) That the instrument is genuine and in all respects what it purports to be;
(b) That he has good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the validity of the instrument or render it
valueless.
But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the
immediate transferee.
The provisions of subdivision (c) of this section do not apply to a person negotiating public or
corporation securities other than bills and notes.
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
633

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Metropolitan Bank and Trust Company vs. BA Finance Corporation
Accordingly, one who credits the proceeds of a check to the account of the indorsing payee is liable in
conversion to the non-indorsing payee for the entire amount of the check.35
It bears noting that in petitioners cross-claim against Bitanga, the trial court ordered Bitanga to return
to petitioner the entire value of the checkP224,500.00with interest as well as damages and cost of
suit. Petitioner never questioned this aspect of the trial courts disposition, yet it now prays for the
modification of its liability to BA Finance to only one-half of said amount. To pander to petitioners
supplication would certainly amount to unjust enrichment at BA Finances expense. Petitioners

remedywhich is the reimbursement for the full amount of the check from the perpetrator of the
irregularitylies with Bitanga.
Articles 1207 and 1208 of the Civil Code cannot be applied to the present case as these are completely
irrelevant. The drawer, Malayan Insurance in this case, issued the check to answer for an underlying
contractual obligation (payment of insurance proceeds). The obligation is merely reflected in the
instrument and whether the payees would jointly share in the proceeds or not is beside the point.
Moreover, granting petitioners appeal for partial liability would run counter to the existing principles on
the liabilities of parties on negotiable instruments, particularly on Section 68 of the Negotiable
Instruments Law which instructs that joint payees who indorse are
_______________

(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.
35 Vide Peoples Nat. Bank v. American Fidelity Fire Ins. Co., 39 Md. App. 614, 386 A.2d 1254, 24 U.C.C.
Rep. Serv. 362 (1978); Middle States Leasing Corp. v. Manufacturers Hanover Trust Co., 62 A.D.2d 273,
404 N.Y.S.2d 846, 23 U.C.C. Rep. Serv. 1215 (1st Dept 1978); Vide 11 Am Jur 2d, Bills and Notes, 225, at
p. 557.
634

634
SUPREME COURT REPORTS ANNOTATED
Metropolitan Bank and Trust Company vs. BA Finance Corporation
deemed to indorse jointly and severally.36 Recall that when the maker dishonors the instrument, the
holder thereof can turn to those secondarily liablethe indorserfor recovery.37 And since the law
explicitly mandates a solidary liability on the part of the joint payees who indorse the instrument, the
holder thereof (assuming the check was further negotiated) can turn to either Bitanga or BA Finance for
full recompense.R
especting petitioners challenge to the award by the appellate court of exemplary damages to BA
Finance, the same fails. Contrary to petitioners claim that no moral, temperate, liquidated or

compensatory damages were awarded by the trial court,38 the RTC did in fact award compensatory or
actual damages of P224,500, the value of the check, plus interest thereon.
Petitioner argues, however, that assuming arguendo that compensatory damages had been awarded,
the same contravened Article 2232 of the Civil Code which provides that in contracts or quasi-contracts,
the court may award exemplary damages only if the defendant acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner. Since, so petitioner concludes, there was no finding that it acted in a
wanton, fraudulent, reckless, oppressive, or malevolent manner,39 it is not liable for exemplary
damages.
The argument fails. To reiterate, petitioners liability is based not on contract or quasi-contract but on
quasi-delict since there is no pre-existing contractual relation between the parties.40 Article 2231 of the
_______________

36 Sec. 68. Order in which indorsers are liable.As respect one another, indorsers are liable prima
facie in the order in which they indorse; but evidence is admissible to show that, as between or among
themselves, they have agreed otherwise. Joint payees or joint indorsees who indorse are deemed to
indorse jointly and severally.
37 Section 66 of the NIL, supra note 35.
38 Rollo, pp. 46-47.
39 Id., at p. 47.
40 Article 2176 of the Civil Code states: Whoever by act or omission causes damage to another, there
being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no
pre-existing
635

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635
Metropolitan Bank and Trust Company vs. BA Finance Corporation
Civil Code, which provides that in quasi-delict, exemplary damages may be granted if the defendant
acted with gross negligence, thus applies. For gross negligence implies a want or absence of or failure
to exercise even slight care or diligence, or the entire absence of care,41 evincing a thoughtless
disregard of consequences without exerting any effort to avoid them.42

x x x The law allows the grant of exemplary damages to set an example for the public good. The
business of a bank is affected with public interest; thus it makes a sworn profession of diligence and
meticulousness in giving irreproachable service. For this reason, the bank should guard against in injury
attributable to negligence or bad faith on its part. The award of exemplary damages is proper as a
warning to [the petitioner] and all concerned not to recklessly disregard their obligation to exercise the
highest and strictest diligence in serving their depositors.43 (Italics and underscoring supplied)

As for the dismissal by the appellate court of petitioners third-party complaint against Malayan
Insurance, the same is well-taken. Petitioner based its third-party complaint on Malayan Insurances
alleged gross negligence in issuing the check payable to both BA Finance and Bitanga, despite the
stipulation in the mortgage and in the insurance policy that liability for loss shall be payable to BA
Finance.44 Malayan Insurance countered, however, that it
x x x paid the amount of P224,500 to BA Finance Corporation and Lamberto Bitanga in compliance
with the decision in the case of Lamberto Bitanga versus Malayan Insurance Co., Inc., Civil Case No. 882802, RTC-Makati Br. 132, and affirmed on appeal by the Supreme Court [3rd Division], G.R. No. 101964,
April 8, 1992 x x x.45 (underscoring supplied)

_______________

contractual relation between the parties is called a quasi-delict and is governed by the provisions of this
Chapter.
41 Acebedo Optical v. National Labor Relations Commission, G.R. No. 150171, July 17, 2007, 527 SCRA
655, 675.
42 Ibid.
43 BPI Family Bank v. Buenaventura, G.R. No. 148196, Septenber 30, 2005, 471 SCRA 431, 445.
44 Vide records, p. 82; Rollo, p. 50.
45 Id., at pp. 100-101.
636

636
SUPREME COURT REPORTS ANNOTATED

Metropolitan Bank and Trust Company vs. BA Finance Corporation


It is noted that Malayan Insurance, which stated that it was a matter of company policy to issue checks
in the name of the insured and the financing company, presented a witness to rebut its supposed
negligence.46 Perforce, it thus wrote a crossed check with joint payees so as to serve warning that the
check was issued for a definite purpose.47 Petitioner never ever disputed these assertions.
The Court takes exception, however, to the appellate courts affirmance of the trial courts grant of legal
interest of 12% per annum on the value of the check. For the obligation in this case did not arise out of a
loan or forbearance of money, goods or credit. While Article 1980 of the Civil Code provides that:
Fixed savings, and current deposits of money in banks and similar institutions shall be governed by the
provisions concerning simple loan,
said provision does not find application in this case since the nature of the relationship between BA
Finance and petitioner is one of agency whereby petitioner, as collecting bank, is to collect for BA
Finance the corresponding proceeds from the check.48 Not being a loan or forbearance of money, the
interest should be 6% per annum computed from the date of extrajudicial demand on September 25,
1992 until finality of judgment; and 12% per annum from finality of judgment until payment,
conformably with Eastern Shipping Lines, Inc. v. Court of Appeals.49
WHEREFORE, the Decision of the Court of Appeals dated May 18, 2007 is AFFIRMED with MODIFICATION
in that the rate of interest
_______________

46 Testimony of Michael Yap, Malayan Insurances first vice president.


47 Vide Bataan Cigar and Cigarette Factory v. Court of Appeals, G.R. No. 93048, March 3, 1994, 230
SCRA 643, 648-649, where the Court held that crossing of checks should put the holder on inquiry and
upon him or her devolves the duty to ascertain the indorsers title to the check or the nature of his
possession. Failing in this respect, the holder is declared guilty of gross negligence amounting to legal
absence of good faith, contrary to Section 52 (c) of the Negotiable Instruments Law. (Underscoring
supplied)
48 Jai Alai Corp. of the Phils. v. BPI, G.R. No. L-29432, August 6, 1975, 66 SCRA 29, 34.
49 G.R. No. 97412, July 12, 1994, 234 SCRA 78.
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Metropolitan Bank and Trust Company vs. BA Finance Corporation
on the judgment obligation of P224,500 should be 6% per annum, computed from the time of
extrajudicial demand on September 25, 1992 until its full payment before finality of judgment;
thereafter, if the amount adjudged remains unpaid, the interest rate shall be 12% per annum computed
from the time the judgment becomes final and executory until fully satisfied.
Costs against petitioner.
SO ORDERED.
Puno (C.J.), Leonardo-De Castro, Bersamin and Villa-rama, Jr., JJ., concur.
Judgment affirmed with modification.
Notes.If a bank refuses to pay a check (notwithstanding sufficiency of funds), the payee-holder cannot
sue the bankthe payee should instead sue the drawer who might in turn sue the bank. (Villanueva vs.
Nite, 496 SCRA 459 [2006])
The term promissory note has a definite meaning under the negotiable instruments law, which does
not include securities. (Security Bank Corporation vs. Commissioner of Internal Revenue, 499 SCRA
453 [2006])
o0o
Copyright 2014 Central Book Supply, Inc. All rights reserved. [Metropolitan Bank and Trust Company
vs. BA Finance Corporation, 607 SCRA 620(2009)]

SPS. PEDRO AND FLORENCIA VIOLAGO, petitioners, vs. BA FINANCE CORPORATION and AVELINO
VIOLAGO, respondents.
Negotiable Instruments Law; Promissory Notes; The promissory note is clearly negotiable.The
promissory note is clearly negotiable. The appellate court was correct in finding all the requisites of a
negotiable instrument present. The NIL provides: Section 1. Form of Negotiable Instruments.An
instrument to be negotiable must conform to the following requirements: (a) It must be in writing and
_______________

* SECOND DIVISION.
70

70
SUPREME COURT REPORTS ANNOTATED
Violago vs. BA Finance Corporation
signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain
in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be
payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
Same; Same; The law presumes that a holder of a negotiable instrument is a holder thereof in due
course.The law presumes that a holder of a negotiable instrument is a holder thereof in due course. In
this case, the CA is correct in finding that BA Finance meets all the foregoing requisites: In the present
recourse, on its face, (a) the Promissory Note, Exhibit A, is complete and regular; (b) the Promissory
Note was endorsed by the VMSC in favor of the Appellee; (c) the Appellee, when it accepted the Note,
acted in good faith and for value; (d) the Appellee was never informed, before and at the time the
Promissory Note was endorsed to the Appellee, that the vehicle sold to the Defendants-Appellants
was not delivered to the latter and that VMSC had already previously sold the vehicle to Esmeraldo
Violago. Although Jose Olvido mortgaged the vehicle to Generoso Lopez, who assigned his rights to the
BA Finance Corporation (Cebu Branch), the same occurred only on May 8, 1987, much later than August
4, 1983, when VMSC assigned its rights over the Chattel Mortgage by the Defendants-Appellants to
the Appellee. Hence, Appellee was a holder in due course.
Same; Same; The Negotiable Instruments Law considers every negotiable instrument prima facie to have
been issued for a valuable consideration.In the hands of one other than a holder in due course, a
negotiable instrument is subject to the same defenses as if it were non-negotiable. A holder in due
course, however, holds the instrument free from any defect of title of prior parties and from defenses
available to prior parties among themselves, and may enforce payment of the instrument for the full
amount thereof. Since BA Finance is a holder in due course, petitioners cannot raise the defense of nondelivery of the object and nullity of the sale against the corporation. The NIL considers every negotiable
instrument prima facie to have been issued for a valuable consideration. In Salas, 181 SCRA 296 (1990),
we held that a party holding an instrument may enforce payment of the instrument for the full amount
thereof. As such, the maker cannot set up the defense of nullity of
71

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71

Violago vs. BA Finance Corporation


the contract of sale. Thus, petitioners are liable to respondent corporation for the payment of the
amount stated in the instrument.
Corporation Law; Piercing-of-the-Corporate-Veil; We suggested as much in Arcilla v. Court of Appeals
(215 SCRA 120 *1992+), an appellate proceeding involving petitioner Arcillas bid to avoid the adverse CA
decision on argument that he is not personally liable for the amount adjudged since the same
constitutes a corporate liability which nevertheless cannot be enforced against the corporation which
has not been impleaded as a party below.The fact that VMSC was not included as defendant in
petitioners third party complaint does not preclude recovery by petitioners from Avelino; neither would
such non-inclusion constitute a bar to the application of the piercing-of-the-corporate-veil doctrine. We
suggested as much in Arcilla v. Court of Appeals, 215 SCRA 120 (1992), an appellate proceeding involving
petitioner Arcillas bid to avoid the adverse CA decision on the argument that he is not personally liable
for the amount adjudged since the same constitutes a corporate liability which nevertheless cannot
even be enforced against the corporation which has not been impleaded as a party below. In that case,
the Court found as well-taken the CAs act of disregarding the separate juridical personality of the
corporation and holding its president, Arcilla, liable for the obligations incurred in the name of the
corporation although it was not a party to the collection suit before the trial court.
PETITION for review on certiorari of the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Cabrera, Makalintal & Baliad Law Offices for petitioners.
Reyes, Cruz & Associates for respondent Avelino Violago.
Brillantes, Navarro, Jumamil, Arcilla, Escolin, Martinez & Vivero Law Offices for respondent BA Finance
Corporation.
72
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SUPREME COURT REPORTS ANNOTATED
Violago vs. BA Finance Corporation
VELASCO, JR., J.:
This is a Petition for Review on Certiorari of the August 20, 2002 Decision1 and May 15, 2003
Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 48489 entitled BA Finance Corporation,
Plaintiff-Appellee v. Sps. Pedro and Florencia Violago, Defendants and Third Party Plaintiffs-Appellants v.
Avelino Violago, Third Party Defendant-Appellant. Petitioners-spouses Pedro and Florencia Violago pray
for the reversal of the appellate courts ruling which held them liable to respondent BA Finance

Corporation (BA Finance) under a promissory note and a chattel mortgage. Petitioners likewise pray that
respondent Avelino Violago be adjudged directly liable to BA Finance.
The Facts
Sometime in 1983, Avelino Violago, President of Violago Motor Sales Corporation (VMSC), offered to sell
a car to his cousin, Pedro F. Violago, and the latters wife, Florencia. Avelino explained that he needed to
sell a vehicle to increase the sales quota of VMSC, and that the spouses would just have to pay a down
payment of PhP 60,500 while the balance would be financed by respondent BA Finance. The spouses
would pay the monthly installments to BA Finance while Avelino would take care of the documentation
and approval of financing of the car. Under these terms, the spouses then agreed to purchase a Toyota
Cressida Model 1983 from VMSC.3
_______________

1 Rollo, pp. 14-28. Penned by Associate Justice Romeo J. Callejo, Sr. (former member of this Court) and
concurred in by Associate Justices Remedios Salazar-Fernando and Danilo B. Pine (now retired).
2 Id., at pp. 30-31.
3 Id., at p. 15.
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Violago vs. BA Finance Corporation
On August 4, 1983, the spouses and Avelino signed a promissory note under which they bound
themselves to pay jointly and severally to the order of VMSC the amount of PhP 209,601 in 36 monthly
installments of PhP 5,822.25 a month, the first installment to be due and payable on September 16,
1983. Avelino prepared a Disclosure Statement of Loan/Credit Transportation which showed the net
purchase price of the vehicle, down payment, balance, and finance charges. VMSC then issued a sales
invoice in favor of the spouses with a detailed description of the Toyota Cressida car. In turn, the
spouses executed a chattel mortgage over the car in favor of VMSC as security for the amount of PhP
209,601. VMSC, through Avelino, endorsed the promissory note to BA Finance without recourse. After
receiving the amount of PhP 209,601, VMSC executed a Deed of Assignment of its rights and interests
under the promissory note and chattel mortgage in favor of BA Finance. Meanwhile, the spouses
remitted the amount of PhP 60,500 to VMSC through Avelino.4
The sales invoice was filed with the Land Transportation Office (LTO)-Baliwag Branch, which issued
Certificate of Registration No. 0137032 in the name of Pedro on August 8, 1983. The spouses were

unaware that the same car had already been sold in 1982 to Esmeraldo Violago, another cousin of
Avelino, and registered in Esmeraldos name by the LTO-San Rafael Branch. Despite the spouses
demand for the car and Avelinos repeated assurances, there was no delivery of the vehicle. Since VMSC
failed to deliver the car, Pedro did not pay any monthly amortization to BA Finance. 5
On March 1, 1984, BA Finance filed with the Regional Trial Court (RTC), Branch 116 in Pasay City a
complaint for Replevin with Damages against the spouses. The complaint, docketed as Civil Case No.
1628-P, prayed for the delivery of the vehicle in favor of BA Finance or, if delivery cannot be
_______________

4 Id., at pp. 15-16.


5 Id.
74

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SUPREME COURT REPORTS ANNOTATED
Violago vs. BA Finance Corporation
effected, for the payment of PhP 199,049.41 plus penalty at the rate of 3% per month from February 15,
1984 until fully paid. BA Finance also asked for the payment of attorneys fees, liquidated damages,
replevin bond premium, expenses in the seizure of the vehicle, and costs of suit. The RTC issued an
Order of Replevin on March 28, 1984. The Violago spouses, as defendants a quo, were declared in
default for failing to file an answer. Eventually, the RTC rendered on December 3, 1984 a decision in
favor of BA Finance. A writ of execution was thereafter issued on January 11, 1985, followed by an alias
writ of execution.6
In the meantime, Esmeraldo conveyed the vehicle to Jose V. Olvido who was then issued Certificate of
Registration No. 0014830-4 by the LTO-Cebu City Branch on April 29, 1985. On May 8, 1987, Jose
executed a Chattel Mortgage over the vehicle in favor of Generoso Lopez as security for a loan covered
by a promissory note in the amount of PhP 260,664. This promissory note was later endorsed to BA
Finance, Cebu City branch.7
On August 21, 1989, the spouses Violago filed a Motion for Reconsideration and Motion to Quash Writ
of Execution on the basis of lack of a valid service of summons on them, among other reasons. The RTC
denied the motions; hence, the spouses filed a petition for certiorari under Rule 65 before the CA,
docketed as CA G.R. No. 2002-SP. On May 31, 1991, the CA nullified the RTCs order. This CA decision
became final and executory.

On January 28, 1992, the spouses filed their Answer before the RTC, alleging the following: they never
received the vehicle from VMSC; the vehicle was previously sold to Esmeraldo; BA Finance was not a
holder in due course under Section 59 of the Negotiable Instruments Law (NIL); and the recourse of BA
Finance should be against VMSC. On February 25, 1995,
_______________

6 Id., at pp. 16-17.


7 Id., at p. 18.
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Violago vs. BA Finance Corporation
the Violago spouses, with prior leave of court, filed a Third Party Complaint against Avelino praying that
he be held liable to them in the event that they be held liable to BA Finance, as well as for damages.
VMSC was not impleaded as third party defendant. In his Motion to Dismiss and Answer, Avelino
contended that he was not a party to the transaction personally, but VMSC. Avelinos motion was
denied and the third party complaint against him was entertained by the trial court. Subsequently, the
spouses belabored to prove that they affixed their signatures on the promissory note and chattel
mortgage in favor of VMSC in blank.8
The RTC rendered a Decision on March 5, 1994, finding for BA Finance but against the Violago spouses.
The RTC, however, declared that they are entitled to be indemnified by Avelino. The dispositive portion
of the RTCs decision reads:
WHEREFORE, defendant-[third]-party plaintiffs spouses Pedro F. Violago and Florencia R. Violago are
ordered to deliver to plaintiff BA Finance Corporation, at its principal office the BAFC Building, Gamboa
St., Legaspi Village, Makati, Metro Manila the Toyota Cressida car, model 1983, bearing Engine No. 21R02854117, and with Serial No. RX60-804614, covered by the deed of chattel mortgage dated August 4,
1983; or if such delivery cannot be made, to pay, jointly and severally, to the plaintiff the sum of
P198,003.06 together with the penalty [thereon] at three percent (3%) a month, from March 1, 1984,
until the amount is fully paid.
In either case, the defendant-third-party plaintiffs are required to pay, jointly and severally, to the
plaintiff a sum equivalent to twenty-five percent (25%) of P198,003.06 as attorneys fees, and another

amount also equivalent to twenty five percent (25%) of the said unpaid balance, as liquidated damages.
The defendant-third party-plaintiffs are also required to shoulder the litigation expenses and costs.
As indemnification, third-party defendant Avelino Violago is ordered to deliver to defendants-third-party
plaintiffs spouses Pedro F. Violago and Florencia R. Violago the aforedescribed motor vehicle;
_______________

8 Id., at pp. 18-19.


76

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SUPREME COURT REPORTS ANNOTATED
Violago vs. BA Finance Corporation
or if such delivery is not possible, to pay to the said spouses the sum of P198,003.06, together with the
penalty thereon at three (3%) a month from March 1, 1984, until the amount is entirely paid.
In either case, the third-party defendant should pay to the defendant-third-party plaintiffs spouses a
sum equivalent to twenty-five percent (25%) of P198,003.06 as attorneys fees, and another sum
equivalent also to twenty-five percent (25%) of the said unpaid balance, as liquidated damages.
Third-party defendant Avelino Violago is further ordered to return to the third-party plaintiffs the sum
of P60,500.00 they paid to him as down payment for the car; and to pay them P15,000.00 as moral
damages; P10,000.00 as exemplary damages; and reimburse them for all the expenses and costs of the
suit.
The counterclaims of the defendants and third-party defendant, for lack of merit, are dismissed.9
The Ruling of the CA
Petitioners-spouses and Avelino appealed to the CA. The spouses argued that the promissory note is a
negotiable instrument; hence, the trial court should have applied the NIL and not the Civil Code. The
spouses also asserted that since VMSC was not the owner of the vehicle at the time of sale, the sale was
null and void for the failure in the cause or consideration of the promissory note, which in this case
was the sale and delivery of the vehicle. The spouses also alleged that BA Finance was not a holder in
due course of the note since it knew, through its Cebu City branch, that the car was never delivered to
the spouses.10 On the other hand, Avelino prayed for the dismissal of the complaint against him
because he was not a party to the transaction, and for an order to the spouses to pay him moral
damages and costs of suit.

The appellate court ruled that the promissory note was a negotiable instrument and that BA Finance
was a holder in
_______________

9 Id.
10 Id., at pp. 20-26.
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Violago vs. BA Finance Corporation
due course, applying Secs. 8, 24, and 52 of the NIL. The CA faulted petitioners for failing to implead
VMSC, the seller of the vehicle and creditor in the promissory note, as a party in their Third Party
Complaint. Citing Salas v. Court of Appeals,11 the appellate court reasoned that since VMSC is an
indispensable party, any judgment will not bind it or be enforced against it. The absence of VMSC
rendered the proceedings in the RTC and the judgment in the Third Party Complaint null and void, not
only as to the absent party but also to the present parties, namely the Defendants-Appellants
(petitioners herein) and the Third-Party-Defendant-Appellant (Avelino Violago). The CA set aside the
trial courts order holding Avelino liable for damages to the spouses without prejudice to the action of
the spouses against VMSC and Avelino in a separate action.12
The dispositive portion of the August 20, 2002 CA Decision reads:
IN THE LIGHT OF ALL THE FOREGOING, the appeal of the Plaintiffs-Appellants is DISMISSED. The appeal
of the Third-Party-Defendant-Appellant is GRANTED. The Decision of the Court a quo is AFFIRMED, with
the modification that the Third-Party Complaint against the Third-Party-Defendant-appellant is
DISMISSED, without prejudice. The counterclaims of the Third-Party Defendant Appellant against the
Defendants-Appellants are DISMISSED, also without prejudice.13
The spouses Violago sought but were denied reconsideration by the CA per its Resolution of May 15,
2003.
The Issues

Petitioners raise the following issues:

_______________

11 G.R. No. 76788, January 22, 1990, 181 SCRA 296.


12 Rollo, p. 19.
13 Supra note 1, at p. 27.
78

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SUPREME COURT REPORTS ANNOTATED
Violago vs. BA Finance Corporation
WHETHER OR NOT THE HOLDER OF AN INVALID NEGOTIABLE PROMISSORY NOTE MAY BE CONSIDERED
A HOLDER IN DUE COURSE
WHETHER OR NOT A CHATTEL MORTGAGE SHOULD BE CONSIDERED VALID DESPITE VITIATION OF
CONSENT OF, AND THE FRAUD COMMITTED ON, THE MORTGAGORS BY AVELINO, AND THE CLEAR
ABSENCE OF OBJECT CERTAIN
WHETHER OR NOT THE VEIL OF CORPORATE ENTITY MAY BE INVOKED AND SUSTAINED DESPITE THE
FRAUD AND DECEPTION OF AVELINO
The Courts Ruling

The ruling of the appellate court is set aside insofar as it dismissed, without prejudice, the third party
complaint of petitioners against Avelino thereby effectively absolving Avelino from any liability under
the third party complaint.
In addressing the threshold issue of whether BA Finance is a holder in due course of the promissory
note, we must determine whether the note is a negotiable instrument and, hence, covered by the NIL.
In their appeal to the CA, petitioners argued that the promissory note is a negotiable instrument and
that the provisions of the NIL, not the Civil Code, should be applied. In the present petition, however,
petitioners claim that Article 1318 of the Civil Code14 should be applied since their consent was vitiated
by fraud, and, thus, the promissory note does not carry any legal effect despite its negotiation. Either
way, the petitioners arguments deserve no merit.
The promissory note is clearly negotiable. The appellate court was correct in finding all the requisites of
a negotiable instrument present. The NIL provides:

_______________

14 Art. 1318. There is no contract unless the following requisites concur:


(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
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Violago vs. BA Finance Corporation
Section 1. Form of Negotiable Instruments.An instrument to be negotiable must conform to the
following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein
with reasonable certainty.
The promissory note signed by petitioners reads:
209,601.00
Makati, Metro Manila, Philippines, August 4, 1983
For value received, I/we, jointly and severally, promise to pay to the order of VIOLAGO MOTOR SALES
CORPORATION, its office, the principal sum of TWO HUNDRED NINE THOUSAND SIX HUNDRED ONE
ONLY Pesos (P209,601.00), Philippines Currency, with interest at the rate stipulated herein below, in
installments as follows:
Thirty Six (36) successive monthly installments of P5,822.25, the first installment to be paid on 9-16-83,
and the succeeding monthly installments on the 16th day of each and every succeeding month

thereafter until the account is fully paid, provided that the penalty charge of three (3%) per cent per
month or a fraction thereof shall be added on each unpaid installment from maturity thereof until fully
paid.
xxxx
Notice of demand, presentment, dishonor and protest are hereby waived.
(Sgd.)
PEDRO F. VIOLAGO
763 Constancia St., Sampaloc, Manila
(Address)
(Sgd.)
FLORENCIA R. VIOLAGO
same
(Address)

80

80
SUPREME COURT REPORTS ANNOTATED
Violago vs. BA Finance Corporation
(Sgd.)
Marivic Avaria
(WITNESS)
(Sgd.)
Jesus Tuazon
(WITNESS)

PAY TO THE ORDER OF BA FINANCE CORPORATION


WITHOUT RECOURSE
VIOLAGO MOTOR SALES CORPORATION
By: (Sgd.)
AVELINO A. VIOLAGO, Pres.15
The promissory note clearly satisfies the requirements of a negotiable instrument under the NIL. It is in
writing; signed by the Violago spouses; has an unconditional promise to pay a certain amount, i.e., PhP
209,601, on specific dates in the future which could be determined from the terms of the note; made
payable to the order of VMSC; and names the drawees with certainty. The indorsement by VMSC to BA
Finance appears likewise to be valid and regular.
The more important issue now is whether or not BA Finance is a holder in due course. The resolution of
this issue will determine whether petitioners defense of fraud and nullity of the sale could validly be
raised against respondent corporation. Sec. 52 of the NIL provides:
Section 52. What constitutes a holder in due course.A holder in due course is a holder who has
taken the instrument under the following conditions:
(a) That it is complete and regular 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.
_______________

15 Rollo, p. 21.
81
VOL. 559, JULY 21, 2008
81
Violago vs. BA Finance Corporation

The law presumes that a holder of a negotiable instrument is a holder thereof in due course.16 In this
case, the CA is correct in finding that BA Finance meets all the foregoing requisites:
In the present recourse, on its face, (a) the Promissory Note, Exhibit A, is complete and regular; (b)
the Promissory Note was endorsed by the VMSC in favor of the Appellee; (c) the Appellee, when it
accepted the Note, acted in good faith and for value; (d) the Appellee was never informed, before and at
the time the Promissory Note was endorsed to the Appellee, that the vehicle sold to the DefendantsAppellants was not delivered to the latter and that VMSC had already previously sold the vehicle to
Esmeraldo Violago. Although Jose Olvido mortgaged the vehicle to Generoso Lopez, who assigned his
rights to the BA Finance Corporation (Cebu Branch), the same occurred only on May 8, 1987, much later
than August 4, 1983, when VMSC assigned its rights over the Chattel Mortgage by the DefendantsAppellants to the Appellee. Hence, Appellee was a holder in due course.17
In the hands of one other than a holder in due course, a negotiable instrument is subject to the same
defenses as if it were non-negotiable.18 A holder in due course, however, holds the instrument free
from any defect of title of prior parties and from defenses available to prior parties among themselves,
and may enforce payment
_______________

16 NIL, Sec. 59.


17 Rollo, p. 25.
18 NIL, Sec. 58.
19 Id., Sec. 57.
20 Id., Sec. 24.
82

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SUPREME COURT REPORTS ANNOTATED
Violago vs. BA Finance Corporation
of the instrument for the full amount thereof.19 Since BA Finance is a holder in due course, petitioners
cannot raise the defense of non-delivery of the object and nullity of the sale against the corporation.
The NIL considers every negotiable instrument prima facie to have been issued for a valuable
consideration.20 In Salas, we held that a party holding an instrument may enforce payment of the
instrument for the full amount thereof. As such, the maker cannot set up the defense of nullity of the

contract of sale.21 Thus, petitioners are liable to respondent corporation for the payment of the amount
stated in the instrument.
From the third party complaint to the present petition, however, petitioners pray that the veil of
corporate fiction be set aside and Avelino be adjudged directly liable to BA Finance. Petitioners likewise
pray for damages for the fraud committed upon them.
In Concept Builders, Inc. v. NLRC, we held:
It is a fundamental principle of corporation law that a corporation is an entity separate and distinct
from its stockholders and from other corporations to which it may be connected. But, this separate and
distinct personality of a corporation is merely a fiction created by law for convenience and to promote
justice. So, when the notion of separate juridical personality is used to defeat public convenience, justify
wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws, this separate
personality of the corporation may be disregarded or the veil of corporate fiction pierced. This is true
likewise when the corporation is merely an adjunct, a business conduit or an alter ego of another
corporation.
xxxx
The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as
follows:
1. Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the corporate
entity as to this transaction had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or dishonest and unjust acts in contravention of
plaintiffs legal rights; and
_______________

21 Supra note 11, at pp. 302-303.


83

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Violago vs. BA Finance Corporation

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.22
This case meets the foregoing test. VMSC is a family-owned corporation of which Avelino was president.
Avelino committed fraud in selling the vehicle to petitioners, a vehicle that was previously sold to
Avelinos other cousin, Esmeraldo. Nowhere in the pleadings did Avelino refute the fact that the vehicle
in this case was already previously sold to Esmeraldo; he merely insisted that he cannot be held liable
because he was not a party to the transaction. The fact that Avelino and Pedro are cousins, and that
Avelino claimed to have a need to increase the sales quota, was likely among the factors which
motivated the spouses to buy the car. Avelino, knowing fully well that the vehicle was already sold, and
with abuse of his relationship with the spouses, still proceeded with the sale and collected the down
payment from petitioners. The trial court found that the vehicle was not delivered to the spouses.
Avelino clearly defrauded petitioners. His actions were the proximate cause of petitioners loss. He
cannot now hide behind the separate corporate personality of VMSC to escape from liability for the
amount adjudged by the trial court in favor of petitioners.
The fact that VMSC was not included as defendant in petitioners third party complaint does not
preclude recovery by petitioners from Avelino; neither would such non-inclusion constitute a bar to the
application of the piercing-of-the-corporate-veil doctrine. We suggested as much in Arcilla v. Court of
Appeals, an appellate proceeding involving petitioner Arcillas bid to avoid the adverse CA decision on
the argument that he is not personally liable for the amount adjudged since the same constitutes a
corporate liability which nevertheless cannot even be enforced against the corporation which has not
been impleaded as a party below. In that case, the Court found as well-taken the CAs act of
disregarding the separate
_______________

22 G.R. No. 108734, May 29, 1996, 257 SCRA 149, 157-159.
84

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SUPREME COURT REPORTS ANNOTATED
Violago vs. BA Finance Corporation
juridical personality of the corporation and holding its president, Arcilla, liable for the obligations
incurred in the name of the corporation although it was not a party to the collection suit before the trial
court. An excerpt from Arcilla:

x x x In short, even if We are to assume arguendo that the obligation was incurred in the name of the
corporation, the petitioner [Arcilla] would still be personally liable therefor because for all legal intents
and purposes, he and the corporation are one and the same. Csar Marine Resources, Inc. is nothing
more than his business conduit and alter ego. The fiction of separate juridical personality conferred
upon such corporation by law should be disregarded. Significantly, petitioner does not seriously
challenge the *CAs+ application of the doctrine which permits the piercing of the corporate veil and the
disregarding of the fiction of a separate juridical personality; this is because he knows only too well that
from the beginning, he merely used the corporation for his personal purposes.23
WHEREFORE, the CAs August 20, 2002 Decision and May 15, 2003 Resolution in CA-G.R. CV No. 48489
are SET ASIDE insofar as they dismissed without prejudice the third party complaint of petitionersspouses Pedro and Florencia Violago against respondent Avelino Violago. The March 5, 1994 Decision of
the RTC is REINSTATED and AFFIRMED. Costs against Avelino Violago.
SO ORDERED.
Quisumbing (Chairperson), Ynares-Santiago,** Carpio-Morales and Tinga, JJ., concur.
Judgment and resolution set aside. That of Regional Trial Court dated March 5, 1994 reinstated and
affirmed.
_______________

23 G.R. No. 89804, October 23, 1992, 215 SCRA 120, 129.
** Additional member as per Special Order No. 509 dated July 1, 2008.
Copyright 2014 Central Book Supply, Inc. All rights reserved. [Violago vs. BA Finance Corporation, 559
SCRA 69(2008)]

OBERT DINO, petitioner, vs. MARIA LUISA JUDAL-LOOT, joined by her husband VICENTE LOOT,
respondents.
Mercantile Law; Negotiable Instruments Law; Checks; Crossed Checks; The act of crossing a check serves
as a warning to the holder that the check 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.The act of crossing a check serves as a warning to the holder that the check 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. Contrary to respondents view,

petitioner never changed his theory, that respondents are not holders in due course of the subject
check, as would violate fundamental rules of justice, fair play, and due process. Besides, the subject
check was presented and admitted as evidence during the trial and respondents did not and in fact
cannot deny that it is a crossed check.
Civil Procedure; Courts; Jurisdiction; The Court is clothed with ample authority to entertain issues or
matters not raised in the lower courts in the interest of substantial justice.In any event, the Court is
clothed with ample authority to entertain issues or matters not raised in the lower courts in the interest
of substantial justice. In Casa Filipina Realty v. Office of the President, 241 SCRA 165 (1995), the Court
held: *T+he trend in modern-day procedure is to accord the courts broad discretionary power such that
the appellate court may consider matters bearing on the issues submitted for resolution which the
parties failed to raise or which the lower court ignored. Since rules of procedure are mere tools
designed to facilitate the attainment of justice, their strict and rigid application which would result in
technicalities that tend to frustrate rather than promote substantial justice, must always be avoided.
Technicality should not be allowed to stand in the way of equitably and completely resolving the rights
and obligations of the parties.
_______________

* SECOND DIVISION.
394

394
SUPREME COURT REPORTS ANNOTATED
Dino vs. Judal-Loot
Mercantile Law; Negotiable Instruments Law; Holder in Due Course, Defined.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.
Same; Same; Checks; Crossed Checks; Principles that must be considered in the treatment of crossed
checks.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 onceto 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.
Same; Same; Same; Same; Special Crossed Check, and General Crossed Check, Defined; Crossing a
check is done by placing two parallel lines diagonally on the left top portion of the check.Under usual
practice, crossing a check is done by placing two parallel lines diagonally on the left top portion of the
check. The crossing may be special wherein between the two parallel lines is written the name of a bank
or a business institution, in which case the drawee should pay only with the intervention of that bank or
company, or crossing may be general wherein between two parallel diagonal lines are written the words
and Co. or none at all as in the case at bar, in which case the drawee should not encash the same but
merely accept the same for deposit. The effect therefore of crossing a check relates to the mode of its
presentment for payment. Under Section 72 of the Negotiable Instruments Law, presentment for
payment to be sufficient must be made (a) by the holder, or by some person authorized to receive
payment on his behalf x x x As to who the holder or authorized person will be depends on the
instructions stated on the face of the check.
395

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Dino vs. Judal-Loot
Same; Same; Same; Holder in Due Course; The Negotiable Instruments Law does not provide that a
holder who is not a holder in due course may not in any case 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.The fact that respondents are not holders in due course does
not automatically mean that they cannot recover on the check. The Negotiable Instruments Law does
not provide that a holder who is not a holder in due course may not in any case 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 Consings 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.
PETITION for review on certiorari of the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
The Law Firm of Hermosisima & Inso for petitioner.

Maderazo & Associates for respondents.


CARPIO, J.:
The Case

This is a petition for review1 of the 16 August 2005 Decision2 and 30 November 2005 Resolution3 of the
Court of Appeals in CA-G.R. CV No. 57994. The Court of Appeals affirmed
_______________

1 Under Rule 45 of the Rules of Court.


2 Rollo, pp. 24-32. Penned by Associate Justice Enrico A. Lanzanas with Associate Justices Arsenio J.
Magpale and Sesinando E. Villon, concurring.
3 Id., at pp. 34-36.
396

396
SUPREME COURT REPORTS ANNOTATED
Dino vs. Judal-Loot
the decision of the Regional Trial Court, 7th Judicial Region, Branch 56, Mandaue City (trial court), with
the deletion of the award of interest, moral damages, attorneys fees and litigation expenses. The trial
court ruled that respondents Maria Luisa Judal-Loot and Vicente Loot are holders in due course of
Metrobank Check No. C-MA 142119406 CA and ordered petitioner Robert Dino as drawer, together with
co-defendant Fe Lobitana as indorser, to solidarily pay respondents the face value of the check, among
others.
The Facts

Sometime in December 1992, a syndicate, one of whose members posed as an owner of several parcels
of land situated in Canjulao, Lapu-lapu City, approached petitioner and induced him to lend the group
P3,000,000.00 to be secured by a real estate mortgage on the properties. A member of the group,
particularly a woman pretending to be a certain Vivencia Ompok Consing, even offered to execute a
Deed of Absolute Sale covering the properties, instead of the usual mortgage contract.4 Enticed and

convinced by the syndicates offer, petitioner issued three Metrobank checks totaling P3,000,000.00,
one of which is Check No. C-MA-142119406-CA postdated 13 February 1993 in the amount of
P1,000,000.00 payable to Vivencia Ompok Consing and/or Fe Lobitana.5
Upon scrutinizing the documents involving the properties, petitioner discovered that the documents
covered rights over government properties. Realizing he had been deceived, petitioner advised
Metrobank to stop payment of his checks. However, only the payment of Check No. C-MA- 142119406CA was ordered stopped. The other two checks were already encashed by the payees.
_______________

4 Records, p. 22.
5 Id.
397

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Dino vs. Judal-Loot
Meanwhile, Lobitana negotiated and indorsed Check No. C-MA- 142119406-CA to respondents in
exchange for cash in the sum of P948,000.00, which respondents borrowed from Metrobank and
charged against their credit line. Before respondents accepted the check, they first inquired from the
drawee bank, Metrobank, Cebu-Mabolo Branch which is also their depositary bank, if the subject check
was sufficiently funded, to which Metrobank answered in the positive. However, when respondents
deposited the check with Metrobank, Cebu-Mabolo Branch, the same was dishonored by the drawee
bank for reason PAYMENT STOPPED.
Respondents filed a collection suit6 against petitioner and Lobitana before the trial court. In their
Complaint, respondents alleged, among other things, that they are holders in due course and for value
of Metrobank Check No. C-MA-142119406-CA and that they had no prior information concerning the
transaction between defendants.
In his Answer, petitioner denied respondents allegations that on the face of the subject check, no
condition or limitation was imposed and that respondents are holders in due course and for value of
the check. For her part, Lobitana denied the allegations in the complaint and basically claimed that the
transaction leading to the issuance of the subject check is a sale of a parcel of land by Vivencia Ompok
Consing to petitioner and that she was made a payee of the check only to facilitate its discounting.

The trial court ruled in favor of respondents and declared them due course holders of the subject check,
since there was no privity between respondents and defendants. The dispositive portion of the 14
March 1996 Decision of the trial court reads:
In summation, this Court rules for the Plaintiff and against the Defendants and hereby orders:
_______________

6 Docketed as Civil Case No. MAN-1843.


398

398
SUPREME COURT REPORTS ANNOTATED
Dino vs. Judal-Loot
1.) defendants to pay to Plaintiff, and severally, the amount of P1,000,000.00 representing the face
value of subject Metrobank check;
2.) to pay to Plaintiff herein, jointly and severally, the sum of P101,748.00 for accrued and paid
interest;
3.) to pay to Plaintiff, jointly and severally, moral damages in the amount of P100,000.00;
4.) to pay to Plaintiff, jointly and severally, the sum of P200,000.00 for attorneys fees; and
5.) to pay to Plaintiff, jointly and severally, litigation expenses in the sum of P10,000.00 and costs of
the suit.
SO ORDERED.7
Only petitioner filed an appeal. Lobitana did not appeal the trial courts judgment.
The Ruling of the Court of Appeals

The Court of Appeals affirmed the trial courts finding that respondents are holders in due course of
Metrobank Check No. C-MA-142119406-CA. The Court of Appeals pointed out that petitioners own
admission that respondents were never parties to the transaction among petitioner, Lobitana,
Concordio Toring, Cecilia Villacarlos, and Consing, proved respondents lack of knowledge of any
infirmity in the instrument or defect in the title of the person negotiating it. Moreover, respondents

verified from Metrobank whether the check was sufficiently funded before they accepted it. Therefore,
respondents must be excluded from the ambit of petitioners stop payment order.
The Court of Appeals modified the trial courts decision by deleting the award of interest, moral
damages, attorneys fees and litigation expenses. The Court of Appeals opined that petitioner was only
exercising (although incorrectly), what he perceived to be his right to stop the payment of the check
_______________

7 Rollo, p. 77.
399

VOL. 618, APRIL 19, 2010


399
Dino vs. Judal-Loot
which he rediscounted. The Court of Appeals ruled that petitioner acted in good faith in ordering the
stoppage of payment of the subject check and thus, he must not be made liable for those amounts.
In its 16 August 2005 Decision, the Court of Appeals affirmed the trial courts decision with
modifications, thus:
WHEREFORE, premises considered, finding no reversible error in the decision of the lower court, WE
hereby DISMISS the appeal and AFFIRM the decision of the court a quo with modifications that the
award of interest, moral damages, attorneys fees and litigation expenses be deleted.
No pronouncement as to costs.
SO ORDERED.8
In its 30 November 2005 Resolution, the Court of Appeals denied petitioners motion for
reconsideration.
In denying the petitioners motion for reconsideration, the Court of Appeals noted that petitioner raised
the defense that the check is a crossed check for the first time on appeal (particularly in the motion for
reconsideration). The Court of Appeals rejected such defense considering that to entertain the same
would be offensive to the basic rules of fair play, justice, and due process.
Hence, this petition.
The Issues

Petitioner raises the following issues:


I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RESPONDENTS WERE HOLDERS IN DUE
COURSE. THE FACT THAT METROBANK CHECK NO. 142119406 IS A CROSSED CHECK CONSTITUTES
SUFFICIENT WARNING TO THE RESPONDENTS TO
_______________

8 Id., at p. 31.
400

400
SUPREME COURT REPORTS ANNOTATED
Dino vs. Judal-Loot
EXERCISE EXTRAORDINARY DILIGENCE TO DETERMINE THE TITLE OF THE INDORSER.
II. THE COURT OF APPEALS ERRED IN DENYING PETITIONERS MOTION FOR RECONSIDERATION UPON
THE GROUND THAT THE ARGUMENTS RELIED UPON HAVE ONLY BEEN RAISED FOR THE FIRST TIME.
EQUITY DEMANDS THAT THE COURT OF APPEALS SHOULD HAVE MADE AN EXCEPTION TO PREVENT THE
COMMISSION OF MANIFEST WRONG AND INJUSTICE UPON THE PETITIONER.9
The Ruling of this Court

The petition is meritorious.


Respondents point out that petitioner raised the defense that Metrobank Check No. C-MA-142119406CA is a crossed check for the first time in his motion for reconsideration before the Court of Appeals.
Respondents insist that issues not raised during the trial cannot be raised for the first time on appeal as
it would be offensive to the elementary rules of fair play, justice and due process. Respondents further
assert that a change of theory on appeal is improper.
In his Answer, petitioner specifically denied, among others, (1) Paragraph 4 of the Complaint, concerning
the allegation that on the face of the subject check, no condition or limitation was imposed, and (2)
Paragraph 8 of the Complaint, regarding the allegation that respondents were holders in due course and
for value of the subject check. In his Special Affirmative Defenses, petitioner claimed that for want or
lack of the prestation, he could validly stop the payment of his check, and that by rediscounting

petitioners check, respondents took the risk of what might happen on the check. Essentially,
petitioner maintained that respondents are not holders in due course of the subject check, and as such,
respondents could not recover any liability on the check from petitioner.
_______________

9 Id., at pp. 14-15.


401

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401
Dino vs. Judal-Loot
Indeed, petitioner did not expressly state in his Answer or raise during the trial that Metrobank Check
No. C-MA-142119406-CA is a crossed check. It must be stressed, however, that petitioner consistently
argues that respondents are not holders in due course of the subject check, which is one of the possible
effects of crossing a check. The act of crossing a check serves as a warning to the holder that the check
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.10 Contrary to respondents
view, petitioner never changed his theory, that respondents are not holders in due course of the subject
check, as would violate fundamental rules of justice, fair play, and due process. Besides, the subject
check was presented and admitted as evidence during the trial and respondents did not and in fact
cannot deny that it is a crossed check.
In any event, the Court is clothed with ample authority to entertain issues or matters not raised in the
lower courts in the interest of substantial justice.11 In Casa Filipina Realty v. Office of the President,12
the Court held:
*T+he trend in modern-day procedure is to accord the courts broad discretionary power such that the
appellate court may consider matters bearing on the issues submitted for resolution which the parties
failed to raise or which the lower court ignored. Since rules of procedure are mere tools designed to
facilitate the attainment of justice, their strict and rigid application which would result in technicalities
that tend to frustrate rather than promote substantial justice, must always be avoided. Technicality
should not be allowed
_______________

10 State Investment House v. Intermediate Appellate Court, G.R. No. 72764, 13 July 1989, 175 SCRA 310,
315.
11 Phil. Commercial & Industrial Bank v. Court of Appeals, 242 Phil. 497, 503-504; 159 SCRA 24, 30
(1988). See also Ortigas, Jr. v. Lufthansa German Airlines, 159-A Phil. 863, 889; 64 SCRA 610; 683 (1975).
12 311 Phil. 170, 181; 241 SCRA 165, 174-175 (1995).
402

402
SUPREME COURT REPORTS ANNOTATED
Dino vs. Judal-Loot
to stand in the way of equitably and completely resolving the rights and obligations of the parties.13
Having disposed of the procedural issue, the Court shall now proceed to the merits of the case. The
main issue is whether respondents are holders in due course of Metrobank Check No. C-MA 142119406
CA as to entitle them to collect the face value of the check from its drawer or petitioner herein.
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
onceto 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.14
_______________

13 Id.
14 State Investment House v. Intermediate Appellate Court, supra note 10; Bataan Cigar and Cigarette
Factory, Inc. v. Court of Appeals, G.R. No. 93048, 3 March 1994, 230 SCRA 643, 648.
403

VOL. 618, APRIL 19, 2010


403
Dino vs. Judal-Loot
Based on the foregoing, respondents had the duty to ascertain the indorsers, in this case Lobitanas,
title to the check or the nature of her possession. This respondents failed to do. Respondents
verification from Metrobank on the funding of the check does not amount to determination of
Lobitanas title to the check. Failing in this respect, respondents are guilty of gross negligence amounting
to legal absence of good faith,15 contrary to Section 52(c) of the Negotiable Instruments Law. Hence,
respondents are not deemed holders in due course of the subject check.16
State Investment House v. Intermediate Appellate Court17 squarely applies to this case. There, New
Sikatuna Wood Industries, Inc. sold at a discount to State Investment House three post-dated crossed
checks, issued by Anita Pea Chua naming as payee New Sikatuna Wood Industries, Inc. The Court found
State Investment House not a holder in due course of the checks. The Court also expounded on the
effect of crossing a check, thus:
Under usual practice, crossing a check is done by placing two parallel lines diagonally on the left top
portion of the check. The crossing may be special wherein between the two parallel lines is written the
name of a bank or a business institution, in which case the drawee should pay only with the intervention
of that bank or company, or crossing may be general wherein between two parallel diagonal lines are
written the words and Co. or none at all as in the case at bar, in which case the drawee should not
encash the same but merely accept the same for deposit.
The effect therefore of crossing a check relates to the mode of its presentment for payment. Under
Section 72 of the Negotiable Instruments Law, presentment for payment to be sufficient must be made
(a) by the holder, or by some person authorized to receive
_______________

15 Vicente R. de Ocampo & Co. v. Gatchalian, No. L-15126, 30 November 1961, 3 SCRA 596, 603.
16 State Investment House v. Intermediate Appellate Court, supra note 10.

17 Id., at pp. 316-317.


404

404
SUPREME COURT REPORTS ANNOTATED
Dino vs. Judal-Loot
payment on his behalf x x x As to who the holder or authorized person will be depends on the
instructions stated on the face of the check.
The three subject checks in the case at bar had been crossed generally and issued payable to New
Sikatuna Wood Industries, Inc. which could only mean that the drawer had intended the same for
deposit only by the rightful person, i.e., the payee named therein. Apparently, it was not the payee who
presented the same for payment and therefore, there was no proper presentment, and the liability did
not attach to the drawer.
Thus, in the absence of due presentment, the drawer did not become liable. Consequently, no right of
recourse is available to petitioner against the drawer of the subject checks, private respondent wife,
considering that petitioner is not the proper party authorized to make presentment of the checks in
question.
In this case, there is no question that the payees of the check, Lobitana or Consing, were not the ones
who presented the check for payment. Lobitana negotiated and indorsed the check to respondents in
exchange for P948,000.00. It was respondents who presented the subject check for payment; however,
the check was dishonored for reason PAYMENT STOPPED. In other words, it was not the payee who
presented the check for payment; and thus, there was no proper presentment. As a result, liability did
not attach to the drawer. Accordingly, no right of recourse is available to respondents against the
drawer of the check, petitioner herein, since respondents are not the proper party authorized to make
presentment 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.18 The Negotiable Instruments Law does not provide that a holder
who is not a holder in due course may not in any case recover on the instrument. The only disadvantage
of a holder who is not in due course is that the negotiable
_______________

18 Bataan Cigar and Cigarette Factory, Inc. v. Court of Appeals, supra note 14 at 649.
405

VOL. 618, APRIL 19, 2010


405
Dino vs. Judal-Loot
instrument is subject to defenses as if it were non-negotiable.19 Among such defenses is the absence or
failure of consideration,20 which petitioner sufficiently established in this case. Petitioner issued the
subject check supposedly for a loan in favor of Consings 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,21 in this case Lobitana. Significantly, Lobitana did
not appeal the trial courts decision, finding her solidarily liable to pay, among others, the face value of
the subject check. Therefore, the trial courts judgment has long become final and executory as to
Lobitana.
WHEREFORE, we GRANT the petition. We SET ASIDE the 16 August 2005 Decision and 30 November
2005 Resolution of the Court of Appeals in CA-G.R. CV No. 57994.
SO ORDERED.
Brion, Del Castillo, Abad and Perez, JJ., concur.
Petition granted, judgment and resolution set aside.
Notes.If instruments payable to named payees or to their order have not been indorsed in blank, only
such payees or their indorsees can be holders and entitled to receive payment in their own right. (Bank
of the Philippine Islands vs. Court of Appeals, 534 SCRA 620 [2007])
_______________

19 Id., citing Chan Wan v. Tan Kim and Chen So, 109 Phil. 706 (1960).
20 Section 28, Negotiable Instruments Law.
21 Bataan Cigar and Cigarette Factory, Inc. v. Court of Appeals, supra.
Copyright 2014 Central Book Supply, Inc. All rights reserved. [Dino vs. Judal-Loot, 618 SCRA
393(2010)]

Atrium Management Corporation vs. Court of Appeals


G.R. No. 109491. February 28, 2001.*
ATRIUM MANAGEMENT CORPORATION, petitioner, vs. COURT OF APPEALS, E.T. HENRY AND CO.,
LOURDES VICTORIA M. DE LEON, RAFAEL DE LEON, JR., AND HI-CEMENT CORPORATION, respondents.
G.R. No. 121794. February 28, 2001.*
LOURDES M. DE LEON, petitioner, vs. COURT OF APPEALS, ATRIUM MANAGEMENT CORPORATION, AND
HI-CEMENT CORPORATION, respondents.
Corporation Law; Ultra Vires Acts; Checks; The act of issuing checks for the purpose of securing a loan to
finance the activities of the corporation is well within the ambit of a valid corporate act, hence, not an
ultra vires act.Hi-Cement, however, maintains that the checks were not issued for consideration and
that Lourdes and E.T. Henry engaged in a kiting operation to raise funds for E.T. Henry, who
admittedly was in need of financial assistance. The Court finds that there was no sufficient evidence to
show that such is the case. Lourdes M. de Leon is the treasurer of the corporation and is authorized to
sign checks for the corporation. At the time of the issuance of the checks, there were sufficient funds in
the bank to cover payment of the amount of P2 million pesos. It is, however, our view that there is basis
to rule that the act of issuing the checks was well within the ambit of a valid corporate act, for it was for
securing a loan to finance the activities of the corporation, hence, not an ultra vires act.
_______________

* FIRST DIVISION.
24

24
SUPREME COURT REPORTS ANNOTATED
Atrium Management Corporation vs. Court of Appeals
Same; Same; Words and Phrases; Ultra Vires Acts, Explained.An ultra vires act is one committed
outside the object for which a corporation is created as defined by the law of its organization and
therefore beyond the power conferred upon it by law. The term ultra vires is distinguished from an
illegal act for the former is merely voidable which may be enforced by performance, ratification, or
estoppel, while the latter is void and cannot be validated.
Same; Same; Instances when personal liability of corporate directors, trustees or officers may validly
attach.The next question to determine is whether Lourdes M. de Leon and Antonio de las Alas were

personally liable for the checks issued as corporate officers and authorized signatories of the check.
Personal liability of a corporate director, trustee or officer along (although not necessarily) with the
corporation may so validly attach, as a rule, only when: 1. He assents (a) to a patently unlawful act of
the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of
interest, resulting in damages to the corporation, its stockholders or other persons; 2. He consents to
the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto; 3. He agrees to hold himself personally and solidarily
liable with the corporation; or 4. He is made, by a specific provision of law, to personally answer for his
corporate action.
Same; Same; Checks; A treasurer of a corporation whose negligence in signing a confirmation letter for
rediscounting of crossed checks, knowing fully well that the checks were strictly endorsed for deposit
only to the payees account and not to be further negotiated, resulting in damage to the corporation
may be personally liable therefor.In the case at bar, Lourdes M. de Leon and Antonio de las Alas as
treasurer and Chairman of HiCement were authorized to issue the checks. However, Ms. de Leon was
negligent when she signed the confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of E.T.
Henry for the rediscounting of the crossed checks issued in favor of E.T. Henry. She was aware that the
checks were strictly endorsed for deposit only to the payees account and not to be further negotiated.
What is more, the confirmation letter contained a clause that was not true, that is, that the checks
issued to E.T. Henry were in payment of Hydro oil bought by Hi-Cement from E.T. Henry. Her
negligence resulted in damage to the corporation. Hence, Ms. de Leon may be held personally liable
therefor.
25

VOL. 353, FEBRUARY 28, 2001


25
Atrium Management Corporation vs. Court of Appeals
Negotiable Instrument Law; Checks; Words and Phrases; Holder in Due Course, Explained.The next
issue is whether or not petitioner Atrium was a holder of the checks in due course. The Negotiable
Instruments Law, Section 52 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 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.
Same; Same; A person to whom a crossed check was endorsed by the payee of said check could not be
considered a holder in due course.In the instant case, the checks were crossed checks and specifically

indorsed for deposit to payees account only. From the beginning, Atrium was aware of the fact that the
checks were all for deposit only to payees account, meaning E.T. Henry. Clearly, then, Atrium could not
be considered a holder in due course.
Same; Same; A holder not in due course may still recover on the instrument.It does not follow as a
legal proposition that simply because petitioner Atrium was not a holder in due course for having taken
the instruments in question with notice that the same was for deposit only to the account of payee E.T.
Henry that it was altogether precluded from recovering on the instrument. The Negotiable Instruments
Law does not provide that a holder not in due course can not recover on the instrument.
Same; Same; The disadvantage of a holder not in due course is that the negotiable instrument is subject
to defenses as if it were non-negotiable, such as absence or failure of consideration.The disadvantage
of Atrium in not being a holder in due course is that the negotiable instrument is subject to defenses as
if it were non-negotiable. One such defense is absence or failure of consideration.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Meer, Meer & Meer for Lourdes M. de Leon.
Castillo, Laman, Tan, Pantaleon & San Jose for Atrium Mgt. Corp.
26

26
SUPREME COURT REPORTS ANNOTATED
Atrium Management Corporation vs. Court of Appeals
Quisumbing, Torres for Hi-Cement Corp.
PARDO, J.:

What is before the Court are separate appeals from the decision of the Court of Appeals,1 ruling that HiCement Corporation is not liable for four checks amounting to P2 million issued to E.T. Henry and Co.
and discounted to Atrium Management Corporation.
On January 3, 1983, Atrium Management Corporation filed with the Regional Trial Court, Manila an
action for collection of the proceeds of four postdated checks in the total amount of P2 million. HiCement Corporation through its corporate signatories, petitioner Lourdes M. de Leon,2 treasurer, and
the late Antonio de las Alas, Chairman, issued checks in favor of E.T. Henry and Co. Inc., as payee. E.T.

Henry and Co., Inc., in turn, endorsed the four checks to petitioner Atrium Management Corporation for
valuable consideration. Upon presentment for payment, the drawee bank dishonored all four checks for
the common reason payment stopped. Atrium, thus, instituted this action after its demand for
payment of the value of the checks was denied.3
After due proceedings, on July 20, 1989, the trial court rendered a decision ordering Lourdes M. de
Leon, her husband Rafael de Leon, E.T. Henry and Co., Inc. and Hi-Cement Corporation to pay petitioner
Atrium, jointly and severally, the amount of P2 million corresponding to the value of the four checks,
plus interest and attorneys fees.4
On appeal to the Court of Appeals, on March 17, 1993, the Court of Appeals promulgated its decision
modifying the decision of the trial court, absolving Hi-Cement Corporation from liability and dismissing
the complaint as against it. The appellate court ruled
_______________

1 In CA-G.R. CV No. 26686, promulgated on March 17, 1973, Francisco, C., J., ponente, Ramirez and
Gutierrez, JJ., concurring.
2 In G.R. No. 121794.
3 Consolidated Memorandum, G.R. No. 121794, Rollo, pp. 191-226, at pp. 192-193.
4 Original Record, Decision, Judge Edilberto O. Sandoval, presiding pp. 356-362.
27

VOL. 353, FEBRUARY 28, 2001


27
Atrium Management Corporation vs. Court of Appeals
that: (1) Lourdes M. de Leon was not authorized to issue the subject checks in favor of E.T. Henry, Inc.;
(2) The issuance of the subject checks by Lourdes M. de Leon and the late Antonio de las Alas
constituted ultra vires acts; and (3) The subject checks were not issued for valuable consideration.5
At the trial, Atrium presented as its witness Carlos C. Syquia who testified that in February 1981, Enrique
Tan of E.T. Henry approached Atrium for financial assistance, offering to discount four RCBC checks in
the total amount of P2 million, issued by Hi-Cement in favor of E.T. Henry. Atrium agreed to discount the
checks, provided it be allowed to confirm with Hi-Cement the fact that the checks represented payment
for petroleum products which E.T. Henry delivered to Hi-Cement. Carlos C. Syquia identified two letters,
dated February 6, 1981 and February 9, 1981 issued by Hi-Cement through Lourdes M. de Leon, as

treasurer, confirming the issuance of the four checks in favor of E.T. Henry in payment for petroleum
products.6
Respondent Hi-Clement presented as witness Ms. Erlinda Yap who testified that she was once a
secretary to the treasurer of Hi-Cement, Lourdes M. de Leon, and as such she was familiar with the four
RCBC checks as the postdated checks issued by Hi-Cement to E.T. Henry upon instructions of Ms. de
Leon. She testified that E.T. Henry offered to give Hi-Cement a loan which the subject checks would
secure as collateral.7
On July 20, 1989, the Regional Trial Court, Manila, Branch 09 rendered a decision, the dispositive portion
of which reads:
WHEREFORE, in view of the foregoing considerations, and plaintiff having proved its cause of action by
preponderance of evidence, judgment is hereby rendered ordering all the defendants except defendant
Antonio de las Alas to pay plaintiff jointly and severally the amount of TWO MILLION (P2,000,000.00)
PESOS with the legal rate of interest from the
_______________

5 Petition, Annex C, in G.R. No. 109491, Rollo, pp. 319-339 and Petition, Annex A, in G.R. No.
121794, Rollo, pp. 30-49.
6 TSN, September 30, 1985, pp. 6-19.
7 TSN, January 29, 1988, pp. 15-16.
28

28
SUPREME COURT REPORTS ANNOTATED
Atrium Management Corporation vs. Court of Appeals
filling of the complaint until fully paid, plus the sum of TWENTY THOUSAND (P20,000.00) PESOS as and
for attorneys fees and the cost of suit.
All other claims are, for lack of merit dismissed.
SO ORDERED.8
In due time, both Lourdes M. de Leon and Hi-Cement appealed to the Court of Appeals.9

Lourdes M. de Leon submitted that the trial court erred in ruling that she was solidarity liable with HiCement for the amount of the check. Also, that the trial court erred in ruling that Atrium was an
ordinary holder, not a holder in due course of the rediscounted checks.10
Hi-Cement on its part submitted that the trial court erred in ruling that even if Hi-Cement did not
authorize the issuance of the checks, it could still be held liable for the checks. And assuming that the
checks were issued with its authorization, the same was without any consideration, which is a defense
against a holder in due course and that the liability shall be borne alone by E.T Henry.11
On March 17, 1993, the Court of Appeals promulgated its decision modifying the ruling of the trial court,
the dispositive portion of which reads:
Judgement is hereby rendered:
(1) dismissing the plaintiffs complaint as against defendants Hi-Cement Corporation and Antonio De las
Alas;
(2) ordering the defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon, jointly and severally to pay
the plaintiff the sum of TWO MILLION PESOS (P2,000,000.00) with interest at the legal rate from the
filling of the complaint until fully paid, plus P20,000.00 for attorneys fees.
_______________

8 Original Record, Decision, Judge Edilberto G. Sandoval, presiding, pp. 356-362.


9 Ibid., Notice of appeal, Lourdes, p. 366, and Notice of Appeal Hi-Cement, p. 365.
10 CA Rollo, Defendant-Appellant Lourdes M. De Leons Brief, pp. 10-10N.
11 Ibid., Defendant Appellants Brief, pp. 23C-23II.
29

VOL. 353, FEBRUARY 28, 2001


29
Atrium Management Corporation vs. Court of Appeals
(3) ordering the plaintiff and defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon, jointly and
severally to pay defendant Hi-Cement Corporation, the sum of P20,000.00 as and for attorneys fees.
With cost in this instance against the appellee Atrium Management Corporation and appellant Lourdes
Victoria M. de Leon.

So ordered.12
Hence, the recourse to this Court.13
The issues raised are the following:
In G.R. No. 109491 (Atrium, petitioner):
1. Whether the issuance of the questioned checks was an ultra vires act;
2. Whether Atrium was not a holder in due course and for value; and
3. Whether the Court of Appeals erred in dismissing the case against Hi-Cement and ordering it to pay
P20,000.00 as attorneys fees.14
In G.R. No. 121794 (de Leon, petitioner):
1. Whether the Court of Appeals erred in holding petitioner personally liable for the Hi-Cement checks
issued to E.T. Henry;
2. Whether the Court of Appeals erred in ruling that Atrium is a holder in due course;
3. Whether the Court of Appeals erred in ruling that petitioner Lourdes M. de Leon as signatory of the
checks was personally liable for the value of the checks, which were declared to be issued without
consideration;
_______________

12 CA Rollo, Decision, pp. 78-99, Francisco, C., J., ponente, Ramirez and Gutierrez, JJ. concurring.
13 G.R. No. 109491, Petition filed on April 13, 1993, Rollo, pp. 3-18; G.R. No. 121794, Petition filed on
October 20, 1995, Rollo, pp. 10-28. On January 31, 2000, we gave due course to the petition. G.R. No.
109491, Rollo, pp. 244-245; G.R. No. 121794, Rollo, pp. 152-153.
14 Petition, G.R. No. 109491, Rollo, pp. 10-16.
30

30
SUPREME COURT REPORTS ANNOTATED
Atrium Management Corporation vs. Court of Appeals

4. Whether the Court of Appeals erred in ordering petitioner to pay Hi-Cement attorneys fees and
costs.15
We affirm the decision of the Court of Appeals.
We first resolve the issue of whether the issuance of the checks was an ultra vires act. The record
reveals that Hi-Cement Corporation issued the four (4) checks to extend financial assistance to E.T.
Henry, not as payment of the balance of the P30 million pesos cost of hydro oil delivered by E.T. Henry
to Hi-Cement. Why else would petitioner de Leon ask for counterpart checks from E.T. Henry if the
checks were in payment for hydro oil delivered by E.T. Henry to Hi-Cement?
Hi-Cement, however, maintains that the checks were not issued for consideration and that Lourdes and
E.T. Henry engaged in a kiting operation to raise funds for E.T. Henry, who admittedly was in need of
financial assistance. The Court finds that there was no sufficient evidence to show that such is the case.
Lourdes M. de Leon is the treasurer of the corporation and is authorized to sign checks for the
corporation. At the time of the issuance of the checks, there were sufficient funds in the bank to cover
payment of the amount of P2 million pesos.
It is, however, our view that there is basis to rule that the act of issuing the checks was well within the
ambit of a valid corporate act, for it was for securing a loan to finance the activities of the corporation,
hence, not an ultra vires act.
An ultra vires act is one committed outside the object for which a corporation is created as defined by
the law of its organization and therefore beyond the power conferred upon it by law.16 The term ultra
vires is distinguished from an illegal act for the former is merely voidable which may be enforced by
performance, ratification, or estoppel, while the latter is void and cannot be validated.17
_______________

15 Petition, G.R. No. 121794, Rollo, p. 16.


16 Republic v. Acoje Mining Co., Inc., 117 Phil. 379, 383; 7 SCRA 361 (1963); Corporation Code, Sec. 45.
17 Republic v. Acoje Mining Co., Inc., supra, Note 16, at pp. 383-384.
31

VOL. 353, FEBRUARY 28, 2001


31
Atrium Management Corporation vs. Court of Appeals

The next question to determine is whether Lourdes M. de Leon and Antonio de las Alas were personally
liable for the checks issued as corporate officers and authorized signatories of the check.
Personal liability of a corporate director, trustee or officer along (although not necessarily) with the
corporation may so validly attach, as a rule, only when:
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in
directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its
stockholders or other persons;
2. He consents to the issuance of watered down stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarity liable with the corporation; or
4. He is made, by a specific provision of law, to personally answer for his corporate action.18
In the case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of Hi-Cement
were authorized to issue the checks. However, Ms. de Leon was negligent when she signed the
confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of E.T. Henry for the rediscounting of
the crossed checks issued in favor of E.T. Henry. She was aware that the checks were strictly endorsed
for deposit only to the payees account and not to be further negotiated. What is more, the
confirmation letter contained a clause that was not true, that is, that the checks issued to E.T. Henry
were in payment of Hydro oil bought by Hi-Cement from E.T. Henry. Her negligence resulted in damage
to the corporation. Hence, Ms. de Leon may be held personally liable therefor.
_______________

18 FCY Construction Group, Inc. v. Court of Appeals, G.R. No. 123358, February 1, 2000, 324 SCRA 270,
citing Tramat Mercantile, Inc. v. Court of Appeals, 238 SCRA 14, 18-19 (1994); Equitable Banking
Corporation v. NLRC, 339 Phil. 541, 566; 273 SCRA 352 (1997).
32

32
SUPREME COURT REPORTS ANNOTATED
Atrium Management Corporation vs. Court of Appeals
The next issue is whether or not petitioner Atrium was a holder of the checks in due course. The
Negotiable Instruments Law, Section 52 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 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.
In the instant case, the checks were crossed checks and specifically indorsed for deposit to payees
account only. From the beginning, Atrium was aware of the fact that the checks were all for deposit only
to payees account, meaning E.T. Henry. Clearly, then, Atrium could not be considered a holder in due
course.
However, it does not follow as a legal proposition that simply because petitioner Atrium was not a
holder in due course for having taken the instruments in question with notice that the same was for
deposit only to the account of payee E.T. Henry that it was altogether precluded from recovering on the
instrument. The Negotiable Instruments Law does not provide that a holder not in due course can not
recover on the instrument.19
The disadvantage of Atrium in not being a holder in due course is that the negotiable instrument is
subject to defenses as if it were non-negotiable.20 One such defense is absence or failure of
consideration.21
We need not rule on the other issues raised, as they merely follow as a consequence of the foregoing
resolutions.
_______________

19 Chan Wan v. Tan Kim and Chen So, 109 Phil. 706 (1960).
20 State Investment House v. Intermediate Appellate Court, 175 SCRA 310, 317(1989).
21 Negotiable Instrument Law, Sec. 28.
33

VOL. 353, FEBRUARY 28, 2001


33

Sevalle vs. Court of Appeals


WHEREFORE, the petitions are hereby DENIED. The decision and resolution of the Court of Appeals in
CA-G.R. CV No. 26686, are hereby AFFIRMED in toto.
No costs.
SO ORDERED.
Davide, Jr. (C.J., Chairman), Puno, Kapunan and Ynares-Santiago, JJ., concur.
Petition denied, judgment and resolution affirmed in toto.
Note.Issuing a crossed check imposes no legal obligation on the drawee not to honor such a check.
(Gempesaw vs. Court of Appeals, 218 SCRA 682 [1993])
In legal parlance, ultra vires act refers to one which is not within the corporate powers conferred by
the Corporation Code or articles of incorporation or not necessary or incidental in the exercise of the
powers so conferred. (Lopez Realty, Inc. vs. Fontecha, 247 SCRA 183 [1995])
The crossing of a check with the phrase Payees Account Only, is a warning that the check should be
deposited only in the account of the payee. (Philippine Commercial International Bank vs. Court of
Appeals, 350 SCRA 446 [2001])
o0o

Copyright 2014 Central Book Supply, Inc. All rights reserved. [Atrium Management Corporation vs.
Court of Appeals, 353 SCRA 23(2001)]

BANK OF AMERICA, NT & SA, petitioner, vs. ASSOCIATED CITIZENS BANK, BA-FINANCE CORPORATION,
MILLER OFFSET PRESS, INC., UY KIAT CHUNG, CHING UY SENG, UY CHUNG GUAN SENG, and COURT OF
APPEALS, respondents.
G.R. No. 141018. May 21, 2009.*
ASSOCIATED CITIZENS BANK (now UNITED OVERSEAS BANK PHILS.), petitioner, vs. BA-FINANCE
CORPORATION, MILLER OFFSET PRESS, INC., UY KIAT CHUNG, CHING UY SENG, UY CHUNG GUAN SENG,
and BANK OF AMERICA, NT & SA, respondents.
Negotiable Instruments Law; Banks and Banking; Checks; 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 drawers account only for properly payable itemsa drawee should charge to the
drawers accounts only the payables authorized by the latter.The bank on which a check is drawn,

known as 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 payees order. The drawers 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 drawers account only for properly payable items. Thus, we ruled in Philippine National
Bank v. Rodriguez (566 SCRA 513 *2008+) that a drawee should charge to the drawers accounts only the
payables authorized by the latter; otherwise, the drawee will be violating the instructions of the drawer
and shall be liable for the amount charged to the drawers account.
Same; Same; Same; Crossed Checks; Judicial Notice; The Supreme Court has taken judicial cognizance of
the practice that 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; The effects of crossing a check as follows: (a) the check
may not be encashed but only deposited in
_______________

* FIRST DIVISION.
52

52
SUPREME COURT REPORTS ANNOTATED
Bank of America, NT & SA vs. Associated Citizens Bank
the bank; (b) the check may be negotiated only onceto one who has an account with a bank; and (c)
the act of crossing the check serves as a warning to the holder that the check has been issued for a
definite purpose so that he must inquire if he has received the check pursuant to that purpose;
otherwise, he is not a holder in due course.Among the different types of checks issued by a drawer is
the crossed check. The Negotiable Instruments Law is silent with respect to crossed checks, although the
Code of Commerce makes reference to such instruments. This Court has taken judicial cognizance of the
practice that 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. The crossing may be special wherein between the two parallel lines is
written the name of a bank or a business institution, in which case the drawee should pay only with the
intervention of that bank or company, or general wherein between two parallel diagonal lines are
written the words and Co. or none at all, in which case the drawee should not encash the same but
merely accept the same for deposit. In Bataan Cigar v. Court of Appeals (230 SCRA 643 [1994]), we
enumerated the effects of crossing a check as follows: (a) the check may not be encashed but only

deposited in the bank; (b) the check may be negotiated only onceto one who has an account with a
bank; and (c) the act of crossing the check serves as a warning to the holder that the check has been
issued for a definite purpose so that he must inquire if he has received the check pursuant to that
purpose; otherwise, he is not a holder in due course.
Same; Same; Same; A collecting bank where a check is deposited, and which endorses the check upon
presentment with the drawee bank, is an endorser; The Court has repeatedly held that in check
transactions, the 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; When the collecting bank stamped the back of the four
checks with the phrase all prior endorsements and/or lack of endorsement guaranteed, that bank had
for all intents and purposes treated the checks as negotiable instruments and, accordingly, assumed the
warranty of an endorser.A 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
53

VOL. 588, MAY 21, 2009


53
Bank of America, NT & SA vs. Associated Citizens Bank
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. This Court has repeatedly held that in check transactions, the
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. When Associated Bank stamped the back of the four checks with the
phrase all prior endorsements and/or lack of endorsement guaranteed, that bank had for all intents
and purposes treated the checks as negotiable instruments and, accordingly, assumed the warranty of
an endorser. Being so, Associated Bank cannot deny liability on the checks.
Same; Same; Same; Negligence; When a bank allows its client to collect on crossed checks issued in the
name of another, the bank is guilty of negligence.Associated Bank was also clearly negligent in
disregarding established banking rules and regulations by allowing the four checks to be presented by,
and deposited in the personal bank account of, a person who was not the payee named in the checks.
The checks were issued to the Order of Miller Offset Press, Inc., but were deposited, and paid by
Associated Bank, to the personal joint account of Ching Uy Seng (a.k.a. Robert Ching) and Uy Chung

Guan Seng. It could not have escaped Associated Banks attention that the payee of the checks is a
corporation while the person who deposited the checks in his own account is an individual. Verily, when
the bank allowed its client to collect on crossed checks issued in the name of another, the bank is guilty
of negligence. As ruled by this Court in Jai-Alai Corporation of the Philippines v. Bank of the Philippine
Islands (66 SCRA 29 [1975]), one who accepts and encashes a check from an individual knowing that the
payee is a corporation does so at his peril. Accordingly, we hold that Associated Bank is liable for the
amount of the four checks and should reimburse the amount of the checks to Bank of America.
Same; Same; Equity; Solutio Indebiti; It is well-settled that a person who had not given value for the
money paid to him has no right to retain the money he received.It is well-settled that a person who
had not given value for the money paid to him has no right to retain the money he received. This Court,
therefore, quotes with approval the ruling of the Court of Appeals in its decision: It appearing, however,
from the evidence on record that since Ching Uy Seng and/or Uy Chung Guan Seng received the
54

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SUPREME COURT REPORTS ANNOTATED
Bank of America, NT & SA vs. Associated Citizens Bank
proceeds of the checks as they were deposited in their personal joint account with Associated Bank,
they should, therefore, be obliged to reimburse Associated Bank for the amount it has to pay to Bank of
America, in line with the rule that no person should be allowed to unjustly enrich himself at the expense
of another.
Attorneys Fees; An award of attorneys fees necessitates a factual, legal, or equitable justification.As
regards the trial courts grant of attorneys fees to BA-Finance, the Court of Appeals found that there
was no sufficient justification therefor; hence, the deletion of the award is proper. An award of
attorneys fees necessitates a factual, legal, or equitable justification. Without such justification, the
award is a conclusion without a premise, its basis being improperly left to speculation and conjecture.
PETITIONS for review on certiorari of the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Brillantes, (Nachura), Navarro, Jumamil, Arcilla & Bello Law Offices for Bank of America Corporation.
Agcaoili & Associates and Villanueva, Caa & Associates Law Offices for Associated Citizens Bank.
Oscar Bati for respondents Miller Offset Press, Inc., et al.
CARPIO, J.:

The Case

Before the Court are consolidated cases docketed as G.R. No. 141001 and G.R. No. 141018. These two
cases are petitions for review on certiorari1 of the Decision2 dated 26 February 1999 and the Resolution
dated 6 December 1999 of the Court of Appeals in CA-G.R. CV No. 48821. The Court of Appeals affirmed
with modifications the Decision of the Regional Trial Court of Makati, Branch 64 (RTC).
_______________

1 Under Rule 45 of the 1997 Rules of Civil Procedure.


2 Penned by Associate Justice Artemon D. Luna with Associate Justices Delilah Vidallon-Magtolis and
Rodrigo V. Cosico, concurring.
55

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Bank of America, NT & SA vs. Associated Citizens Bank
The Antecedent Facts
On 6 October 1978, BA-Finance Corporation (BA-Finance) entered into a transaction with Miller Offset
Press, Inc. (Miller), through the latters authorized representatives, i.e., Uy Kiat Chung, Ching Uy Seng,
and Uy Chung Guan Seng. BA-Finance granted Miller a credit line facility through which the latter could
assign or discount its trade receivables with the former. On 20 October 1978, Uy Kiat Chung, Ching Uy
Seng, and Uy Chung Guan Seng executed a Continuing Suretyship Agreement with BA-Finance whereby
they jointly and severally guaranteed the full and prompt payment of any and all indebtedness which
Miller may incur with BA-Finance.
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 Payees Account Only. These
checks were drawn against Bank of America and had the following details:3
Check No.

Date

Amount

128274

13 February 1981

P222,363.33

129067

26 February 1981

252,551.16

132133

20 April 1981 206,450.57

133057

7 May 1981

59,862.72

---------------Total P741,227.78
The four checks were deposited by Ching Uy Seng (a.k.a. Robert Ching), then the corporate secretary of
Miller, in Account No. 989 in Associated Citizens Bank (Associated Bank). Account No. 989 is a joint bank
account under the names of Ching Uy Seng and Uy Chung Guan Seng. Associated Bank stamped the
checks with the
_______________

3 Records, pp. 107-110.


56

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SUPREME COURT REPORTS ANNOTATED
Bank of America, NT & SA vs. Associated Citizens Bank
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 the collecting bank.
Miller failed to deliver to BA-Finance the proceeds of the assigned trade receivables. Consequently, BAFinance filed a Complaint against Miller for collection of the amount of P731,329.63 which BA-Finance
allegedly paid in consideration of the assignment, plus interest at the rate of 16% per annum and
penalty charges.4 Likewise impleaded as party defendants in the collection case were Uy Kiat Chung,
Ching Uy Seng, and Uy Chung Guan Seng.
Miller, Uy Kiat Chung, and Uy Chung Guan Seng filed a Joint Answer (to the BA-Finances Complaint)
with Cross-Claim against Ching Uy Seng, wherein they denied that (1) they received the amount covered
by the four Bank of America checks, and (2) they authorized their co-defendant Ching Uy Seng to
transact business with BA-Finance on behalf of Miller. Uy Kiat Chung and Uy Chung Guan Seng also
denied having signed the Continuing Suretyship Agreement with BA-Finance. In view thereof, BAFinance filed an Amended Complaint impleading Bank of America as additional defendant for allegedly
allowing encashment and collection of the checks by person or persons other than the payee named
thereon. Ching Uy Seng, on the other hand, did not file his Answer to the complaint.

Bank of America filed a Third Party Complaint against Associated Bank. In its Answer to the Third Party
Complaint, Associated Bank admitted having received the four checks for deposit in the joint account of
Ching Uy Seng (a.k.a. Robert Ching) and Uy Chung Guan Seng, but alleged that Robert Ching, being one
of the corporate officers of Miller, was duly authorized to act for and on behalf of Miller.
On 28 September 1994, the RTC rendered a Decision, the dispositive portion of which reads:
_______________

4 Id., at p. 3.
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Bank of America, NT & SA vs. Associated Citizens Bank
WHEREFORE, in view of the foregoing, judgment is hereby rendered against defendant Bank of America
to pay plaintiff BA Finance Corporation the sum of P741,277.78, the value of the four (4) checks subject
matter of this case, with legal interest thereon from the time of the filing of this complaint until
payment is made and attorneys fees corresponding to 15% of the amount due and to pay the costs of
the suit.
Judgment is likewise rendered ordering the third-party defendant Associated Citizens Bank to reimburse
Bank of America, the defendant third-party plaintiff, of the aforestated amount.
SO ORDERED.5
The Court of Appeals Ruling

On appeal, the Court of Appeals rendered judgment,6 affirming with modifications the decision of the
RTC, thus:
WHEREFORE, judgment is hereby rendered, as follows:
(1) Defendant and third-party plaintiff-appellant, Bank of America, NT & SA, is ordered to pay plaintiffappellee BA-Finance Corporation the sum of P741,277.78, with legal interest thereon from the time of
the filing of the complaint until the whole amount is fully paid;

(2) Third-party defendant-appellant Associated Citizens Bank is likewise ordered to reimburse Bank of
America the aforestated amount;
(3) Defendants Ching Uy Seng and/or Uy Chung Guan Seng are also ordered to pay Associated Citizens
Bank the aforestated amount; and
(4) The award of attorneys fees is ordered deleted.
SO ORDERED.7
Associated Bank and Bank of America filed their respective Motions for Reconsideration, but these were
denied by the Court of Appeals in its Resolution of 6 December 1999.8
Hence, these petitions.
_______________

5 CA Rollo, p. 38.
6 Promulgated on 26 February 1999.
7 Rollo (G.R. No. 141001), pp. 25-26.
8 Id., at pp. 34-35.
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SUPREME COURT REPORTS ANNOTATED
Bank of America, NT & SA vs. Associated Citizens Bank
The Issue
The issues raised in these consolidated cases may be summarized as follows:
Whether the Court of Appeals erred in rendering judgment finding (1) Bank of America liable to pay BAFinance the amount of the four checks; (2) Associated Bank liable to reimburse Bank of America the
amount of the four checks; and (3) Ching Uy Seng and/or Uy Chung Guan Seng liable to pay Associated
Bank the amount of the four checks.
The Courts Ruling

We find the petitions unmeritorious.


The Court of Appeals did not err in finding Bank
of America liable to pay BA-Finance the
amount of the four checks.

Bank of America denies liability for paying the amount of the four checks issued by BA-Finance to Miller,
alleging that it (Bank of America) relied on the stamps made by Associated Bank stating that all prior
endorsement and/or lack of endorsement guaranteed, through which Associated Bank assumed the
liability of a general endorser under Section 66 of the Negotiable Instruments Law. Moreover, Bank of
America contends that the proximate cause of BA-Finances injury, if any, is the gross negligence of
Associated Bank which allowed Ching Uy Seng (Robert Ching) to deposit the four checks issued to Miller
in the personal joint bank account of Ching Uy Seng and Uy Chung Guan Seng.
We are not convinced.
The bank on which a check is drawn, known as 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 payees
order. The drawers 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
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Bank of America, NT & SA vs. Associated Citizens Bank
drawers account only for properly payable items.9 Thus, we ruled in Philippine National Bank v.
Rodriguez10 that a drawee should charge to the drawers accounts only the payables authorized by the
latter; otherwise, the drawee will be violating the instructions of the drawer and shall be liable for the
amount charged to the drawers account.
Among the different types of checks issued by a drawer is the crossed check. The Negotiable
Instruments Law is silent with respect to crossed checks, although the Code of Commerce11 makes
reference to such instruments.12 This Court has taken judicial cognizance of the practice that 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.13 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.14 The crossing may be special wherein between the two parallel lines is written the name of
a bank or a business institution, in which case the drawee should pay only with the intervention of that
bank or company, or general wherein between two parallel diagonal lines are written the words and
Co. or none at all, in which case the drawee should not encash the same but merely accept the same
for deposit.15 In Bataan
_______________

9 Associated Bank v. Court of Appeals, 322 Phil. 677, 697; 252 SCRA 620, 631 (1996).
10 G.R. No. 170325, 26 September 2008, 566 SCRA 513.
11 Article 541 of the Code of Commerce states: The maker or any legal holder of a check shall be
entitled to indicate therein that it be paid to a certain banker or institution, which he shall do by writing
across the face the name of said banker or institution, or only the words and company.
12 Yang v. Court of Appeals, 456 Phil. 378, 395; 409 SCRA 159, 171 (2003); Bataan Cigar and Cigarette
Factory, Inc. v. Court of Appeals, G.R. No. 93048, 3 March 1994, 230 SCRA 643.
13 State Investment House v. Intermediate Appellate Court, G.R. No. 72764, 3 July 1989, 175 SCRA 310,
315.
14 Id.
15 Id.
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SUPREME COURT REPORTS ANNOTATED
Bank of America, NT & SA vs. Associated Citizens Bank
Cigar v. Court of Appeals,16 we enumerated the effects of crossing a check as follows: (a) the check may
not be encashed but only deposited in the bank; (b) the check may be negotiated only onceto one
who has an account with a bank; and (c) the act of crossing the check serves as a warning to the holder
that the check has been issued for a definite purpose so that he must inquire if he has received the
check pursuant to that purpose; otherwise, he is not a holder in due course.17
In this case, the four 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 Payees Account Only. Clearly, the drawer
intended the check for deposit only by Miller Offset Press, Inc. in the latters bank account. Thus, when a

person other than Miller, i.e., Ching Uy Seng, a.k.a. Robert Ching, presented and deposited the checks in
his own personal account (Ching Uy Sengs joint account with Uy Chung Guan Seng), and the drawee
bank, Bank of America, paid the value of the checks and charged BA-Finances account therefor, the
drawee Bank of America is deemed to have violated the instructions of the drawer, and therefore, is
liable for the amount charged to the drawers account.
The Court of Appeals did not err in finding Associated
Bank liable to reimburse Bank of America the
amount of the four checks.
A collecting bank where a check is deposited, and which endorses the check upon presentment with the
drawee bank, is an endorser.18 Under Section 66 of the Negotiable Instruments Law, an endorser
warrants that the instrument is genuine and in all
_______________

16 Supra.
17 Citing Ocampo v. Gatchalian, G.R. No. L-15126, 30 November 1961, 3 SCRA 596; Associated Bank v.
Court of Appeals, G.R. No. 89802, 7 May 1992, 208 SCRA 465; and State Investment House v.
Intermediate Appellate Court, supra note 13. See also Gempesaw v. Court of Appeals, G.R. No. 92244, 9
February 1993, 218 SCRA 682.
18 Associated Bank v. Court of Appeals, supra note 9.
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Bank of America, NT & SA vs. Associated Citizens Bank
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. This Court has
repeatedly held that in check transactions, the 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.19

When Associated Bank stamped the back of the four checks with the phrase all prior endorsements
and/or lack of endorsement guaranteed, that bank had for all intents and purposes treated the checks
as negotiable instruments and, accordingly, assumed the warranty of an endorser. Being so, Associated
Bank cannot deny liability on the checks. In Banco de Oro Savings and Mortgage Bank v. Equitable
Banking Corporation,20 we held that:
x x x 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. x x x In presenting the checks for clearing and for payment, the defendant [collecting bank]
made an express guarantee on the validity of all prior endorsements. Thus, stamped at the back of the
checks are the defendants clear warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF
ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff [drawee] would not have paid on the
checks. No amount of legal jargon can reverse the clear meaning of defendants warranty. As the
warranty has proven to be false and inaccurate, the defendant is liable for any damage arising out of the
falsity of its representation.
_______________

19 Id., citing Bank of Philippine Islands v. Court of Appeals, G.R. No. 102383, 26 November 1992, 216
SCRA 51, 63; Banco de Oro Savings and Mortgage Bank v. Equitable Banking Corporation, 241 Phil. 187;
157 SCRA 188 (1988); and Great Eastern Life Insurance Co. v. Hongkong & Shanghai Banking
Corporation, 43 Phil. 678 (1922).
20 Supra at pp. 200-201.
62

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SUPREME COURT REPORTS ANNOTATED
Bank of America, NT & SA vs. Associated Citizens Bank
Associated Bank was also clearly negligent in disregarding established banking rules and regulations by
allowing the four checks to be presented by, and deposited in the personal bank account of, a person
who was not the payee named in the checks. The checks were issued to the Order of Miller Offset
Press, Inc., but were deposited, and paid by Associated Bank, to the personal joint account of Ching Uy
Seng (a.k.a. Robert Ching) and Uy Chung Guan Seng. It could not have escaped Associated Banks
attention that the payee of the checks is a corporation while the person who deposited the checks in his
own account is an individual. Verily, when the bank allowed its client to collect on crossed checks issued

in the name of another, the bank is guilty of negligence.21 As ruled by this Court in Jai-Alai Corporation
of the Philippines v. Bank of the Philippine Islands,22 one who accepts and encashes a check from an
individual knowing that the payee is a corporation does so at his peril. Accordingly, we hold that
Associated Bank is liable for the amount of the four checks and should reimburse the amount of the
checks to Bank of America.
The Court of Appeals did not err in finding Ching Uy Seng and/or Uy Chung Guan Seng liable to pay
Associated Bank
the amount of the four checks.

It is well-settled that a person who had not given value for the money paid to him has no right to retain
the money he received.23 This Court, therefore, quotes with approval the ruling of the Court of Appeals
in its decision:
_______________

21 Id.; Associated Bank v. Court of Appeals, supra note 9; Philippine Commercial International Bank v.
Court of Appeals, 403 Phil. 361; 350 SCRA 446 (2001).
22 160 Phil. 741, 747-748; 66 SCRA 29, 35 (1975).
23 Applying Article 22 of the Civil Code of the Philippines which provides: Every person who through an
act of performance by another, or any other means, acquires or comes into possession of something at
the expense of the latter without just or legal ground, shall return the same to him.
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Bank of America, NT & SA vs. Associated Citizens Bank
It appearing, however, from the evidence on record that since Ching Uy Seng and/or Uy Chung Guan
Seng received the proceeds of the checks as they were deposited in their personal joint account with
Associated Bank, they should, therefore, be obliged to reimburse Associated Bank for the amount it has
to pay to Bank of America, in line with the rule that no person should be allowed to unjustly enrich
himself at the expense of another.24

As regards the trial courts grant of attorneys fees to BA-Finance, the Court of Appeals found that there
was no sufficient justification therefor; hence, the deletion of the award is proper. An award of
attorneys fees necessitates a factual, legal, or equitable justification. Without such justification, the
award is a conclusion without a premise, its basis being improperly left to speculation and conjecture.25
We note that the Decision of the Court of Appeals provides for the amount of P741,277.78 as the sum of
the four checks subject of this case.26 This amount should be modified as records show that the total
value of the four checks is P741,227.78.27
WHEREFORE, we DENY the petitions. We AFFIRM the Court of Appeals Decision dated 26 February 1999
in CA-G.R. CV No. 48821 with the MODIFICATION that Bank of America, NT & SA is ordered to pay BAFinance Corporation the amount of P741,227.78, with legal interest from the time of filing of the
complaint until the amount is fully paid. Associated Citizens Bank is ordered to reimburse Bank of
America the abovementioned amount. Ching Uy Seng and/or Uy Chung Guan Seng are also ordered to
pay Associated Citizens Bank the abovementioned amount.
SO ORDERED.
_______________

24 Rollo (G.R. No. 141001), p. 25.


25 Buan v. Camaganacan, 123 Phil. 131, 135; 16 SCRA 321, 324 (1966).
26 Rollo (G.R. No. 141001), pp. 25-26.
27 Records, pp. 107-110.
Copyright 2014 Central Book Supply, Inc. All rights reserved. [Bank of America, NT & SA vs. Associated
Citizens Bank, 588 SCRA 51(2009)]

BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. SPOUSES REYNALDO AND VICTORIA ROYECA,
respondents.
Civil Procedure; Burden of Proof; In civil cases, the party having the burden of proof must establish his
case by a preponderance of evidence, or evidence which is more convincing to the court as worthy of
belief than that which is offered in opposition thereto.In civil cases, the party having the burden of
proof must establish his case by a preponderance of evidence, or evidence which is more convincing to
the court as worthy of belief than that which is offered in opposition thereto. Thus, the party, whether
plaintiff or defendant, who asserts the affirmative of an issue has the onus to prove his assertion in
order to obtain a favorable judgment. For the plaintiff, the burden to prove its positive assertions never
parts. For the defendant, an affirmative defense is one which is not a denial of an essential ingredient in

the plaintiffs cause of action, but one which, if established, will be a good defensei.e. an avoidance
of the claim.
_______________

* THIRD DIVISION.
208

208
SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Royeca
Payment; As a general rule, one who pleads payment has the burden of proving it.In Jimenez v.
National Labor Relations Commission (NLRC), 256 SCRA 84 (1996), cited by both the Regional Trial Court
and the Court of Appeals, the Court elucidated on who, between the plaintiff and defendant, has the
burden to prove the affirmative defense of payment: As a general rule, one who pleads payment has the
burden of proving it. Even where the plaintiff must allege non-payment, the general rule is that the
burden rests on the defendant to prove payment, rather than on the plaintiff to prove non-payment.
The debtor has the burden of showing with legal certainty that the obligation has been discharged by
payment. When the existence of a debt is fully established by the evidence contained in the record, the
burden of proving that it has been extinguished by payment devolves upon the debtor who offers such a
defense to the claim of the creditor. Where the debtor introduces some evidence of payment, the
burden of going forward with the evidenceas distinct from the general burden of proofshifts to the
creditor, who is then under a duty of producing some evidence to show non-payment.
Same; Settled is the rule that payment must be made in legal tender.Settled is the rule that payment
must be made in legal tender. A check is not legal tender and, therefore, cannot constitute a valid
tender of payment. Since a negotiable instrument is only a substitute for money and not money, the
delivery of such an instrument does not, by itself, operate as payment. Mere delivery of checks does not
discharge the obligation under a judgment. The obligation is not extinguished and remains suspended
until the payment by commercial document is actually realized.
Same; Because of this failure of the respondents to present sufficient proof of payment, it was no longer
necessary for the petitioner to prove non-payment, particularly proof that the checks were
dishonored.Because of this failure of the respondents to present sufficient proof of payment, it was
no longer necessary for the petitioner to prove non-payment, particularly proof that the checks were
dishonored. The burden of evidence is shifted only if the party upon whom it is lodged was able to
adduce preponderant evidence to prove its claim.

Same; A notice of dishonor is required only to preserve the right of the payee to recover on the check.
It should be noted that the
209

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209
Bank of the Philippine Islands vs. Royeca
petitioner, as payee, did not have a legal obligation to inform the respondents of the dishonor of the
checks. A notice of dishonor is required only to preserve the right of the payee to recover on the check.
It preserves the liability of the drawer and the indorsers on the check. Otherwise, if the payee fails to
give notice to them, they are discharged from their liability thereon, and the payee is precluded from
enforcing payment on the check. The respondents, therefore, cannot fault the petitioner for not
notifying them of the non-payment of the checks because whatever rights were transgressed by such
omission belonged only to the petitioner.
Same; Promissory Notes; A promissory note in the hands of the creditor is a proof of indebtedness
rather than proof of payment.In all, we find that the evidence at hand preponderates in favor of the
petitioner. The petitioners possession of the documents pertaining to the obligation strongly buttresses
its claim that the obligation has not been extinguished. The creditors possession of the evidence of debt
is proof that the debt has not been discharged by payment. A promissory note in the hands of the
creditor is a proof of indebtedness rather than proof of payment. In an action for replevin by a
mortgagee, it is prima facie evidence that the promissory note has not been paid. Likewise, an
uncanceled mortgage in the possession of the mortgagee gives rise to the presumption that the
mortgage debt is unpaid.
Laches; Laches cannot, as a rule, abate a collection suit filed within the prescriptive period mandated by
the New Civil Code.The respondents posit that the petitioners claim is barred by laches since it has
been three years since the checks were issued. We do not agree. Laches is a recourse in equity. Equity,
however, is applied only in the absence, never in contravention, of statutory law. Thus, laches cannot, as
a rule, abate a collection suit filed within the prescriptive period mandated by the New Civil Code. The
petitioners action was filed within the ten-year prescriptive period provided under Article 1144 of the
New Civil Code. Hence, there is no room for the application of laches.
Banks and Banking; Payment; Reasonable banking practice and prudence dictates that, when a check
given to a creditor bank in payment of an obligation is dishonored, the bank should immediately return
it to the debtor and demand its replacement or payment lest it
210

210
SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Royeca
causes any prejudice to the drawer.The Court cannot ignore what the respondents have consistently
raisedthat they were not notified of the non-payment of the checks. Reasonable banking practice and
prudence dictates that, when a check given to a creditor bank in payment of an obligation is dishonored,
the bank should immediately return it to the debtor and demand its replacement or payment lest it
causes any prejudice to the drawer. In light of this and the fact that the obligation has been partially
paid, we deem it just and equitable to reduce the 3% per month penalty charge as stipulated in the
Promissory Note to 12% per annum. Although a court is not at liberty to ignore the freedom of the
parties to agree on such terms and conditions as they see fit, as long as they contravene no law, morals,
good customs, public order or public policy, a stipulated penalty, nevertheless, may be equitably
reduced by the courts if it is iniquitous or unconscionable, or if the principal obligation has been partly
or irregularly complied with.
PETITION for review on certiorari of the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Benedictine Law Center for petitioner.
Morales, Rojas & Risos-Vidal for respondents.
NACHURA, J.:
Bank of the Philippine Islands (BPI) seeks a review of the Court of Appeals (CA) Decision1 dated July 12,
2006, and Resolution2 dated February 13, 2007, which dismissed its complaint for replevin and damages
and granted the respondents counterclaim for damages.
The case stems from the following undisputed facts:
_______________

1 Penned by Associate Justice Eliezer R. De los Santos, with Associate Justices Fernanda Lampas-Peralta
and Myrna Dimaranan-Vidal concurring; Rollo, pp. 25-31.
2 Rollo, p. 33.
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Bank of the Philippine Islands vs. Royeca
On August 23, 1993, spouses Reynaldo and Victoria Royeca (respondents) executed and delivered to
Toyota Shaw, Inc. a Promissory Note3 for P577,008.00 payable in 48 equal monthly installments of
P12,021.00, with a maturity date of August 18, 1997. The Promissory Note provides for a penalty of 3%
for every month or fraction of a month that an installment remains unpaid.
To secure the payment of said Promissory Note, respondents executed a Chattel Mortgage4 in favor of
Toyota over a certain motor vehicle, more particularly described as follows:
Make and Type

1993 Toyota Corolla 1.3 XL

Motor No.

2E-2649879

Serial No.
EE100-9512571
Color
D.B. Gray Met.
Toyota, with notice to respondents, executed a Deed of Assignment5 transferring all its rights, title, and
interest in the Chattel Mortgage to Far East Bank and Trust Company (FEBTC).
Claiming that the respondents failed to pay four (4) monthly amortizations covering the period from
May 18, 1997 to August 18, 1997, FEBTC sent a formal demand to respondents on March 14, 2000
asking for the payment thereof, plus penalty.6 The respondents refused to pay on the ground that they
had already paid their obligation to FEBTC.
On April 19, 2000, FEBTC filed a Complaint for Replevin and Damages against the respondents with the
Metropolitan Trial Court (MeTC) of Manila praying for the delivery of the vehicle, with an alternative
prayer for the payment of P48,084.00 plus interest and/or late payment charges at the
_______________

3 Id., at p. 37.
4 Id., at pp. 42-45.
5 Id., at p. 39.

6 Id., at p. 58.
212

212
SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Royeca
rate of 36% per annum from May 18, 1997 until fully paid. The complaint likewise prayed for the
payment of P24,462.73 as attorneys fees, liquidated damages, bonding fees and other expenses
incurred in the seizure of the vehicle. The complaint was later amended to substitute BPI as plaintiff
when it merged with and absorbed FEBTC.7
In their Answer, respondents alleged that on May 20, 1997, they delivered to the Auto Financing
Department of FEBTC eight (8) postdated checks in different amounts totaling P97,281.78. The
Acknowledgment Receipt,8 which they attached to the Answer, showed that FEBTC received the
following checks:
DATE

BANK

26 May 97

Landbank #610945

6 June 97

Head Office

30 May 97

FEBTC

15 June 97

Shaw Blvd. 11550P 12,021.00

30 June 97

"

11549P

12,021.00

18 June 97

Landbank #17A00-

18 July 97

Head Office

18 August 97

CHECK NO.

AMOUNT
P13,824.15

#610946

#17A00-

12,381.63

12,021.00

#17A00-

#610947
#610948
#610949

1,671.00

11551P 111,671.00
11,671.00

The respondents further averred that they did not receive any notice from the drawee banks or from
FEBTC that these checks were dishonored. They explained that, considering this and the fact that the
checks were issued three years ago, they believed in good faith that their obligation had already been
fully paid. They alleged that the complaint is frivolous and
_______________

7 Id., at pp. 46-49.


8 Id., at p. 56.
213

VOL. 559, JULY 21, 2008


213
Bank of the Philippine Islands vs. Royeca
plainly vexatious. They then prayed that they be awarded moral and exemplary damages, attorneys
fees and costs of suit.9
During trial, Mr. Vicente Magpusao testified that he had been connected with FEBTC since 1994 and had
assumed the position of Account Analyst since its merger with BPI. He admitted that they had, in fact,
received the eight checks from the respondents. However, two of these checks (Landbank Check No.
0610947 and FEBTC Check No. 17A00-11551P) amounting to P23,692.00 were dishonored. He recalled
that the remaining two checks were not deposited anymore due to the previous dishonor of the two
checks. He said that after deducting these payments, the total outstanding balance of the obligation was
P48,084.00, which represented the last four monthly installments.
On February 23, 2005, the MeTC dismissed the case and granted the respondents counterclaim for
damages, thus:
WHEREFORE, judgment is hereby rendered dismissing the complaint for lack of cause of action, and on
the counterclaim, plaintiff is ordered to indemnify the defendants as follows:
a) The sum of PhP30,000.00 as and by way of moral damages;
b) The sum of PhP30,000.00 as and by way of exemplary damages;
c) The sum of PhP20,000.00 as and by way of attorneys fees; and
d) To pay the costs of the suit.

SO ORDERED.10
On appeal, the Regional Trial Court (RTC) set aside the MeTC Decision and ordered the respondents to
pay the
_______________

9 Id., at p. 53.
10 Id., at pp. 62-63.
214

214
SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Royeca
amount claimed by the petitioner. The dispositive portion of its Decision11 dated August 11, 2005 reads:
WHEREFORE, premises considered, the Decision of the Metropolitan Trial Court, Branch 9 dated
February 23, 2005 is REVERSED and a new one entered directing the defendants-appellees to pay the
plaintiff-appellant, jointly and severally,
1. The sum of P48,084.00 plus interest and/or late payment charges thereon at the rate of 36% per
annum from May 18, 1997 until fully paid;
2. The sum of P10,000.00 as attorneys fees; and
3. The costs of suit.
SO ORDERED.12
The RTC denied the respondents motion for reconsideration.13
The respondents elevated the case to the Court of Appeals (CA) through a petition for review. They
succeeded in obtaining a favorable judgment when the CA set aside the RTCs Decision and reinstated
the MeTCs Decision on July 12, 2006.14 On February 13, 2007, the CA denied the petitioners motion
for reconsideration.15
The issues submitted for resolution in this petition for review are as follows:
I. WHETHER OR NOT RESPONDENTS WERE ABLE TO PROVE FULL PAYMENT OF THEIR OBLIGATION AS
ONE OF THEIR AFFIRMATIVE DEFENSES.

II. WHETHER OR NOT TENDER OF CHECKS CONSTITUTES PAYMENT.


_______________

11 Id., at pp. 64-73.


12 Id., at p. 73.
13 Id., at p. 11.
14 Id., at p. 31.
15 Id., at p. 33.
215

VOL. 559, JULY 21, 2008


215
Bank of the Philippine Islands vs. Royeca
III. WHETHER OR NOT RESPONDENTS ARE ENTITLED TO MORAL AND EXEMPLARY DAMAGES AND
ATTORNEYS FEES.16
The petitioner insists that the respondents did not sufficiently prove the alleged payment. It avers that,
under the law and existing jurisprudence, delivery of checks does not constitute payment. It points out
that this principle stands despite the fact that there was no notice of dishonor of the two checks and the
demand to pay was made three years after default.
On the other hand, the respondents postulate that they have established payment of the amount being
claimed by the petitioner and, unless the petitioner proves that the checks have been dishonored, they
should not be made liable to pay the obligation again.17
The petition is partly meritorious.
In civil cases, the party having the burden of proof must establish his case by a preponderance of
evidence, or evidence which is more convincing to the court as worthy of belief than that which is
offered in opposition thereto.18 Thus, the party, whether plaintiff or defendant, who asserts the
affirmative of an issue has the onus to prove his assertion in order to obtain a favorable judgment. For
the plaintiff, the burden to prove its positive assertions never parts. For the defendant, an affirmative
defense is one which is not a denial of an essential ingredient in the plaintiffs cause of action, but one
which, if established, will be a good defensei.e. an avoidance of the claim.19

_______________

16 Id., at p. 15.
17 Id., at p. 124.
18 Encinas v. National Bookstore, Inc., G.R. No. 162704, November 19, 2004, 443 SCRA 293, 302.
19 DBP Pool of Accredited Insurance Companies v. Radio Mindanao Network, Inc., G.R. No. 147039,
January 27, 2006, 480 SCRA 314, 322-323.
216
216
SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Royeca
In Jimenez v. NLRC,20 cited by both the RTC and the CA, the Court elucidated on who, between the
plaintiff and defendant, has the burden to prove the affirmative defense of payment:
As a general rule, one who pleads payment has the burden of proving it. Even where the plaintiff must
allege non-payment, the general rule is that the burden rests on the defendant to prove payment,
rather than on the plaintiff to prove non-payment. The debtor has the burden of showing with legal
certainty that the obligation has been discharged by payment.
When the existence of a debt is fully established by the evidence contained in the record, the burden of
proving that it has been extinguished by payment devolves upon the debtor who offers such a defense
to the claim of the creditor. Where the debtor introduces some evidence of payment, the burden of
going forward with the evidenceas distinct from the general burden of proofshifts to the creditor,
who is then under a duty of producing some evidence to show non-payment.21
In applying these principles, the CA and the RTC, however, arrived at different conclusions. While both
agreed that the respondents had the burden of proof to establish payment, the two courts did not agree
on whether the respondents were able to present sufficient evidence of paymentenough to shift the
burden of evidence to the petitioner. The RTC found that the respondents failed to discharge this
burden because they did not introduce evidence of payment, considering that mere delivery of checks
does not constitute payment.22 On the other hand, the CA concluded that the respondents introduced
sufficient evidence of payment, as opposed to the petitioner, which failed to produce evidence that the
checks were in fact dishonored. It noted that the petitioner could have easily presented the dishonored
checks or the advice of dis_______________

20 326 Phil. 89; 256 SCRA 84 (1996).


21 Id., at p. 95; pp. 89-90.
22 Rollo, p. 72.
217

VOL. 559, JULY 21, 2008


217
Bank of the Philippine Islands vs. Royeca
honor and required respondents to replace the dishonored checks but none was presented. Further, the
CA remarked that it is absurd for a bank, such as petitioner, to demand payment of a failed amortization
only after three years from the due date.
The divergence in this conflict of opinions can be narrowed down to the issue of whether the
Acknowledgment Receipt was sufficient proof of payment. As correctly observed by the RTC, this is only
proof that respondents delivered eight checks in payment of the amount due. Apparently, this will not
suffice to establish actual payment.
Settled is the rule that payment must be made in legal tender. A check is not legal tender and, therefore,
cannot constitute a valid tender of payment.23 Since a negotiable instrument is only a substitute for
money and not money, the delivery of such an instrument does not, by itself, operate as payment. Mere
delivery of checks does not discharge the obligation under a judgment. The obligation is not
extinguished and remains suspended until the payment by commercial document is actually realized.24
To establish their defense, the respondents therefore had to present proof, not only that they delivered
the checks to the petitioner, but also that the checks were encashed. The respondents failed to do so.
Had the checks been actually encashed, the respondents could have easily produced the cancelled
checks as evidence to prove the same. Instead, they merely averred that they believed in good faith that
the checks were encashed because they were not notified of the dishonor of the checks and three years
had already lapsed since they issued the checks.
_______________

23 Abalos v. Macatangay, Jr., G.R. No. 155043, September 30, 2004, 439 SCRA 649, 659.
24 Philippine Airlines, Inc. v. Court of Appeals, G.R. No. 49188, January 30, 1990, 181 SCRA 557, 568.

218

218
SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Royeca
Because of this failure of the respondents to present sufficient proof of payment, it was no longer
necessary for the petitioner to prove non-payment, particularly proof that the checks were dishonored.
The burden of evidence is shifted only if the party upon whom it is lodged was able to adduce
preponderant evidence to prove its claim.25
To stress, the obligation to prove that the checks were not dishonored, but were in fact encashed, fell
upon the respondents who would benefit from such fact. That payment was effected through the eight
checks was the respondents affirmative allegation that they had to establish with legal certainty. If the
petitioner were seeking to enforce liability upon the check, the burden to prove that a notice of
dishonor was properly given would have devolved upon it.26 The fact is that the petitioners cause of
action was based on the original obligation as evidenced by the Promissory Note and the Chattel
Mortgage, and not on the checks issued in payment thereof.
Further, it should be noted that the petitioner, as payee, did not have a legal obligation to inform the
respondents of the dishonor of the checks. A notice of dishonor is required only to preserve the right of
the payee to recover on the check. It preserves the liability of the drawer and the indorsers on the
check. Otherwise, if the payee fails to give notice to them, they are discharged from their liability
thereon, and the payee is precluded from enforcing payment on the check. The respondents, therefore,
cannot fault the petitioner for not notifying them of the non-payment of the checks because whatever
rights were transgressed by such omission belonged only to the petitioner.
In all, we find that the evidence at hand preponderates in favor of the petitioner. The petitioners
possession of the
_______________

25 Asian Transmission Corporation v. Canlubang Sugar Estates, 457 Phil. 260, 290; 410 SCRA 202 (2003).
26 See Negotiable Instruments Law, Sec. 89.
219

VOL. 559, JULY 21, 2008

219
Bank of the Philippine Islands vs. Royeca
documents pertaining to the obligation strongly buttresses its claim that the obligation has not been
extinguished. The creditors possession of the evidence of debt is proof that the debt has not been
discharged by payment.27 A promissory note in the hands of the creditor is a proof of indebtedness
rather than proof of payment.28 In an action for replevin by a mortgagee, it is prima facie evidence that
the promissory note has not been paid.29 Likewise, an uncanceled mortgage in the possession of the
mortgagee gives rise to the presumption that the mortgage debt is unpaid.30
Finally, the respondents posit that the petitioners claim is barred by laches since it has been three years
since the checks were issued. We do not agree. Laches is a recourse in equity. Equity, however, is
applied only in the absence, never in contravention, of statutory law. Thus, laches cannot, as a rule,
abate a collection suit filed within the prescriptive period mandated by the New Civil Code.31 The
petitioners action was filed within the ten-year prescriptive period provided under Article 1144 of the
New Civil Code. Hence, there is no room for the application of laches.
Nonetheless, the Court cannot ignore what the respondents have consistently raisedthat they were
not notified of the non-payment of the checks. Reasonable banking practice and prudence dictates that,
when a check given to a creditor bank in payment of an obligation is dishonored, the bank should
immediately return it to the debtor and demand its replacement or payment lest it causes any prejudice
to the drawer. In
_______________

27 Redmond v. Hughes, 135 N.Y.S. 843, 151 App. Div. 99 (1912).


28 Biala v. Court of Appeals, G.R. No. 43503, October 31, 1990, 191 SCRA 50, 59.
29 Heagney v. J. I. Case Threshing Mach. Co., 99 N.W. 260 (1904).
30 Guerin v. Cassidy, 38 NJ Super 454, 119 A2d 780 (1956); Beattie v. Meeker, 149 N.Y.S. 453 (1914).
31 Agra v. Philippine National Bank, 368 Phil. 829; 309 SCRA 509 (1999).
220

220
SUPREME COURT REPORTS ANNOTATED
Bank of the Philippine Islands vs. Royeca

light of this and the fact that the obligation has been partially paid, we deem it just and equitable to
reduce the 3% per month penalty charge as stipulated in the Promissory Note to 12% per annum.32
Although a court is not at liberty to ignore the freedom of the parties to agree on such terms and
conditions as they see fit, as long as they contravene no law, morals, good customs, public order or
public policy, a stipulated penalty, nevertheless, may be equitably reduced by the courts if it is iniquitous
or unconscionable, or if the principal obligation has been partly or irregularly complied with.33
WHEREFORE, premises considered, the petition is PARTIALLY GRANTED. The Court of Appeals Decision
dated July 12, 2006, and Resolution dated February 13, 2007, are REVERSED and SET ASIDE. The Decision
of the Regional Trial Court, dated August 11, 2005, is REINSTATED with the MODIFICATION that
respondents are ordered to deliver the possession of the subject vehicle, or in the alternative, pay the
petitioner P48,084.00 plus late penalty charges/interest thereon at the rate of 12% per annum from
May 18, 1997 until fully paid.
SO ORDERED.
Quisumbing,** Ynares-Santiago (Chairperson), Austria-Martinez and Reyes, JJ., concur.
Petition partially granted, judgment and resolution reversed and set aside. That of Regional Trial Court
reinstated with modification.
_______________

32 Article 1229 of the Civil Code authorizes the judge to equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor.
33 Ligutan v. Court of Appeals, 427 Phil. 42, 51; 376 SCRA 560, 568 (2002).
** In lieu of Associate Justice Minita V. Chico-Nazario, per Special Order No. 508 dated June 25, 2008.
Copyright 2014 Central Book Supply, Inc. All rights reserved. [Bank of the Philippine Islands vs.
Royeca, 559 SCRA 207(2008)]

o0o

G.R. No. 168842. August 11, 2010.*


VICENTE GO, petitioner, vs. METROPOLITAN BANK AND TRUST CO., respondent.

Mercantile Law; Checks; Crossed Checks; A check is a bill of exchange drawn on a bank payable on
demand; A crossed check is one where two parallel lines are drawn across its face or across the corner
thereof; A check may be crossed generally or specially.A check is a bill of exchange drawn on a bank
payable on demand. There are different kinds of checks. In this case, crossed checks are the subject of
the controversy. A crossed check is one where two parallel lines are drawn across its face or across the
corner thereof. It may be crossed generally or specially. A check is crossed specially when the name of a
particular banker or a company is written between the parallel lines drawn. It is crossed generally when
only the words and company are written or nothing is written at all between the parallel lines, as in
this case. It may be issued so that presentment can be made only by a bank.
Same; Same; Same; Effects of Crossing a Check.In order to preserve the credit worthiness of checks,
jurisprudence has pronounced that crossing of a check has the following effects: (a) the check may not
be encashed but only deposited in the bank; (b) the check may be negotiated only onceto one who
has an account with a bank; and (c) the act of crossing the check serves as warning to the holder that the
check has been issued for a definite purpose so that he must inquire if he has received the check
pursuant to that purpose, otherwise, he is not a holder in due course.
_______________

* SECOND DIVISION.
108

108
SUPREME COURT REPORTS ANNOTATED
Go vs. Metropolitan Bank and Trust Company
Same; Same; Same; The Court has taken judicial cognizance of the practice that a check with two parallel
lines in the upper left hand corner means that it could only be deposited and not converted into cash;
The crossing of a check is a warning that the check should be deposited only in the account of the
payee.The Court has taken judicial cognizance of the practice that a check with two parallel lines in
the upper left hand corner means that it could only be deposited and not converted into cash. The effect
of crossing a check, thus, 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. The crossing of a check is a
warning that the check should be deposited only in the account of the payee. Thus, it is the duty of the
collecting bank to ascertain that the check be deposited to the payees account only.
Civil Law; Banks and Banking; Negligence; The law imposes a duty of extraordinary diligence on the
collecting bank to scrutinize checks deposited with it, for the purpose of determining their genuiness

and regularity.Negligence was committed by respondent bank in accepting for deposit the crossed
checks without indorsement and in not verifying the authenticity of the negotiation of the checks. The
law imposes a duty of extraordinary diligence on the collecting bank to scrutinize checks deposited with
it, for the purpose of determining their genuineness and regularity. As a business affected with public
interest and because of the nature of its functions, the banks are under obligation to treat the accounts
of its depositors with meticulous care, always having in mind the fiduciary nature of the relationship.
The fact that this arrangement had been practiced for three years without Mr. Go/Hope Pharmacy
raising any objection does not detract from the duty of the bank to exercise extraordinary diligence.
PETITION for review on certiorari of the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Francis M. Zosa for petitioner.
Eduardo F. Rosello for respondent.
109

VOL. 628, AUGUST 11, 2010


109
Go vs. Metropolitan Bank and Trust Company
NACHURA, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the
Decision1 dated May 27, 2005 and the Resolution2 dated August 31, 2005 of the Court of Appeals (CA)
in CA-G.R. CV No. 63469.
The Facts

The facts of the case are as follows:


Petitioner filed two separate cases before the Regional Trial Court (RTC) of Cebu. Civil Case No. CEB9713 was filed by petitioner against Ma. Teresa Chua (Chua) and Glyndah Tabaag (Tabaag) for a sum
of money with preliminary attachment. Civil Case No. CEB-9866 was filed by petitioner for a sum of
money with damages against herein respondent Metropolitan Bank and Trust Company (Metrobank)
and Chua.3
In both cases, petitioner alleged that he was doing business under the name Hope Pharmacy which
sells medicine and other pharmaceutical products in the City of Cebu. Petitioner had in his employ Chua

as his pharmacist and trustee or caretaker of the business; Tabaag, on the other hand, took care of the
receipts and invoices and assisted Chua in making deposits for petitioners accounts in the business
operations of Hope Pharmacy.4
In CEB-9713, petitioner claimed that there were unauthorized deposits and encashments made by Chua
and Tabaag in the total amount of One Hundred Nine Thousand Four
_______________

1 Penned by Associate Justice Vicente L. Yap, with Associate Justices Isaias P. Dicdican and Enrico A.
Lanzanas, concurring; CA Rollo, pp. 184-195.
2 Id., at pp. 226-228.
3 Id., at p. 52.
4 Id.
110

110
SUPREME COURT REPORTS ANNOTATED
Go vs. Metropolitan Bank and Trust Company
Hundred Thirty-three Pesos and Thirty Centavos (P109,433.30). He questioned particularly the
following:
(1) FEBTC Check No. 251111 dated April 29, 1990 in the amount of P22,635.00 which was issued by
plaintiffs *petitioners+ customer Loy Libron in payment of the stocks purchased was deposited under
Metrobank Savings Account No. 420-920-6 belonging to the defendant Ma. Teresa Chua;
(2) RCBC Checks Nos. 330958 and 294515, which were in blank but pre-signed by him (plaintiff
*petitioner+ Vicente Go) for convenience and intended for payment to plaintiffs *petitioners+ suppliers,
were filled up and dated September 22, 1990 and September 7, 1990 in the amount of P30,000.00 and
P50,000.00 respectively, and were deposited with defendant Chuas aforestated account with
Metrobank;
(3) PBC Check No. 005874, drawn by Elizabeth Enriquez payable to the Hope Pharmacy in the amount of
P6,798.30 was encashed by the defendant Glyndah Tabaag;
(4) There were unauthorized deposits and encashments in the total sum of P109,433.30;5In CEB-9866,
petitioner averred that there were thirty-two (32) checks with Hope Pharmacy as payee, for varying

sums, amounting to One Million Four Hundred Ninety-Two Thousand Five Hundred Ninety-Five Pesos
and Six Centavos (P1,492,595.06), that were not endorsed by him but were deposited under the
personal account of Chua with respondent bank,6 and these are the following:

CHECK NO.

DATE
AMOUNT
FEBTC 251166

5-23-90

P 65,214.88

FEBTC 239399

5-08-90

24,917.75

FEBTC 251350

7-24-90

212,326.56

PBC 279887

6-27-90

2,000.00

PBC 162387

1-24-90

6,300.00

_______________

5 Id., at pp. 52-53.


6 Id., at p. 53.
111

VOL. 628, AUGUST 11, 2010


111

Go vs. Metropolitan Bank and Trust Company


PBC 162317

12-22-89 3,300.00

PBC 279881

6-23-90

7,650.00

PBC 009005

7-21-89

3,584.00

PBC 279771

5-14-90

3,600.00

PBC 279771

5-14-90

3,600.00

PBC 279726

4-25-90

2,000.00

PBC 168004

3-22-90

2,800.00

PBC 167963

3-07-90

1,700.00

FEBTC 267793

8-20-90

80,085.66

FEBTC 267761

7-21-90

45,304.63

FEBTC 251252

6-03-90

64,000.00

FEBTC 267798

8-15-90

40,078.67

PBC 367292

8-06-90

2,100.00

PBC 376445

9-26-90

1,125.00

PBC 00905

8-07-89

2,500.00

PBC 376402

9-12-90

12,105.40

BPI 197074

7-17-90

5,240.00

BPI 19705

7-06-90

1,350.00

BPI 204358

9-19-90

5,402.60

BPI 204252

7-31-90

6,715.60

FEBTC 251171

6-27-90

83,175.54

FEBTC 251165

6-28-90

231,936.10

FEBTC 251251

6-30-90

47,087.25

FEBTC 251163

6-21-90

170,600.85

FEBTC 251170

5-23-90

16,440.00

FEBTC 251112

5-31-90

211,592.69

FEBTC 239400

6-15-90

47,664.03

FEBTC 251162

6-22-90

___82,697.85

P1,492,595.067

Petitioner claimed that the said checks were crossed checks payable to Hope Pharmacy only; and that
without the participation and connivance of respondent bank, the checks could not have been accepted
for deposit to any other account, except petitioners account.8
_______________

7 Id.
8 Id.
112

112
SUPREME COURT REPORTS ANNOTATED
Go vs. Metropolitan Bank and Trust Company
Thus, in CEB-9866, petitioner prayed that Chua and respondent bank be ordered, jointly and severally,
to pay the principal amount of P1,492,595.06, plus interest at 12% from the dates of the checks, until
the obligation shall have been fully paid; moral damages of Five Hundred Thousand Pesos
(P500,000.00); exemplary damages of P500,000.00; and attorneys fees and costs in the amount of
P500,000.00.9
On February 23, 1995, the RTC rendered a Joint Decision,10 the dispositive portion of which reads:
WHEREFORE, premises considered, the Court hereby renders judgment dismissing plaintiff Vicente Gos
complaint against the defendant Ma. Teresa Chua and Glyndah Tabaag in Civil Case No. CEB-9713, as
well as plaintiffs complaint against the same defendant Ma. Teresa Chua in Civil Case No. CEB-9866.
Plaintiff Vicente Go is moreover sentenced to pay P50,000.00 in attorneys fees and litigation expenses
to the defendants Ma. Teresa Chua and Glyndah Tabaag in Civil Case No. CEB-9713.

Defendant Metrobank in Civil Case No. CEB-9866 is hereby condemned to pay unto plaintiff Vicente
Go/Hope Pharmacy the amount of P50,000.00 as moral damages, and attorneys fees and litigation
expenses in the aggregate sum of P25,000.00.
The defendant Metrobanks crossclaim against its co-defendant Ma. Teresa Chua in Civil Case No. CEB9866 is dismissed for lack of merit.
No special pronouncement as to costs in both instances.
SO ORDERED.11
In striking down the complaint of the petitioner against Chua and Tabaag in CEB-9713, the RTC made
the following findings:
_______________

9 Id., at p. 54.
10 Penned by Judge Renato C. Dacudao; id., at p. 68.
11 Id.
113

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113
Go vs. Metropolitan Bank and Trust Company
(1) FEBTC Check No. 251111, dated April 29, 1990, in the amount of P22,635.00 payable to cash, was
drawn by Loy Libron in payment of her purchases of medicines and other drugs which Ma. Teresa Chua
was selling side by side with the medicines and drugs of the Hope Pharmacy, for which she (Maritess)
was granted permission by its owner, Mr. Vicente Chua. These medicines and drugs from Thailand were
Maritess sideline, and were segregated from the stocks of Hope Pharmacy; x x x.
(2) RCBC Check Nos. 294519 and 330958 were checks belonging to plaintiff Vicente Go payable to cash
x x x; these checks were replacements of the sums earlier advanced by Ma. Teresa Chua, but which were
deposited in the account of Vicente Go with RCBC, as shown by the deposit slips x x x, and confirmed by
the statement of account of Vicente Go with RCBC.
(3) Check No. PCIB 005374 drawn by Elizabeth Enriquez payable to Hope Pharmacy/Cash in the
amount of P6,798.30 dated September 6, 1990, was admittedly encashed by the defendant,

Glyndah Tabaag. As per instruction by Vicente Go, Glyndah requested the drawer to insert the word
Cash, so that she could encash the same with PCIB, to meet the Hope Pharmacys overdraft.
The listings x x x, made by Glyndah Tabaag and Flor Ouano will show that the corresponding amounts
covered thereby were in fact deposited to the account of Mr. Vicente Go with RCBC; the Bank Statement
of Mr. Go x x x, confirms defendants claim independently of the deposit slip*s+ x x x.12
The trial court absolved Chua in CEB-9866 because of the finding that the subject checks in CEB-9866
were payments of petitioner for his loans or borrowings from the parents of Ma. Teresa Chua, through
Ma. Teresa, who was given the total discretion by petitioner to transfer money from the offices of Hope
Pharmacy to pay the advances and other obligations of the drugstore; she was also given the full
discretion where to source the funds to cover the daily overdrafts, even to the extent of borrowing
money with interest from other persons.13
_______________

12 Id., at pp. 64-65.


13 Id., at p. 66.
114

114
SUPREME COURT REPORTS ANNOTATED
Go vs. Metropolitan Bank and Trust Company
While the trial court exonerated Chua in CEB-9866, it however declared respondent bank liable for being
negligent in allowing the deposit of crossed checks without the proper indorsement.
Petitioner filed an appeal before the CA. On May 27, 2005, the CA rendered a Decision,14 the fallo of
which reads:
WHEREFORE, except for the award of attorneys fees and litigation expenses in favor of defendants
Chua and Tabaag which is hereby deleted, the decision of the lower court is hereby AFFIRMED.
SO ORDERED.15
Hence, this petition.
The Issue

Petitioner presented this sole issue for resolution:


The Court of Appeals Erred In Not Holding Metrobank Liable For Allowing The Deposit, Of Crossed
Checks Which Were Issued In Favor Of And Payable To Petitioner And Without Being Indorsed By The
Petitioner, To The Account Of Maria Teresa Chua.16
The Ruling of the Court

A check is a bill of exchange drawn on a bank payable on demand.17 There are different kinds of checks.
In this case, crossed checks are the subject of the controversy. A crossed check is one where two parallel
lines are drawn across its face or across the corner thereof. It may be crossed generally or specially.18
_______________

14 Supra note 1, at p. 195.


15 Id.
16 Rollo, p. 10.
17 Sec. 185, Negotiable Instruments Law.
18 Bataan Cigar and Cigarette Factory, Inc. v. Court of Appeals, G.R. No. 93048, March 3, 1994, 230 SCRA
643, 647; citing Associated
115

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115
Go vs. Metropolitan Bank and Trust Company
A check is crossed specially when the name of a particular banker or a company is written between the
parallel lines drawn. It is crossed generally when only the words and company are written or nothing is
written at all between the parallel lines, as in this case. It may be issued so that presentment can be
made only by a bank.19
In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a
check has the following effects: (a) the check may not be encashed but only deposited in the bank; (b)
the check may be negotiated only onceto one who has an account with a bank; and (c) the act of
crossing the check serves as warning to the holder that the check has been issued for a definite purpose

so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a
holder in due course.20
The Court has taken judicial cognizance of the practice that a check with two parallel lines in the upper
left hand corner means that it could only be deposited and not converted into cash. The effect of
crossing a check, thus, 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.21 The crossing of a check is
a warning that the check should be deposited only in the account of the payee. Thus, it is the duty of the
collecting bank to ascertain that the check be deposited to the payees account only.22
_______________

Bank v. Court of Appeals, G.R. No. 89802, May 7, 1992, 208 SCRA 465; State Investment House v.
Intermediate Appellate Court, G.R. No. 72764, 175 SCRA 310; and Vicente R. de Ocampo & Co. v.
Gatchalian, 113 Phil. 574; 3 SCRA 596 (1961).
19 Id.
20 Bataan Cigar and Cigarette Factory, Inc. v. Court of Appeals, supra note 18, at p. 648.
21 Yang v. Court of Appeals, 456 Phil. 378, 381-382; 409 SCRA 159, 171 (2003).
22 Philippine Commercial International Bank v. Court of Appeals, 403 Phil. 361, 364; 350 SCRA 446, 467
(2001).
116

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SUPREME COURT REPORTS ANNOTATED
Go vs. Metropolitan Bank and Trust Company
In the instant case, there is no dispute that the subject 32 checks with the total amount of
P1,492,595.06 were crossed checks with petitioner as the named payee. It is the submission of
petitioner that respondent bank should be held accountable for the entire amount of the checks
because it accepted the checks for deposit under Chuas account despite the fact that the checks were
crossed and that the payee named therein was not Chua.
In its defense, respondent bank countered that petitioner is not entitled to reimbursement of the total
sum of P1,492,595.06 from either Maria Teresa Chua or respondent bank because petitioner was not
damaged thereby.23

Respondent banks contention is meritorious. Respondent bank should not be held liable for the entire
amount of the checks considering that, as found by the RTC and affirmed by the CA, the checks were
actually given to Chua as payments by petitioner for loans obtained from the parents of Chua.
Furthermore, petitioners non-inclusion of Chua and Tabaag in the petition before this Court is, in
effect, an admission by the petitioner that Chua, in representation of her parents, had rightful claim to
the proceeds of the checks, as payments by petitioner for money he borrowed from the parents of
Chua. Therefore, petitioner suffered no pecuniary loss in the deposit of the checks to the account of
Chua.
However, we affirm the finding of the RTC that respondent bank was negligent in permitting the deposit
and encashment of the crossed checks without the proper indorsement. An indorsement is necessary
for the proper negotiation of checks specially if the payee named therein or holder thereof is not the
one depositing or encashing it. Knowing fully well that the subject checks were crossed, that the payee
was not the holder and that the checks contained no indorsement, respondent bank should have taken
reasonable steps in order to determine the validity of the representations made by Chua.
_______________

23 Rollo, p. 46.
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117
Go vs. Metropolitan Bank and Trust Company
Respondent bank was amiss in its duty as an agent of the payee. Prudence dictates that respondent
bank should not have merely relied on the assurances given by Chua.
Respondent presented Jonathan Davis as its witness in the trial before the RTC. He was the officer-incharge and ranked second to the assistant vice president of the bank at the time material to this case.
Davis testimony was summarized by the RTC as follows:
Davis also testified that he allowed Ma. Teresa Chua to deposit the checks subject of this litigation
which were payable to Hope Pharmacy. According to him, it was a privilege given to valued customers
on a highly selective case to case basis, for marketing purposes, based on trust and confidence, because
Ma. Teresa [Chua] told him that those checks belonged to her as payment for the advances she
extended to Mr. Go/Hope Pharmacy. x x x

Davis stressed that Metrobank granted the privilege to Ma. Teresa Chua that for every check she
deposited with Metrobank, the same would be credited outright to her account, meaning that she could
immediately make use of the amount credited; this arrangement went on for about three years, without
any complaint from Mr. Go/Hope Pharmacy, and Ma. Teresa Chua made warranty that she would
reimburse Metrobank if Mr. Go complained. He did not however call or inform Mr. Go about this
arrangement, because their bank being a Chinese bank, transactions are based on trust and confidence,
and for him to inform Mr. Vicente Go about it, was tantamount to questioning the integrity of their
client, Ma. Teresa Chua. Besides, this special privilege or arrangement would not bring any monetary
gain to the bank.24
Negligence was committed by respondent bank in accepting for deposit the crossed checks without
indorsement and in not verifying the authenticity of the negotiation of the checks. The law imposes a
duty of extraordinary diligence on the collecting bank to scrutinize checks deposited with it, for the pur_______________

24 CA Rollo, p. 64.
118

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SUPREME COURT REPORTS ANNOTATED
Go vs. Metropolitan Bank and Trust Company
pose of determining their genuineness and regularity.25 As a business affected with public interest and
because of the nature of its functions, the banks are under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary nature of the relationship.26 The
fact that this arrangement had been practiced for three years without Mr. Go/Hope Pharmacy raising
any objection does not detract from the duty of the bank to exercise extraordinary diligence. Thus, the
Decision of the RTC, as affirmed by the CA, holding respondent bank liable for moral damages is
sufficient to remind it of its responsibility to exercise extraordinary diligence in the course of its business
which is imbued with public interest.
WHEREFORE, the Decision dated May 27, 2005 and the Resolution dated August 31, 2005 of the Court of
Appeals in CA-G.R. CV No. 63469 are hereby AFFIRMED.
SO ORDERED.
Carpio (Chairperson), Peralta, Abad, and Mendoza, JJ., concur.
Judgment and resolution affirmed.

Note.A bank that regularly processes checks that are neither payable to the customer nor duly
indorsed by the payee is apparently grossly negligent in its operations. (Philippine National Bank vs.
Rodriguez, 566 SCRA 513 [2008])
o0o
_______________

25 Philippine National Bank v. Rodriguez, G.R. No. 170325, September 26, 2008, 566 SCRA 513, 518;
Associated Bank v. Court of Appeals, supra note 18.
26 Philippine Commercial International Bank v. Court of Appeals, supra note 22.
Copyright 2014 Central Book Supply, Inc. All rights reserved. [Go vs. Metropolitan Bank and Trust
Company, 628 SCRA 107(2010)]

PHILIPPINE COMMERCIAL INTERNATIONAL BANK, petitioner, vs. ANTONIO B. BALMACEDA and


ROLANDO N. RAMOS, respondents.
Appeals; An exception to the rule that petitions for review on certiorari only involve questions of law is
when the findings of fact in the tribunals below are conflicting, in which case the Supreme Court can
delve into evidence and the factual circumstance of the case, and when the exception applies, the Court
is given latitude to review the evidence on record to decide the case with finality.At the outset, we
observe that the petition raises mainly questions of fact whose resolution requires the re-examination
of the evidence on record. As a general rule, petitions for review on certiorari only involve questions of
law. By way of exception, however, we can delve into evidence and the factual circumstance of the case
when the findings of fact in the tribunals below (in this case between those of the CA and of the RTC)
are conflicting. When the exception applies, we are given latitude to review the evidence on record to
decide the case with finality.
Actions; Evidence; Quantum of Proof; Words and Phrases; Preponderance of Evidence, Explained;
Preponderance of evidence is the weight, credit, and value of the aggregate evidence on either side
and is usually considered to be synonymous with the term greater weight of the evidence or greater
weight of the credible evidencepreponderance of evidence is a phrase which, in the last analysis,
means probability of the truth, evidence which is more convincing to the court as worthy of belief than
that which is offered in opposition thereto.In civil cases, the party carrying the burden of proof must
establish his case by a preponderance of evidence, or evidence which, to the court, is more worthy of
belief than the evidence offered in opposition. This Court, in Encinas v. National Bookstore, Inc., 443
SCRA 293 (2004), defined preponderance of evidence in the following manner: Preponderance of
evidence is the weight, credit, and value of the aggregate evidence on either side and is usually

considered to be synonymous with the term greater weight of the evidence or greater weight of the
credible evidence.
_______________
* SECOND DIVISION.
34

34
SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Balmaceda
Preponderance of evidence is a phrase which, in the last analysis, means probability of the truth. It is
evidence which is more convincing to the court as worthy of belief than that which is offered in
opposition thereto. The party, whether the plaintiff or the defendant, who asserts the affirmative of an
issue has the onus to prove his assertion in order to obtain a favorable judgment, subject to the
overriding rule that the burden to prove his cause of action never leaves the plaintiff. For the defendant,
an affirmative defense is one that is not merely a denial of an essential ingredient in the plaintiff's cause
of action, but one which, if established, will constitute an avoidance of the claim.
Same; Same; Same; Even if the evidence adduced by the plaintiff appears stronger than that presented
by the defendant, a judgment cannot be entered in the plaintiffs favor if his evidence still does not
suffice to sustain his cause of action.Given that PCIB failed to establish Ramos participation in
Balmacedas scheme, it was not even necessary for Ramos to provide an explanation for the money he
received from Balmaceda. Even if the evidence adduced by the plaintiff appears stronger than that
presented by the defendant, a judgment cannot be entered in the plaintiffs favor if his evidence still
does not suffice to sustain his cause of action; to reiterate, a preponderance of evidence as defined
must be established to achieve this result.
Banks and Banking; Negotiable Instruments Law; Checks; Crossed Checks; Words and Phrases; A crossed
check is one where two parallel lines are drawn across its face or across its corner; The crossing of a
check has the following effects: (a) the check may not be encashed but only deposited in the bank; (b)
the check may be negotiated only onceto the one who has an account with the bank; and (c) the act
of crossing the check serves as a warning to the holder that the check has been issued for a definite
purpose and he must inquire if he received the check pursuant to this purpose; otherwise, he is not a
holder in due course.Another telling indicator of PCIBs negligence is the fact that it allowed
Balmaceda to encash the Managers checks that were plainly crossed checks. A crossed check is one
where two parallel lines are drawn across its face or across its corner. Based on jurisprudence, the
crossing of a check has the following effects: (a) the check may not be encashed but only deposited in
the bank; (b) the check may be negotiated only onceto the

35

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35
Philippine Commercial International Bank vs. Balmaceda
one who has an account with the bank; and (c) the act of crossing the check serves as a warning to the
holder that the check has been issued for a definite purpose and he must inquire if he received the
check pursuant to this purpose; otherwise, he is not a holder in due course. In other words, the crossing
of a check is a warning that the check should be deposited only in the account of the payee. When a
check is crossed, it is the duty of the collecting bank to ascertain that the check is only deposited to the
payees account. In complete disregard of this duty, PCIBs systems allowed Balmaceda to encash 26
Managers checks which were all crossed checks, or checks payable to the payees account only.
Same; Same; Same; The diligence required of banks is more than that of a Roman pater familias or a
good father of a familythe highest degree of diligence is expected.The General Banking Law of 2000
requires of banks the highest standards of integrity and performance. The banking business is impressed
with public interest. Of paramount importance is the trust and confidence of the public in general in the
banking industry. Consequently, 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.
Equity; Unjust Enrichment; To substantiate a claim for unjust enrichment, the claimant must
unequivocally prove that another party knowingly received something of value to which he was not
entitled and that the state of affairs are such that it would be unjust for the person to keep the
benefit.To have a cause of action based on unjust enrichment, we explained in University of the
Philippines v. Philab Industries, Inc., 439 SCRA 467 (2004), that: Unjust enrichment claims do not lie
simply because one party benefits from the efforts or obligations of others, but instead it must be
shown that a party was unjustly enriched in the sense that the term unjustly could mean illegally or
unlawfully. Moreover, to substantiate a claim for unjust enrichment, the claimant must unequivocally
prove that another party knowingly received something of value to which he was not entitled and that
the state of affairs are such that it would be unjust for the person to keep the benefit. Unjust
enrichment is a term used to depict result or effect of failure to make remuneration of or for property or
benefits received under circumstances that give rise to legal or equitable obligation to account for them;
to be entitled to remuneration, one must confer benefit by mistake, fraud, coercion,
36

36

SUPREME COURT REPORTS ANNOTATED


Philippine Commercial International Bank vs. Balmaceda
or request. Unjust enrichment is not itself a theory of reconvey. Rather, it is a prerequisite for the
enforcement of the doctrine of restitution.
Banks and Banking; Compensation; A bank does not have a unilateral right to freeze the account of a
depositor based on its mere suspicion that the funds therein were proceeds of some shady transactions;
For legal compensation to take place, two persons, in their own right, must first be creditors and debtors
of each other.We also find that PCIB acted illegally in freezing and debiting Ramos bank account. In
BPI Family Bank v. Franco, 538 SCRA 184 (2007), we cautioned against the unilateral freezing of bank
accounts by banks, noting that: More importantly, [BPI Family Bank] does not have a unilateral right to
freeze the accounts of Franco based on its mere suspicion that the funds therein were proceeds of the
multi-million peso scam Franco was allegedly involved in. To grant [BPI Family Bank], or any bank for
that matter, the right to take whatever action it pleases on deposits which it supposes are derived from
shady transactions, would open the floodgates of public distrust in the banking industry. We see no legal
merit in PCIBs claim that legal compensation took place between it and Ramos, thereby warranting the
automatic deduction from Ramos bank account. For legal compensation to take place, two persons, in
their own right, must first be creditors and debtors of each other. While PCIB, as the depositary bank, is
Ramos debtor in the amount of his deposits, Ramos is not PCIBs debtor under the evidence the PCIB
adduced. PCIB thus had no basis, in fact or in law, to automatically debit from Ramos bank account.
Same; Damages; One may err, but error alone is not a ground for granting moral damages.Although
PCIBs act of freezing and debiting Ramos account is unlawful, we cannot hold PCIB liable for moral and
exemplary damages. Since a contractual relationship existed between Ramos and PCIB as the depositor
and the depositary bank, respectively, the award of moral damages depends on the applicability of
Article 2220 of the Civil Code, which provides: Article 2220. Willful injury to property may be a legal
ground for awarding moral damages if the court should find that, under the circumstances, such
damages are justly due. The same rule applies to breaches of contract where the defendant acted
fraudulently or in bad faith. [emphasis ours] Bad faith does not simply connote bad judg37

VOL. 658, SEPTEMBER 21, 2011


37
Philippine Commercial International Bank vs. Balmaceda
ment or negligence; it imports a dishonest purpose or some moral obliquity and conscious commission
of a wrong; it partakes of the nature of fraud. As the facts of this case bear out, PCIB did not act out of
malice or bad faith when it froze Ramos bank account and subsequently debited the amount of

P251,910.96 therefrom. While PCIB may have acted hastily and without regard to its primary duty to
treat the accounts of its depositors with meticulous care and utmost fidelity, we find that its actions
were propelled more by the need to protect itself, and not out of malevolence or ill will. One may err,
but error alone is not a ground for granting moral damages.
Attorneys Fees; Taking into consideration the time and efforts involved that went into this case, the
Court increases the award of attorneys fees from P20,000.00 to P75,000.00.We deem it just and
equitable, however, to uphold the award of attorneys fees in Ramos favor. Taking into consideration
the time and efforts involved that went into this case, we increase the award of attorneys fees from
P20,000.00 to P75,000.00.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Musico Law Office for respondent Rolando Ramos.
BRION,** J.:
Before us is a petition for review on certiorari,1 filed by the Philippine Commercial International Bank2
(Bank or PCIB), to reverse and set aside the decision3 dated April 29, 2003 of the Court of Appeals (CA)
in CA-G.R. CV No. 69955. The CA
_______________
** Designated as Acting Chairperson in lieu of Associate Justice Antonio T. Carpio per Special Order No.
1083 dated September 13, 2011.
1 Rollo, pp. 16-36.
2 Now the Equitable PCI Bank.
3 Penned by Associate Justice Eugenio S. Labitoria, and concurred in by Associate Justices Andres B.
Reyes, Jr. and Regalado E. Maambong; Rollo, pp. 38-49.
38

38
SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Balmaceda
overturned the September 22, 2000 decision of the Regional Trial Court (RTC) of Makati City, Branch
148, in Civil Case No. 93-3181, which held respondent Rolando Ramos liable to PCIB for the amount of
P895,000.00.

Factual Antecedents

On September 10, 1993, PCIB filed an action for recovery of sum of money with damages before the RTC
against Antonio Balmaceda, the Branch Manager of its Sta. Cruz, Manila branch. In its complaint, PCIB
alleged that between 1991 and 1993, Balmaceda, by taking advantage of his position as branch
manager, fraudulently obtained and encashed 31 Managers checks in the total amount of Ten Million
Seven Hundred Eighty Two Thousand One Hundred Fifty Pesos (P10,782,150.00).
On February 28, 1994, PCIB moved to be allowed to file an amended complaint to implead Rolando
Ramos as one of the recipients of a portion of the proceeds from Balmacedas alleged fraud. PCIB also
increased the number of fraudulently obtained and encashed Managers checks to 34, in the total
amount of Eleven Million Nine Hundred Thirty Seven Thousand One Hundred Fifty Pesos
(P11,937,150.00). The RTC granted this motion.
Since Balmaceda did not file an Answer, he was declared in default. On the other hand, Ramos filed an
Answer denying any knowledge of Balmacedas scheme. According to Ramos, he is a reputable
businessman engaged in the business of buying and selling fighting cocks, and Balmaceda was one of his
clients. Ramos admitted receiving money from Balmaceda as payment for the fighting cocks that he sold
to Balmaceda, but maintained that he had no knowledge of the source of Balmacedas money.
39

VOL. 658, SEPTEMBER 21, 2011


39
Philippine Commercial International Bank vs. Balmaceda

The RTC Decision


On September 22, 2000, the RTC issued a decision in favor of PCIB, with the following dispositive
portion:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against
the defendants as follows:
1. Ordering defendant Antonio Balmaceda to pay the amount of P11,042,150.00 with interest thereon
at the legal rate from [the] date of his misappropriation of the said amount until full restitution shall
have been made[.]

2. Ordering defendant Rolando Ramos to pay the amount of P895,000.00 with interest at the legal rate
from the date of misappropriation of the said amount until full restitution shall have been made[.]
3. Ordering the defendants to pay plaintiff moral damages in the sum of P500,000.00 and attorneys
fees in the amount of ten (10%) percent of the total misappropriated amounts sought to be recovered.
4. Plus costs of suit.
SO ORDERED.4
From the evidence presented, the RTC found that Balmaceda, by taking undue advantage of his position
and authority as branch manager of the Sta. Cruz, Manila branch of PCIB, successfully obtained and
misappropriated the banks funds by falsifying several commercial documents. He accomplished this by
claiming that he had been instructed by one of the Banks corporate clients to purchase Managers
checks on its behalf, with the value of the checks to be debited from the clients corporate bank
account. First, he would instruct the Bank staff to prepare the application forms for the purchase of
Managers checks, payable to several persons. Then, he would forge the signature of the clients
authorized representative on these forms and sign the forms as PCIBs approving
_______________
4 Id., at p. 59.
40

40
SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Balmaceda
officer. Finally, he would have an authorized officer of PCIB issue the Managers checks. Balmaceda
would subsequently ask his subordinates to release the Managers checks to him, claiming that the
client had requested that he deliver the checks.5 After receiving the Managers checks, he encashed
them by forging the signatures of the payees on the checks.
In ruling that Ramos acted in collusion with Balmaceda, the RTC noted that although the Managers
checks payable to Ramos were crossed checks, Balmaceda was still able to encash the checks.6 After
Balmaceda encashed three of these Managers checks, he deposited most of the money into Ramos
account.7 The RTC concluded that from the P11,937,150.00 that Balmaceda misappropriated from PCIB,
P895,000.00 actually went to Ramos. Since the RTC disbelieved Ramos allegation that the sum of
money deposited into his Savings Account (PCIB, Pasig branch) were proceeds from the sale of fighting
cocks, it held Ramos liable to pay PCIB the amount of P895,000.00.
The Court of Appeals Decision

On appeal, the CA dismissed the complaint against Ramos, holding that no sufficient evidence existed to
prove that Ramos colluded with Balmaceda in the latters fraudulent manipulations.8
_______________
5 Id., at pp. 51-52.
6 Id., at p. 54.
7 Balmaceda encashed PCIB Managers Check No. 017979 dated February 28, 1992 in the amount of
P250,000.00, and deposited P200,000.00 into Ramos PCIB bank account, maintained in the Banks Pasig
branch, while he took P50,000.00. Balmaceda also encashed PCIB Managers Check No. 019340 dated
October 1992 in the amount of P425,000.00, and PCIB Managers Check No. 019708 dated November
27, 1992 in the amount of P480,000.00, and deposited these amounts in Ramos PCIB bank account,
although he kept P10,000.00 from the latter check.
8 Decision, dated April 29, 2003; supra note 3.
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Philippine Commercial International Bank vs. Balmaceda
According to the CA, the mere fact that Balmaceda made Ramos the payee in some of the Managers
checks does not suffice to prove that Ramos was complicit in Balmacedas fraudulent scheme. It
observed that other persons were also named as payees in the checks that Balmaceda acquired and
encashed, and PCIB only chose to go after Ramos. With PCIBs failure to prove Ramos actual
participation in Balmacedas fraud, no legal and factual basis exists to hold him liable.
The CA also found that PCIB acted illegally in freezing and debiting P251,910.96 from Ramos bank
account. The CA thus decreed:
WHEREFORE, the appeal is granted. The Decision of the trial court rendered on September 22, 2000[,]
insofar as appellant Ramos is concerned, is SET ASIDE, and the complaint below against him is
DISMISSED.
Appellee is hereby ordered to release the amount of P251,910.96 to appellant Ramos plus interest at
[the] legal rate computed from September 30, 1993 until appellee shall have fully complied therewith.
Appellee is likewise ordered to pay appellant Ramos the following:

a) P50,000.00 as moral damages


b) P50,000.00 as exemplary damages, and
c) P20,000.00 as attorneys fees.
No costs.
SO ORDERED.9
The Petition

In the present petition, PCIB avers that:


_______________
9 Supra note 3, at p. 48.
42

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SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Balmaceda

I
THE APPELLATE COURT ERRED IN HOLDING THAT THERE IS NO EVIDENCE TO HOLD THAT RESPONDENT
RAMOS ACTED IN COMPLICITY WITH RESPONDENT BALMACEDA
II
THE APPELLATE COURT ERRED IN ORDERING THE PETITIONER TO RELEASE THE AMOUNT OF
P251,910.96 TO RESPONDENT RAMOS AND TO PAY THE LATTER MORAL AND EXEMPLARY DAMAGES
AND ATTORNEYS FEES10
PCIB contends that the circumstantial evidence shows that Ramos had knowledge of, and acted in
complicity with Balmaceda in, the perpetuation of the fraud. Ramos explanation that he is a
businessman and that he received the Managers checks as payment for the fighting cocks he sold to
Balmaceda is unconvincing, given the large sum of money involved. While Ramos presented evidence
that he is a reputable businessman, this evidence does not explain why the Managers checks were
made payable to him in the first place.

PCIB maintains that it had the right to freeze and debit the amount of P251,910.96 from Ramos bank
account, even without his consent, since legal compensation had taken place between them by
operation of law. PCIB debited Ramos bank account, believing in good faith that Ramos was not entitled
to the proceeds of the Managers checks and was actually privy to the fraud perpetrated by Balmaceda.
PCIB cannot thus be held liable for moral and exemplary damages.
Our Ruling

We partly grant the petition.


At the outset, we observe that the petition raises mainly questions of fact whose resolution requires the
re-examination of the evidence on record. As a general rule, petitions for re_______________
10 Supra note 1, at p. 22.
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Philippine Commercial International Bank vs. Balmaceda
view on certiorari only involve questions of law.11 By way of exception, however, we can delve into
evidence and the factual circumstance of the case when the findings of fact in the tribunals below (in
this case between those of the CA and of the RTC) are conflicting. When the exception applies, we are
given latitude to review the evidence on record to decide the case with finality.12
Ramos participation in
Balmacedas scheme not proven
From the testimonial and documentary evidence presented, we find it beyond question that Balmaceda,
by taking advantage of his position as branch manager of PCIBs Sta. Cruz, Manila branch, was able to
apply for and obtain Managers checks drawn against the bank account of one of PCIBs clients. The
unsettled question is whether Ramos, who received a portion of the money that Balmaceda took from
PCIB, should also be held liable for the return of this money to the Bank.
PCIB insists that it presented sufficient evidence to establish that Ramos colluded with Balmaceda in the
scheme to fraudulently secure Managers checks and to misappropriate their proceeds. Since Ramos

defenseanchored on mere denial of any participation in Balmacedas wrongdoingis an intrinsically


weak defense, it was error for the CA to exonerate Ramos from any liability.
In civil cases, the party carrying the burden of proof must establish his case by a preponderance of
evidence, or evidence which, to the court, is more worthy of belief than the evidence
_______________
11 Rules of Court, Rule 45, Section 1.
12 F.A.T. Kee Computer Systems, Inc. v. Online Networks International, Inc., G.R. No. 171238, February
2, 2011, 641 SCRA 390; and McDonalds Corporation v. L.C. Big Mak Burger, Inc., 480 Phil. 402; 437 SCRA
10 (2004).
44

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SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Balmaceda
offered in opposition.13 This Court, in Encinas v. National Bookstore, Inc.,14 defined preponderance of
evidence in the following manner:
Preponderance of evidence is the weight, credit, and value of the aggregate evidence on either side
and is usually considered to be synonymous with the term greater weight of the evidence or greater
weight of the credible evidence. Preponderance of evidence is a phrase which, in the last analysis,
means probability of the truth. It is evidence which is more convincing to the court as worthy of belief
than that which is offered in opposition thereto.
The party, whether the plaintiff or the defendant, who asserts the affirmative of an issue has the onus to
prove his assertion in order to obtain a favorable judgment, subject to the overriding rule that the
burden to prove his cause of action never leaves the plaintiff. For the defendant, an affirmative defense
is one that is not merely a denial of an essential ingredient in the plaintiff's cause of action, but one
which, if established, will constitute an avoidance of the claim.15
Thus, PCIB, as plaintiff, had to prove, by preponderance of evidence, its positive assertion that Ramos
conspired with Balmaceda in perpetrating the latters scheme to defraud the Bank. In PCIBs estimation,
it successfully accomplished this through the submission of the following evidence:
[1] Exhibits A, D, PPPP, QQQQ, and RRRR and their submarkings, the application forms for
MCs, show that [these MCs were applied for in favor of Ramos;]

[2] Exhibits K, N, SSSS, TTTT, and UUUU and their submarkings prove that the MCs were
issued in favor of x x x Ramos[; and]
_______________
13 Rules of Court, Rule 133, Section 1.
14 485 Phil. 683, 695; 443 SCRA 293, 302 (2004).
15 Bank of the Philippine Islands v. Royeca, G.R. No. 176664, July 21, 2008, 559 SCRA 207.
45

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Philippine Commercial International Bank vs. Balmaceda
[3] [T]estimonies of the witness for [PCIB].16
We cannot accept these submitted pieces of evidence as sufficient to satisfy the burden of proof that
PCIB carries as plaintiff.
On its face, all that PCIBs evidence proves is that Balmaceda used Ramos name as a payee when he
filled up the application forms for the Managers checks. But, as the CA correctly observed, the mere
fact that Balmaceda made Ramos the payee on some of the Managers checks is not enough basis to
conclude that Ramos was complicit in Balmacedas fraud; a number of other people were made payees
on the other Managers checks yet PCIB never alleged them to be liable, nor did the Bank adduce any
other evidence pointing to Ramos participation that would justify his separate treatment from the
others. Also, while Ramos is Balmacedas brother-in-law, their relationship is not sufficient, by itself, to
render Ramos liable, absent concrete proof of his actual participation in the fraudulent scheme.
Moreover, the evidence on record clearly shows that Balmaceda acted on his own when he applied for
the Managers checks against the bank account of one of PCIBs clients, as well as when he encashed the
fraudulently acquired Managers checks.
Mrs. Elizabeth Costes, the Area Manager of PCIB at the time of the relevant events, testified that
Balmaceda committed all the acts necessary to obtain the unauthorized Managers checksfrom filling
up the application form by forging the signature of the clients representative, to forging the signatures
of the payees in order to encash the checks. As Mrs. Costes stated in her testimony:
Q: I am going into [these] particular instances where you said that Mr. Balmaceda [has] been making
unauthorized withdrawals from particular account of a client or a

_______________
16 Supra note 1, at p. 25.
46

46
SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Balmaceda
client of yours at Sta. Cruz branch. Would you tell us how he effected his unauthorized withdrawals?
A: He prevailed upon the domestic remittance clerk to prepare the application of a Managers check
which *has+ been debited to a clients account. This particular Managers check will be payable to a
certain individual thru his account as the instruction of the client.
Q: What was your findings in so far as the particular alleged instruction of a client is concerned?
A: We found out that he forged the signature of the client.
Q: On that particular application?
A: Yes sir.
Q: Showing to you several applications for Managers Check previously attached as Annexes A, B, C, D
and E*+ of the complaint. Could you please tell us where is that particular alleged signature of a client
applying for the Managers check which you claimed to have been forged by Mr. Balmaceda?
A: Here sir.
xxxx
Q: After the accomplishment of this application form as you stated Mrs. witness, do you know what
happened to the application form?
A: Before that application form is processed it goes to several stages. Here for example this was signed
supposed to be by the client and his signature representing that, he certified the signature based on
their records to be authentic.
Q: When you said he to whom are you referring to?
A: Mr. Balmaceda. And at the same time he approved the transaction.
xxxx

Q: Do you know if the corresponding checks applied for in the application forms were issued?
A: Yes sir.
47

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Philippine Commercial International Bank vs. Balmaceda

Q: Could you please show us where these checks are now, the one applied for in Exhibit A which is in
the amount of P150,000.00, where is the corresponding check?
A: Rolando Ramos dated December 26, 1991 and one of the signatories with higher authority, this is
Mr. Balmacedas signature.
Q: In other words he is likewise approving signatory to the Managers check?
A: Yes sir. This is an authority that the check [has] been encashed.
Q: In other words this check issued to Rolando Ramos dated December 26, 1991 is a cross check but
nonetheless he allowed to encash by granting it.
Could you please show us?
ATTY. PACES: Witness pointing to an initial of the defendant
Antonio Balmaceda, the notation cross check.
A: And this is his signature.
xxxx
Q: How about the check corresponding to Exhibit E-2 which is an application for P125,000.00 for a
certain Rolando Ramos. Do you have the check?
A: Yes sir.
ATTY. PACES: Witness producing a check dated December 19,
1991 the amount of P125,000.00 payable to certain
Rolando Ramos.

Q: Can you tell us whether the same modus operandi was ad[o]pted by Mr. Balmaceda in so far as he
is concerned?
A: Yes sir he is also the right signer and he authorized the cancellation of the cross check.17 (emphasis
ours)
xxxx
_______________
17 TSN, September 16, 1993, pp. 8-17.
48

48
SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Balmaceda

Q: These particular checks [Mrs.] witness in your findings, do you know if Mr. Balmaceda [has] again
any participation in these checks?
A: He is also the right signer and approved officer and he was authorized to debit on file.
xxxx
Q: And do you know if these particular checks marked as Exhibit G-2 to triple FFF were subsequently
encashed?
A: Yes sir.
Q: Were you able to find out who encashed?
A: Mr. Balmaceda himself and besides he approved the encashment because of the signature that he
allowed the encashment of the check.
xxxx
Q: Do you know if this particular person having in fact withdraw or received the proceeds of [these]
particular checks, the payee?
A: No sir.
Q: It was all Mr. Balmaceda dealing with you?

A: Yes sir.
Q: In other words it would be possible that Mr. Balmaceda himself gotten the proceeds of the checks
by forging the payees signature?
A: Yes sir.18 (emphases ours)
Mrs. Nilda Laforteza, the Commercial Account Officer of PCIBs Sta. Cruz, Manila branch at the time the
events of this case occurred, confirmed Mrs. Costes testimony by stating that it was Balmaceda who
forged Ramos signature on the Managers checks where Ramos was the payee, so as to encash the
amounts indicated on the checks.19 Mrs. Laforteza also testified that Ramos never went to the PCIB,
Sta. Cruz, Manila branch to encash the checks since Balmaceda was the one who deposited the checks
into
_______________
18 Id., at pp. 24-26.
19 TSN, June 24, 1997, pp. 15-17.
49

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Philippine Commercial International Bank vs. Balmaceda
Ramos bank account. As revealed during Mrs. Lafortezas cross-examination:
Q: Mrs. Laforteza, these checks that were applied for by Mr. Balmaceda, did you ever see my client go
to the bank to encash these checks?
A: No it is Balmaceda who is depositing in his behalf.
Q: Did my client ever call up the bank concerning this amount?
A: Yes he is not going to call PCIBank Sta. Cruz branch because his account is maintained at Pasig.
Q: So Mr. Balmaceda was the one who just remitted or transmitted the amount that you claimed [was
sent] to the account of my client?
A: Yes.20 (emphases ours)
Even Mrs. Rodelia Nario, presented by PCIB as its rebuttal witness to prove that Ramos encashed a
Managers check for P480,000.00, could only testify that the money was deposited into Ramos PCIB

bank account. She could not attest that Ramos himself presented the Managers check for deposit in his
bank account.21 These testimonies clearly dispute PCIBs theory that Ramos was instrumental in the
encashment of the Managers checks.
We also find no reason to doubt Ramos claim that Balmaceda deposited these large sums of money into
his bank account as payment for the fighting cocks that Balmaceda purchased from him. Ramos
presented two witnessesVicente Cosculluela and Crispin Gadapanwho testified that Ramos
previously engaged in the business of buying and selling fighting cocks, and that Balmaceda was one of
Ramos biggest clients.
Quoting from the RTC decision, PCIB stresses that Ramos own witness and business partner,
Cosculluela, testified that
_______________
20 Id., at p. 77.
21 TSN, January 28, 1999, pp. 7-13.
50

50
SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Balmaceda
the biggest net profit he and Ramos earned from a single transaction with Balmaceda amounted to no
more than P100,000.00, for the sale of approximately 45 fighting cocks.22 In PCIBs view, this testimony
directly contradicts Ramos assertion that he received approximately P400,000.00 from his biggest
transaction with Balmaceda. To PCIB, the testimony also renders questionable Ramos assertion that
Balmaceda deposited large amounts of money into his bank account as payment for the fighting cocks.
On this point, we find that PCIB misunderstood Cosculluelas testimony. A review of the testimony
shows that Cosculluela specifically referred to the net profit that they earned from the sale of the
fighting cocks;23 PCIB apparently did not take into account the capital, transportation and other
expenses that are components of these transactions. Obviously, in sales transactions, the buyer has to
pay not only for the value of the thing sold, but also for the shipping costs and other incidental costs
that accompany the acquisition of the thing sold. Thus, while the biggest net profit that Ramos and
Cosculluela earned in a single transaction amounted to no more than P100,000.00,24 the inclusion of
the actual acquisition costs of the fighting cocks, the transportation expenses (i.e., airplane tickets from
Bacolod or Zamboanga to Manila) and other attendant expenses could account for the P400,000.00 that
Balmaceda deposited into Ramos bank account.

Given that PCIB failed to establish Ramos participation in Balmacedas scheme, it was not even
necessary for Ramos to provide an explanation for the money he received from Balmaceda. Even if the
evidence adduced by the plaintiff appears stronger than that presented by the defendant, a judgment
cannot be entered in the plaintiffs favor if his evidence still
_______________
22 TSN, August 6, 1998, p. 28.
23 Id., at p. 29.
24 Id., at p. 30.
51

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Philippine Commercial International Bank vs. Balmaceda
does not suffice to sustain his cause of action;25 to reiterate, a preponderance of evidence as defined
must be established to achieve this result.
PCIB itself at fault as employer
In considering this case, one point that cannot be disregarded is the significant role that PCIB played
which contributed to the perpetration of the fraud. We cannot ignore that Balmaceda managed to carry
out his fraudulent scheme primarily because other PCIB employees failed to carry out their assigned
tasksflaws imputable to PCIB itself as the employer.
Ms. Analiza Vega, an accounting clerk, teller and domestic remittance clerk working at the PCIB, Sta.
Cruz, Manila branch at the time of the incident, testified that Balmaceda broke the Banks protocol
when he ordered the Banks employees to fill up the application forms for the Managers checks, to be
debited from the bank account of one of the banks clients, without providing the necessary Authority to
Debit from the client.26 PCIB also admitted that these Managers checks were subsequently released to
Balmaceda, and not to the clients representative, based solely on Balmacedas word that the client had
tasked him to deliver these checks.27
Despite Balmacedas gross violations of bank proceduresmainly in the processing of the applications
for Managers checks and in the releasing of the Managers checksBalmacedas co-employees not only
turned a blind eye to his actions, but actually complied with his instructions. In this way, PCIBs own
employees were unwitting accomplices in Balmacedas fraud.
_______________

25 Ong v. Yap, 492 Phil. 188, 197; 452 SCRA 41, 50 (2005), citing United Airlines, Inc. v. Court of Appeals,
G.R. No. 124110, April 20, 2001, 357 SCRA 99, 106-107.
26 TSN, September 13, 1996, p. 21.
27 RTC Records, p. 164.
52

52
SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Balmaceda

Another telling indicator of PCIBs negligence is the fact that it allowed Balmaceda to encash the
Managers checks that were plainly crossed checks. A crossed check is one where two parallel lines are
drawn across its face or across its corner.28 Based on jurisprudence, the crossing of a check has the
following effects: (a) the check may not be encashed but only deposited in the bank; (b) the check may
be negotiated only onceto the one who has an account with the bank; and (c) the act of crossing the
check serves as a warning to the holder that the check has been issued for a definite purpose and he
must inquire if he received the check pursuant to this purpose; otherwise, he is not a holder in due
course.29 In other words, the crossing of a check is a warning that the check should be deposited only in
the account of the payee. When a check is crossed, it is the duty of the collecting bank to ascertain that
the check is only deposited to the payees account.30 In complete disregard of this duty, PCIBs systems
allowed Balmaceda to encash 26 Managers checks which were all crossed checks, or checks payable to
the payees account only.
The General Banking Law of 200031 requires of banks the highest standards of integrity and
performance. The banking business is impressed with public interest. Of paramount
_______________
28 Go v. Metropolitan Bank and Trust Company, G.R. No. 168842, August 11, 2010, 628 SCRA 107, 114,
citing Bataan Cigar and Cigarette Factory, Inc. v. Court of Appeals, G.R. No. 93048, March 3, 1994, 230
SCRA 643, 647; Associated Bank v. Court of Appeals, G.R. No. 89802, May 7, 1992, 208 SCRA 465; State
Investment House v. Intermediate Appellate Court, G.R. No. 72764, July 13, 1989, 175 SCRA 310; and De
Ocampo & Co. v. Gatchalian, et al., 113 Phil. 574; 3 SCRA 596 (1961).
29 Go v. Metropolitan Bank and Trust Company, supra, at p. 115, citing Bataan Cigar and Cigarette
Factory, Inc. v. Court of Appeals, supra, at p. 648.

30 Philippine Commercial International Bank v. Court of Appeals, 403 Phil. 361, 364; 350 SCRA 446, 467
(2001).
31 Republic Act No. 8791.
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Philippine Commercial International Bank vs. Balmaceda
importance is the trust and confidence of the public in general in the banking industry. Consequently,
the diligence required of banks is more than that of a Roman pater familias or a good father of a
family.32 The highest degree of diligence is expected.33
While we appreciate that Balmaceda took advantage of his authority and position as the branch
manager to commit these acts, this circumstance cannot be used to excuse the manner the Bank
through its employeeshandled its clients bank accounts and thereby ignored established bank
procedures at the branch managers mere order. This lapse is made all the more glaring by Balmacedas
repetition of his modus operandi 33 more times in a period of over one year by the Banks own
estimation. With this kind of record, blame must be imputed on the Bank itself and its systems, not
solely on the weakness or lapses of individual employees.
Principle of unjust enrichment not
applicable
PCIB maintains that even if Ramos did not collude with Balmaceda, it still has the right to recover the
amounts unjustly received by Ramos pursuant to the principle of unjust enrichment. This principle is
embodied in Article 22 of the Civil Code which provides:
Article 22. Every person who through an act of performance by another, or any other means,
acquires or comes into possession of something at the expense of the latter without just or legal ground,
shall return the same to him.
_______________
32 Bank of the Philippine Islands v. Court of Appeals, 383 Phil. 538; 326 SCRA 641 (2000); and Philippine
Bank of Commerce v. Court of Appeals, 336 Phil. 667; 269 SCRA 695 (1997).
33 Philippine Commercial International Bank v. Court of Appeals, supra note 30.
54

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SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Balmaceda
To have a cause of action based on unjust enrichment, we explained in University of the Philippines v.
Philab Industries, Inc.34 that:
Unjust enrichment claims do not lie simply because one party benefits from the efforts or obligations of
others, but instead it must be shown that a party was unjustly enriched in the sense that the term
unjustly could mean illegally or unlawfully.
Moreover, to substantiate a claim for unjust enrichment, the claimant must unequivocally prove that
another party knowingly received something of value to which he was not entitled and that the state of
affairs are such that it would be unjust for the person to keep the benefit. Unjust enrichment is a term
used to depict result or effect of failure to make remuneration of or for property or benefits received
under circumstances that give rise to legal or equitable obligation to account for them; to be entitled to
remuneration, one must confer benefit by mistake, fraud, coercion, or request. Unjust enrichment is not
itself a theory of reconvey. Rather, it is a prerequisite for the enforcement of the doctrine of
restitution.35 (emphasis ours)
Ramos cannot be held liable to PCIB on account of unjust enrichment simply because he received
payments out of money secured by fraud from PCIB. To hold Ramos accountable, it is necessary to prove
that he received the money from Balmaceda, knowing that he (Ramos) was not entitled to it. PCIB must
also prove that Ramos, at the time that he received the money from Balmaceda, knew that the money
was acquired through fraud. Knowledge of the fraud is the link between Ramos and PCIB that would
obligate Ramos to return the money based on the principle of unjust enrichment.
However, as the evidence on record indicates, Ramos accepted the deposits that Balmaceda made
directly into his bank account, believing that these deposits were payments for the fighting cocks that
Balmaceda had purchased. Signifi_______________
34 482 Phil. 693; 439 SCRA 467 (2004).
35 Id., at pp. 709-710; p. 484-485.
55

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Philippine Commercial International Bank vs. Balmaceda
cantly, PCIB has not presented any evidence proving that Ramos participated in, or that he even knew
of, the fraudulent sources of Balmacedas funds.
PCIB illegally froze and debited
Ramos assets
We also find that PCIB acted illegally in freezing and debiting Ramos bank account. In BPI Family Bank v.
Franco,36 we cautioned against the unilateral freezing of bank accounts by banks, noting that:
More importantly, *BPI Family Bank+ does not have a unilateral right to freeze the accounts of Franco
based on its mere suspicion that the funds therein were proceeds of the multi-million peso scam Franco
was allegedly involved in. To grant [BPI Family Bank], or any bank for that matter, the right to take
whatever action it pleases on deposits which it supposes are derived from shady transactions, would
open the floodgates of public distrust in the banking industry.37
We see no legal merit in PCIBs claim that legal compensation took place between it and Ramos, thereby
warranting the automatic deduction from Ramos bank account. For legal compensation to take place,
two persons, in their own right, must first be creditors and debtors of each other.38 While PCIB, as the
depositary bank, is Ramos debtor in the amount of his deposits, Ramos is not PCIBs debtor under the
evidence the PCIB adduced. PCIB thus had no basis, in fact or in law, to automatically debit from Ramos
bank account.
On the award of damages
Although PCIBs act of freezing and debiting Ramos account is unlawful, we cannot hold PCIB liable for
moral and
_______________
36 G.R. No. 123498, November 23, 2007, 538 SCRA 184.
37 Id., at p. 197.
38 Civil Code, Article 1278.
56

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SUPREME COURT REPORTS ANNOTATED

Philippine Commercial International Bank vs. Balmaceda


exemplary damages. Since a contractual relationship existed between Ramos and PCIB as the depositor
and the depositary bank, respectively, the award of moral damages depends on the applicability of
Article 2220 of the Civil Code, which provides:
Article 2220. Willful injury to property may be a legal ground for awarding moral damages if the
court should find that, under the circumstances, such damages are justly due. The same rule applies to
breaches of contract where the defendant acted fraudulently or in bad faith. *emphasis ours+
Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some
moral obliquity and conscious commission of a wrong; it partakes of the nature of fraud.39
As the facts of this case bear out, PCIB did not act out of malice or bad faith when it froze Ramos bank
account and subsequently debited the amount of P251,910.96 therefrom. While PCIB may have acted
hastily and without regard to its primary duty to treat the accounts of its depositors with meticulous
care and utmost fidelity,40 we find that its actions were propelled more by the need to protect itself,
and not out of malevolence or ill will. One may err, but error alone is not a ground for granting moral
damages.41
We also disallow the award of exemplary damages. Article 2234 of the Civil Code requires a party to first
prove that he is entitled to moral, temperate or compensatory damages before he can be awarded
exemplary damages. Since no reason ex_______________
39 BPI Family Bank v. Franco, supra note 36, at p. 203, citing Board of Liquidators v. Kalaw, No. L-18805,
August 14, 1967, 20 SCRA 987.
40 Central Bank of the Philippines v. Court of Appeals, G.R. Nos. 88353 and 92943, May 8, 1992, 208
SCRA 652, 684-685.
41 Bank of the Philippine Islands v. Casa Montessori Internationale, G.R. No. 149454, May 28, 2004, 430
SCRA 261, 294.
57

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Philippine Commercial International Bank vs. Balmaceda
ists to award moral damages, so too can there be no reason to award exemplary damages.

We deem it just and equitable, however, to uphold the award of attorneys fees in Ramos favor. Taking
into consideration the time and efforts involved that went into this case, we increase the award of
attorneys fees from P20,000.00 to P75,000.00.
WHEREFORE, the petition is PARTIALLY GRANTED. We AFFIRM the decision of the Court of Appeals
dated April 29, 2003 in CA-G.R. CV No. 69955 with the MODIFICATION that the award of moral and
exemplary damages in favor of Rolando N. Ramos is DELETED, while the award of attorneys fees is
INCREASED to P75,000.00. Costs against the Philippine Commercial International Bank.
SO ORDERED.
Velasco, Jr.,*** Perez, Sereno and Reyes, JJ., concur.
Petition partially granted, judgment affirmed with modification.
Notes.There is unjust enrichment when a person unjustly retains a benefit at the loss of another, or
when a person retains money or property of another against the fundamental principles of justice,
equity and good conscience; A sense of justice and fairness demands that a party should not be allowed
to benefit from his act of entering into a contract to sell that violates the constitutional proscription.
(Hulst vs. PR Builders, Inc., 532 SCRA 74 [2007])
Preponderance of evidence means evidence which is more convincing to the court as worthy of belief
than that which is
_______________
*** Designated as Additional Member of the Second Division in lieu of Associate Justice Antonio T.
Carpio per Special Order No. 1084 dated September 13, 2011.
58

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SUPREME COURT REPORTS ANNOTATED
Philippine Commercial International Bank vs. Balmaceda
offered in opposition thereto. (Republic vs. Bautista, 532 SCRA 598 [2007])
o0o

Copyright 2014 Central Book Supply, Inc. All rights reserved. [Philippine Commercial International
Bank vs. Balmaceda, 658 SCRA 33(2011)]

G.R. No. 172954. October 5, 2011.*


ENGR. JOSE E. CAYANAN, petitioner, vs. NORTH STAR INTERNATIONAL TRAVEL, INC., respondent.
Negotiable Instruments Law; Checks; Upon issuance of a check, in the absence of evidence to the
contrary, it is presumed that the same was issued for valuable consideration which may consist either in
some right, interest, profit or benefit accruing to the party who makes the contract, or some
forbearance, detriment, loss or some responsibility, to act, or labor, or service given, suffered or
undertaken by the other side.We have held that upon issuance of a check, in the absence of evidence
to the contrary, it is presumed that the same was issued for valuable consideration which may consist
either in some right, interest, profit or benefit accruing to the party who makes the contract, or some
forbearance, detriment, loss or some responsibility, to act, or labor, or service given, suffered or
undertaken by the other side. Under the Negotiable Instruments Law, it is presumed that every party to
an instrument acquires the same for a consideration or for value. As petitioner alleged that there was no
consideration for the issuance of the subject checks, it devolved upon him to present convincing
evidence to overthrow the presumption and prove that the checks were in fact issued without valuable
consideration. Sadly, however, petitioner has not presented any credible evidence to rebut the
presumption, as well as North Stars assertion, that the checks were issued as payment for the
US$85,000 petitioner owed.
Same; Same; It is highly inconceivable that an experienced businessman would issue various checks in
sizeable amounts to a payee if these are without consideration.Petitioner claims that North Star did
not give any valuable consideration for the checks since the US$85,000 was taken from the personal
dollar account of Virginia and not the corporate funds of North Star. The contention, however, deserves
scant consideration. The subject checks, bearing petitioners signature, speak for themselves. The fact
that petitioner himself specifically named North Star as the payee of the checks is an admission of his
liability to North Star and not to Virginia Balag_______________
* FIRST DIVISION.
645

VOL. 658, OCTOBER 5, 2011


645
Cayanan vs. North Star International Travel, Inc.
tas, who as manager merely facilitated the transfer of funds. Indeed, it is highly inconceivable that an
experienced businessman like petitioner would issue various checks in sizeable amounts to a payee if
these are without consideration. Moreover, we note that Virginia Balagtas averred in her Affidavit that

North Star caused the payment of the US$60,000 and US$25,000 to View Sea Ventures to accommodate
petitioner, which statement petitioner failed to refute. In addition, petitioner did not question the
Statement of Account No. 8639 dated August 31, 1994 issued by North Star which contained itemized
amounts including the US$60,000 and US$25,000 sent through telegraphic transfer to View Sea
Ventures per his instruction. Thus, the inevitable conclusion is that when petitioner issued the subject
checks to North Star as payee, he did so to settle his obligation with North Star for the US$85,000.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Napoleon M. Marapao for petitioner.
Alexandre John Andrada Villanueva for respondent.
VILLARAMA, JR., J.:
Petitioner Engr. Jose E. Cayanan appeals the May 31, 2006 Decision1 of the Court of Appeals (CA) in CAG.R. SP No. 65538 finding him civilly liable for the value of the five checks which are the subject of
Criminal Case Nos. 166549-53.
The antecedent facts are as follows:
North Star International Travel Incorporated (North Star) is a corporation engaged in the travel agency
business while petitioner is the owner/general manager of JEAC International Management and
Contractor Services, a recruitment agency.
_______________
1 Rollo, pp. 35-45. Penned by Associate Justice Roberto A. Barrios with Associate Justices Mario L.
Guaria III and Santiago Javier Ranada concurring.
646

646
SUPREME COURT REPORTS ANNOTATED
Cayanan vs. North Star International Travel, Inc.
On March 17,2 1994, Virginia Balagtas, the General Manager of North Star, in accommodation and upon
the instruction of its client, petitioner herein, sent the amount of US$60,0003 to View Sea Ventures Ltd.,
in Nigeria from her personal account in Citibank Makati. On March 29, 1994, Virginia again sent
US$40,000 to View Sea Ventures by telegraphic transfer,4 with US$15,000 coming from petitioner.
Likewise, on various dates, North Star extended credit to petitioner for the airplane tickets of his clients,

with the total amount of such indebtedness under the credit extensions eventually reaching
P510,035.47.5
To cover payment of the foregoing obligations, petitioner issued the following five checks to North Star:
Check No

: 246822

Drawn Against : Republic Planters Bank


Amount

: P695,000.00

Dated/Postdated : May 15, 1994


Payable to

: North Star International Travel, Inc.

Check No.

: 246823

Drawn Against : Republic Planters Bank


Amount

: P278,000.00

Dated/Postdated : May 15, 1994


Payable to

: North Star International Travel, Inc.

Check No.

: 246824

Drawn Against : Republic Planters Bank


Amount

: P22,703.00

Dated/Postdated : May 15, 1994


Payable to

: North Star International Travel, Inc.

Check No.

: 687803

Drawn Against : PCIB


_______________
2 March 15 in some parts of the records but the date appearing on the telegraphic transfer
receipt/money transfer slip is March 17.
3 Exh. 8, records, p. 262.
4 Exh. 9, id., at p. 263.
5 Id., at p. 35.

647

VOL. 658, OCTOBER 5, 2011


647
Cayanan vs. North Star International Travel, Inc.
Amount

: P1,500,000.00

Dated/Postdated : April 14, 1994


Payable to

: North Star International Travel, Inc.

Check No.

: 687804

Drawn Against : PCIB


Amount

: P35,000.00

Dated/Postdated : April 14, 1994


Payable to

: North Star International Travel,


Inc.6

When presented for payment, the checks in the amount of P1,500,000 and P35,000 were dishonored for
insufficiency of funds while the other three checks were dishonored because of a stop payment order
from petitioner.7 North Star, through its counsel, wrote petitioner on September 14, 19948 informing
him that the checks he issued had been dishonored. North Star demanded payment, but petitioner
failed to settle his obligations. Hence, North Star instituted Criminal Case Nos. 166549-53 charging
petitioner with violation of Batas Pambansa Blg. 22, or the Bouncing Checks Law, before the
Metropolitan Trial Court (MeTC) of Makati City.
The Informations,9 which were similarly worded except as to the check numbers, the dates and
amounts of the checks, alleged:
That on or about and during the month of March 1994 in the Municipality of Makati, Metro Manila,
Philippines, a place within the jurisdiction of this Honorable Court, the above-named accused, being the
authorized signatory of *JEAC+ Intl Mgt & Cont. Serv. did then and there willfully, unlawfully and
feloniously make out*,+ draw and issue to North Star Intl. Travel Inc. herein rep. by Virginia D. Balagtas
to apply on account or for value the checks described below:
xxxx
_______________

6 Id., at pp. 36, 53-54.


7 Id., at p. 56.
8 Exh. R, id., at p. 291.
9 Id., at pp. 1-10.
648

648
SUPREME COURT REPORTS ANNOTATED
Cayanan vs. North Star International Travel, Inc.
said accused well knowing that at the time of issue thereof, did not have sufficient funds in or credit
with the drawee bank for the payment in full of the face amount of such check upon its presentment,
which check when presented for payment within ninety (90) days from the date thereof was
subsequently dishonored by the drawee bank for the reason PAYMENT STOPPED/DAIF and despite
receipt of notice of such dishonor the accused failed to pay the payee the face amount of said check or
to make arrangement for full payment thereof within five (5) banking days after receiving notice.
Contrary to law.
Upon arraignment, petitioner pleaded not guilty to the charges.
After trial, the MeTC found petitioner guilty beyond reasonable doubt of violation of B.P. 22. Thus:
WHEREFORE, finding the accused, ENGR. JOSE E. CAYANAN GUILTY beyond reasonable doubt of
Violation of Batas Pambansa Blg. 22 he is hereby sentenced to suffer imprisonment of one (1) year for
each of the offense committed.
Accused is likewise ordered to indemnify the complainant North Star International Travel, Inc.
represented in this case by Virginia Balagtas, the sum of TWO MILLION FIVE HUNDRED THIRTY
THOUSAND AND SEVEN HUNDRED THREE PESOS (P2,530,703.00) representing the total value of the
checks in [question] plus FOUR HUNDRED EIGHTY[-]FOUR THOUSAND SEVENTY[-]EIGHT PESOS AND
FORTY[-]TWO CENTAVOS (P484,078.42) as interest of the value of the checks subject matter of the
instant case, deducting therefrom the amount of TWO HUNDRED TWENTY THOUSAND PESOS
(P220,000.00) paid by the accused as interest on the value of the checks duly receipted by the
complainant and marked as Exhibit FF of the record.
xxxx
SO ORDERED.10

On appeal, the Regional Trial Court (RTC) acquitted petitioner of the criminal charges. The RTC also held
that there is
_______________
10 Rollo, pp. 57-58.
649

VOL. 658, OCTOBER 5, 2011


649
Cayanan vs. North Star International Travel, Inc.
no basis for the imposition of the civil liability on petitioner. The RTC ratiocinated that:
In the instant cases, the checks issued by the accused were presented beyond the period of NINETY
(90) DAYS and therefore, there is no violation of the provision of Batas Pambansa Blg. 22 and the
accused is not considered to have committed the offense. There being no offense committed, accused is
not criminally liable and there would be no basis for the imposition of the civil liability arising from the
offense.11
Aggrieved, North Star elevated the case to the CA. On May 31, 2006, the CA reversed the decision of the
RTC insofar as the civil aspect is concerned and held petitioner civilly liable for the value of the subject
checks. The fallo of the CA decision reads:
WHEREFORE, the petition is GRANTED. The assailed Decision of the RTC insofar as Cayanan's civil
liability is concerned, is NULLIFIED and SET ASIDE. The indemnity awarded by the MeTC in its September
1, 1999 Decision is REINSTATED.
SO ORDERED.12
The CA ruled that although Cayanan was acquitted of the criminal charges, he may still be held civilly
liable for the checks he issued since he never denied having issued the five postdated checks which were
dishonored.
Petitioner now assails the CA decision raising the lone issue of whether the CA erred in holding him
civilly liable to North Star for the value of the checks.13
Petitioner argues that the CA erred in holding him civilly liable to North Star for the value of the checks
since North Star did not give any valuable consideration for the checks. He insists that the US$85,000
sent to View Sea Ventures was
_______________

11 Id., at p. 61.
12 Id., at p. 44.
13 Id., at p. 26.
650

650
SUPREME COURT REPORTS ANNOTATED
Cayanan vs. North Star International Travel, Inc.
not sent for the account of North Star but for the account of Virginia as her investment. He points out
that said amount was taken from Virginias personal dollar account in Citibank and not from North Stars
corporate account.
Respondent North Star, for its part, counters that petitioner is liable for the value of the five subject
checks as they were issued for value. Respondent insists that petitioner owes North Star P2,530,703 plus
interest of P264,078.45, and that the P220,000 petitioner paid to North Star is conclusive proof that the
checks were issued for value.
The petition is bereft of merit.
We have held that upon issuance of a check, in the absence of evidence to the contrary, it is presumed
that the same was issued for valuable consideration which may consist either in some right, interest,
profit or benefit accruing to the party who makes the contract, or some forbearance, detriment, loss or
some responsibility, to act, or labor, or service given, suffered or undertaken by the other side.14 Under
the Negotiable Instruments Law, it is presumed that every party to an instrument acquires the same for
a consideration or for value.15 As petitioner alleged that there was no consideration for the issuance of
the subject checks, it devolved upon him to present convincing evidence to overthrow the presumption
and prove that the checks were in fact issued without valuable consideration.16 Sadly, however,
petitioner has not presented any credible evidence to rebut the presumption, as well as
_______________
14 Palana v. People, G.R. No. 149995, September 28, 2007, 534 SCRA 296, 305.
15 Section 24, Negotiable Instruments Law.
Sec. 24. Presumption of consideration.Every negotiable instrument is deemed prima facie to have
been issued for a valuable consideration; and every person whose signature appears thereon to have
become a party thereto for value.

16 See Bayani v. People, G.R. No. 155619, August 14, 2007, 530 SCRA 84, 95.
651

VOL. 658, OCTOBER 5, 2011


651
Cayanan vs. North Star International Travel, Inc.
North Stars assertion, that the checks were issued as payment for the US$85,000 petitioner owed.
Notably, petitioner anchors his defense of lack of consideration on the fact that he did not personally
receive the US$85,000 from Virginia. However, we note that in his pleadings, he never denied having
instructed Virginia to remit the US$85,000 to View Sea Ventures. Evidently, Virginia sent the money
upon the agreement that petitioner will give to North Star the peso equivalent of the amount remitted
plus interest. As testified to by Virginia, Check No. 246822 dated May 15, 1994 in the amount of
P695,000.00 is equivalent to US$25,000; Check No. 246823 dated May 15, 1994 in the amount of
P278,000 is equivalent to US$10,000; Check No. 246824 in the amount of P22,703 represents the one
month interest for P695,000 and P278,000 at the rate of twenty-eight (28%) percent per annum;17
Check No. 687803 dated April 14, 1994 in the amount of P1,500,000 is equivalent to US$50,000 and
Check No. 687804 dated 14 April 1994 in the amount of P35,000 represents the one month interest for
P1,500,000 at the rate of twenty-eight (28%) percent per annum.18 Petitioner has not substantially
refuted these averments.
Concomitantly, petitioners assertion that the dollars sent to Nigeria was for the account of Virginia
Balagtas and as her own investment with View Sea Ventures deserves no credence. Virginia has not
been shown to have any business transactions with View Sea Ventures and from all indications, she only
remitted the money upon the request and in accordance with petitioners instructions. The evidence
shows that it was petitioner who had a contract with View Sea Ventures as he was sending contract
workers to Nigeria; Virginia Balagtass participation was merely to send the money through telegraphic
transfer in exchange for the checks issued by petitioner to North Star. Indeed, the transaction
_______________
17 TSN, July 31, 1996, p. 4; records, p. 429.
18 See Exh. DD, records, p. 307; see also TSN, July 27, 1998, p. 4; records, p. 544; TSN, August 17,
1998, p. 8; records, p. 563.
652

652

SUPREME COURT REPORTS ANNOTATED


Cayanan vs. North Star International Travel, Inc.
between petitioner and North Star is actually in the nature of a loan and the checks were issued as
payment of the principal and the interest.
As aptly found by the trial court:
It is to be noted that the checks subject matter of the instant case were issued in the name of North
Star International Inc., represented by private complainant Virginia Balagtas in replacement of the
amount of dollars remitted by the latter to Vie[w] Sea Ventures in Nigeria. x x x But Virginia Balagtas has
no business transaction with Vie[w] Sea Ventures where accused has been sending his contract workers
and the North Star provided the trip tickets for said workers sent by the accused. North Star
International has no participation at all in the transaction between accused and the Vie[w] Sea Ventures
except in providing plane ticket used by the contract workers of the accused upon its understanding
with the latter. The contention of the accused that the dollars were sent by Virginia Balagtas to Nigeria
as business investment has not been shown by any proof to set aside the foregoing negative
presumptions, thus negates accused contentions regarding the absence of consideration for the
issuance of checks. x x x19
Petitioner claims that North Star did not give any valuable consideration for the checks since the
US$85,000 was taken from the personal dollar account of Virginia and not the corporate funds of North
Star. The contention, however, deserves scant consideration. The subject checks, bearing petitioners
signature, speak for themselves. The fact that petitioner himself specifically named North Star as the
payee of the checks is an admission of his liability to North Star and not to Virginia Balagtas, who as
manager merely facilitated the transfer of funds. Indeed, it is highly inconceivable that an experienced
businessman like petitioner would issue various checks in sizeable amounts to a payee if these are
without consideration. Moreover, we note that Virginia Balagtas averred in her Affidavit20 that North
Star caused the payment of the
_______________
19 Rollo, pp. 54-55.
20 Records, pp. 62-65.
653

VOL. 658, OCTOBER 5, 2011


653
Cayanan vs. North Star International Travel, Inc.

US$60,000 and US$25,000 to View Sea Ventures to accommodate petitioner, which statement
petitioner failed to refute. In addition, petitioner did not question the Statement of Account No. 863921
dated August 31, 1994 issued by North Star which contained itemized amounts including the US$60,000
and US$25,000 sent through telegraphic transfer to View Sea Ventures per his instruction. Thus, the
inevitable conclusion is that when petitioner issued the subject checks to North Star as payee, he did so
to settle his obligation with North Star for the US$85,000. And since the only payment petitioner made
to North Star was in the amount of P220,000.00, which was applied to interest due, his liability is not
extinguished. Having failed to fully settle his obligation under the checks, the appellate court was correct
in holding petitioner liable to pay the value of the five checks he issued in favor of North Star.
WHEREFORE, the present appeal by way of a petition for review on certiorari is DENIED for lack of merit.
The Decision dated May 31, 2006 of the Court of Appeals in CA-G.R. SP No. 65538 is AFFIRMED.
With costs against petitioner.
SO ORDERED.
Corona (C.J., Chairperson), Leonardo-De Castro, Bersamin and Del Castillo, JJ., concur.
Petition denied, judgment affirmed.
Note.A check, the entries of which are no doubt in writing, could prove a loan transaction. (Tan vs.
Villapaz, 475 SCRA 720 [2005])
o0o
_______________
21 Id., at p. 88.
Copyright 2014 Central Book Supply, Inc. All rights reserved. [Cayanan vs. North Star International
Travel, Inc., 658 SCRA 644(2011)]

RIZAL COMMERCIAL BANKING CORPORATION, petitioner, vs. HI-TRI DEVELOPMENT CORPORATION and
LUZ R. BAKUNAWA, respondents.
Escheat Proceedings; Banks and Banking; Words and Phrases; Escheat proceedings refer to the judicial
process in which the state, by virtue of its sovereignty, steps in and claims abandoned, left vacant, or
unclaimed property, without there being an interested person having a legal claim thereto; Escheat is
not a proceeding to penalize depositors for failing to deposit to or withdraw from their accounts.
Escheat proceedings refer to the judicial process in which the state, by virtue of its sovereignty, steps in
and claims abandoned, left vacant, or unclaimed property, without there being an interested person
having a legal claim thereto. In the case of dormant accounts, the state inquires into the status, custody,
and ownership of the unclaimed balance to determine whether the inactivity was brought about by the

fact of death or absence of or abandonment by the depositor. If after the proceedings the property
remains without a lawful owner interested to claim it, the property shall be reverted to the state to
forestall an open invitation to self-service by the first comers. However, if interested parties have come
forward and lain claim to the property, the courts shall determine whether the credit or deposit should
pass to the claimants or be forfeited in favor of the state. We emphasize that escheat is not a
proceeding to penalize depositors for failing to deposit to or withdraw from their accounts. It is a
proceeding whereby the state compels the surrender to it of unclaimed deposit balances when there is
substantial ground for a belief that they have been abandoned, forgotten, or without an owner.
Same; Same; In case the bank complies with the provisions of the law and the unclaimed balances are
eventually escheated to the Republic, the bank shall not thereafter be liable to any person for the same
and any action which may be brought by any person against any bank for unclaimed balances so
deposited shall be defended by the Solicitor General without cost to such bank.In case the bank
_______________
* SECOND DIVISION.
515

VOL. 672, JUNE 13, 2012


515
Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation
complies with the provisions of the law and the unclaimed balances are eventually escheated to the
Republic, the bank shall not thereafter be liable to any person for the same and any action which may
be brought by any person against in any bank xxx for unclaimed balances so deposited xxx shall be
defended by the Solicitor General without cost to such bank. Otherwise, should it fail to comply with
the legally outlined procedure to the prejudice of the depositor, the bank may not raise the defense
provided under Section 5 of Act No. 3936, as amended.
Negotiable Instruments Law; Checks; The issuance of the check does not of itself operate as an
assignment of any part of the funds in the bank to the credit of the drawer.An ordinary check refers to
a bill of exchange drawn by a depositor (drawer) on a bank (drawee), requesting the latter to pay a
person named therein (payee) or to the order of the payee or to the bearer, a named sum of money.
The issuance of the check does not of itself operate as an assignment of any part of the funds in the
bank to the credit of the drawer. Here, the bank becomes liable only after it accepts or certifies the
check. After the check is accepted for payment, the bank would then debit the amount to be paid to the
holder of the check from the account of the depositor-drawer.

Same; Same; Managers Checks; Cashiers Checks; There are checks of a special type called managers or
cashiers checks. These are bills of exchange drawn by the banks manager or cashier, in the name of the
bank, against the bank itself. Typically, a managers or a cashiers check is procured from the bank by
allocating a particular amount of funds to be debited from the depositors account or by directly paying
or depositing to the bank the value of the check to be drawn.There are checks of a special type called
managers or cashiers checks. These are bills of exchange drawn by the banks manager or cashier, in
the name of the bank, against the bank itself. Typically, a managers or a cashiers check is procured
from the bank by allocating a particular amount of funds to be debited from the depositors account or
by directly paying or depositing to the bank the value of the check to be drawn. Since the bank issues
the check in its name, with itself as the drawee, the check is deemed accepted in advance. Ordinarily,
the check becomes the primary obligation of the issuing bank and constitutes its written promise to pay
upon demand.
516

516
SUPREME COURT REPORTS ANNOTATED
Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation
PETITION for review on certiorari of the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Ramos, Zantua, Arches, Cruz, Manlangit and Rogero for petitioner.
Francisco T. Ignalaga, Jr. for respondents.
SERENO, J.:
Before the Court is a Rule 45 Petition for Review on Certiorari filed by petitioner Rizal Commercial
Banking Corporation (RCBC) against respondents Hi-Tri Development Corporation (Hi-Tri) and Luz R.
Bakunawa (Bakunawa). Petitioner seeks to appeal from the 26 November 2009 Decision and 27 May
2010 Resolution of the Court of Appeals (CA),1 which reversed and set aside the 19 May 2008 Decision
and 3 November 2008 Order of the Makati City Regional Trial Court (RTC) in Civil Case No. 06-244.2 The
case before the RTC involved the Complaint for Escheat filed by the Republic of the Philippines
(Republic) pursuant to Act No. 3936, as amended by Presidential Decree No. 679 (P.D. 679), against
certain deposits, credits, and unclaimed balances held by the branches of various banks in the
Philippines. The trial court declared the amounts, subject of the special proceedings, escheated to the
Republic and ordered them deposited with the Treasurer of the Philippines (Treasurer) and credited in
favor of the Republic.3 The assailed RTC judgments included
_______________

1 The Decision and Resolution in CA-G.R. SP No. 107261 were penned by CA Associate Justice Vicente
S.E. Veloso and concurred in by Associate Justices Andres B. Reyes, Jr. and Marlene Gonzales-Sison.
2 The Decision and Order in Civil Case No. 06-244 (for Escheat) was penned by Judge Elmo M. Alameda.
3 CA Decision at pp. 1-2 (Hi-Tri Development Corporation v. Republic of the Philippines, CA-G.R. SP No.
107261, 26 November
517

VOL. 672, JUNE 13, 2012


517
Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation
an unclaimed balance in the amount of P1,019,514.29, maintained by RCBC in its Ermita Business Center
branch.
We quote the narration of facts of the CA4 as follows:
x x x Luz *R.+ Bakunawa and her husband Manuel, now deceased (Spouses Bakunawa) are registered
owners of six (6) parcels of land covered by TCT Nos. 324985 and 324986 of the Quezon City Register of
Deeds, and TCT Nos. 103724, 98827, 98828 and 98829 of the Marikina Register of Deeds. These lots
were sequestered by the Presidential Commission on Good Government [(PCGG)].
Sometime in 1990, a certain Teresita Millan (Millan), through her representative, Jerry Montemayor,
offered to buy said lots for P6,724,085.71, with the promise that she will take care of clearing
whatever preliminary obstacles there may*+be to effect a completion of the sale. The Spouses
Bakunawa gave to Millan the Owners Copies of said TCTs and in turn, Millan made a down[]payment of
P1,019,514.29 for the intended purchase. However, for one reason or another, Millan was not able to
clear said obstacles. As a result, the Spouses Bakunawa rescinded the sale and offered to return to
Millan her down[]payment of P1,019,514.29. However, Millan refused to accept back the P1,019,514.29
down[]payment. Consequently, the Spouses Bakunawa, through their company, the Hi-Tri Development
Corporation (Hi-Tri) took out on October 28, 1991, a Managers Check from RCBC-Ermita in the
amount of P1,019,514.29, payable to Millans company Rosmil Realty and Development Corporation
(Rosmil) c/o Teresita Millan and used this as one of their basis for a complaint against Millan and
Montemayor which they filed with the Regional Trial Court of Quezon City, Branch 99, docketed as Civil
Case No. Q-91-10719 [in 1991], praying that:
1. That the defendants Teresita Mil[l]an and Jerry Montemayor may be ordered to return to plaintiffs
spouses the Owners Copies of Transfer Certificates of Title Nos. 324985, 324986, 103724, 98827, 98828
and 98829;

_______________
2009), Rollo, pp. 61-62; RTC Decision at the 18th to the 19th pp. (unpaged) (Republic of the Philippines
v. Allied Banking Corporation, Civil Case No. 06-244, 19 May 2008), Rollo, pp. 210-211.
4 CA Decision at 2-7, supra, Rollo, pp. 62-67.
518

518
SUPREME COURT REPORTS ANNOTATED
Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation
2. That the defendant Teresita Mil[l]an be correspondingly ordered to receive the amount of One
Million Nineteen Thousand Five Hundred Fourteen Pesos and Twenty Nine Centavos (P1,019,514.29);
3. That the defendants be ordered to pay to plaintiffs spouses moral damages in the amount of
P2,000,000.00; and
4. That the defendants be ordered to pay plaintiffs attorneys fees in the amount of P50,000.00.
Being part and parcel of said complaint, and consistent with their prayer in Civil Case No. Q-91-10719
that Teresita Mil*l+an be correspondingly ordered to receive the amount of One Million Nineteen
Thousand Five Hundred Fourteen Pesos and Twenty Nine *Centavos+ (P1,019,514.29)*+, the Spouses
Bakunawa, upon advice of their counsel, retained custody of RCBC Managers Check No. ER 034469 and
refrained from canceling or negotiating it.
All throughout the proceedings in Civil Case No. Q-91-10719, especially during negotiations for a
possible settlement of the case, Millan was informed that the Managers Check was available for her
withdrawal, she being the payee.
On January 31, 2003, during the pendency of the abovementioned case and without the knowledge of
[Hi-Tri and Spouses Bakunawa], x x x RCBC reported the P1,019,514.29-credit existing in favor of
Rosmil to the Bureau of Treasury as among its unclaimed balances as of January 31, 2003. Allegedly, a
copy of the Sworn Statement executed by Florentino N. Mendoza, Manager and Head of RCBCs Asset
Management, Disbursement & Sundry Department (AMDSD) was posted within the premises of RCBCErmita.
On December 14, 2006, x x x Republic, through the [Office of the Solicitor General (OSG)], filed with the
RTC the action below for Escheat [(Civil Case No. 06-244)].
On April 30, 2008, [Spouses Bakunawa] settled amicably their dispute with Rosmil and Millan. Instead of
only the amount of P1,019,514.29, *Spouses Bakunawa+ agreed to pay Rosmil and Millan the amount

of P3,000,000.00, *which is+ inclusive *of+ the amount of *+P1,019,514.29. But during negotiations
and evidently prior to said settlement, [Manuel Bakunawa, through Hi-Tri] inquired from RCBC-Ermita
the availability of the P1,019,514.29 under RCBC Managers Check No. ER 034469. *Hi-Tri and Spouses
519

VOL. 672, JUNE 13, 2012


519
Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation
Bakunawa] were however dismayed when they were informed that the amount was already subject of
the escheat proceedings before the RTC.
On April 17, 2008, [Manuel Bakunawa, through Hi-Tri] wrote x x x RCBC, viz.:
We understand that the deposit corresponding to the amount of Php 1,019,514.29 stated in the
Managers Check is currently the subject of escheat proceedings pending before Branch 150 of the
Makati Regional Trial Court.
Please note that it was our impression that the deposit would be taken from [Hi-Tris+ RCBC bank
account once an order to debit is issued upon the payees presentation of the Managers Check. Since
the payee rejected the negotiated Managers Check, presentation of the Managers Check was never
made.
Consequently, the deposit that was supposed to be allocated for the payment of the Managers Check
was supposed to remain part of the Corporation*s+ RCBC bank account, which, thereafter, continued to
be actively maintained and operated. For this reason, We hereby demand your confirmation that the
amount of Php 1,019,514.29 continues to form part of the funds in the Corporations RCBC bank
account, since pay-out of said amount was never ordered. We wish to point out that if there was any
attempt on the part of RCBC to consider the amount indicated in the Managers Check separate from
the Corporations bank account, RCBC would have issued a statement to that effect, and repeatedly
reminded the Corporation that the deposit would be considered dormant absent any fund movement.
Since the Corporation never received any statements of account from RCBC to that effect, and more
importantly, never received any single letter from RCBC noting the absence of fund movement and
advising the Corporation that the deposit would be treated as dormant.
On April 28, 2008, [Manuel Bakunawa] sent another letter to x x x RCBC reiterating their position as
above-quoted.
In a letter dated May 19, 2008, x x x RCBC replied and informed [Hi-Tri and Spouses Bakunawa] that:

The Banks Ermita BC informed Hi-Tri and/or its principals regarding the inclusion of Managers Check
No. ER034469 in
520

520
SUPREME COURT REPORTS ANNOTATED
Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation
the escheat proceedings docketed as Civil Case No. 06-244, as well as the status thereof, between 28
January 2008 and 1 February 2008.
xxx

xxx

xxx

Contrary to what Hi-Tri hopes for, the funds covered by the Managers Check No. ER034469 does not
form part of the Banks own account. By simple operation of law, the funds covered by the managers
check in issue became a deposit/credit susceptible for inclusion in the escheat case initiated by the OSG
and/or Bureau of Treasury.
xxx

xxx

xxx

Granting arguendo that the Bank was duty-bound to make good the check, the Banks obligation to do
so prescribed as early as October 2001.
(Emphases, citations, and annotations were omitted.)
The RTC Ruling

The escheat proceedings before the Makati City RTC continued. On 19 May 2008, the trial court
rendered its assailed Decision declaring the deposits, credits, and unclaimed balances subject of Civil
Case No. 06-244 escheated to the Republic. Among those included in the order of forfeiture was the
amount of P1,019,514.29 held by RCBC as allocated funds intended for the payment of the Managers
Check issued in favor of Rosmil. The trial court ordered the deposit of the escheated balances with the
Treasurer and credited in favor of the Republic. Respondents claim that they were not able to
participate in the trial, as they were not informed of the ongoing escheat proceedings.
Consequently, respondents filed an Omnibus Motion dated 11 June 2008, seeking the partial
reconsideration of the RTC Decision insofar as it escheated the fund allocated for the payment of the
Managers Check. They asked that they be included as party-defendants or, in the alternative, allowed
to intervene in the case and their motion considered as an answer-in-intervention. Respondents argued
that they had

521

VOL. 672, JUNE 13, 2012


521
Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation
meritorious grounds to ask reconsideration of the Decision or, alternatively, to seek intervention in the
case. They alleged that the deposit was subject of an ongoing dispute (Civil Case No. Q-91-10719)
between them and Rosmil since 1991, and that they were interested parties to that case.5
On 3 November 2008, the RTC issued an Order denying the motion of respondents. The trial court
explained that the Republic had proven compliance with the requirements of publication and notice,
which served as notice to all those who may be affected and prejudiced by the Complaint for Escheat.
The RTC also found that the motion failed to point out the findings and conclusions that were not
supported by the law or the evidence presented, as required by Rule 37 of the Rules of Court. Finally, it
ruled that the alternative prayer to intervene was filed out of time.
The CA Ruling

On 26 November 2009, the CA issued its assailed Decision reversing the 19 May 2008 Decision and 3
November 2008 Order of the RTC. According to the appellate court,6 RCBC failed to prove that the latter
had communicated with the purchaser of the Managers Check (Hi-Tri and/or Spouses Bakunawa) or the
designated payee (Rosmil) immediately before the bank filed its Sworn Statement on the dormant
accounts held therein. The CA ruled that the banks failure to notify respondents deprived them of an
opportunity to intervene in the escheat proceedings and to present evidence to substantiate their claim,
in violation of their right to due process. Furthermore, the CA pronounced that the Makati City RTC Clerk
of Court failed to issue individual notices
_______________
5 Omnibus Motion at 3-7 (Republic of the Philippines v. Allied Banking Corporation, Civil Case No. 06244, decided on 19 May 2008), Rollo, pp. 217-221. See also RTC Judgment (Bakunawa v. Milan, Civil Case
No. Q-91-10719, 17 June 2008), Rollo, pp. 287-289.
6 CA Decision at pp. 14-16, supra note Error: Reference source not found, Rollo, pp. 74-76.
522

522

SUPREME COURT REPORTS ANNOTATED


Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation
directed to all persons claiming interest in the unclaimed balances, as well as to require them to appear
after publication and show cause why the unclaimed balances should not be deposited with the
Treasurer of the Philippines. It explained that the jurisdictional requirement of individual notice by
personal service was distinct from the requirement of notice by publication. Consequently, the CA held
that the Decision and Order of the RTC were void for want of jurisdiction.
Issue

After a perusal of the arguments presented by the parties, we cull the main issues as follows:
I. Whether the Decision and Order of the RTC were void for failure to send separate notices to
respondents by personal service
II. Whether petitioner had the obligation to notify respondents immediately before it filed its Sworn
Statement with the Treasurer
III. Whether or not the allocated funds may be escheated in favor of the Republic
Discussion

Petitioner bank assails7 the CA judgments insofar as they ruled that notice by personal service upon
respondents is a jurisdictional requirement in escheat proceedings. Petitioner contends that
respondents were not the owners of the unclaimed balances and were thus not entitled to notice from
the RTC Clerk of Court. It hinges its claim on the theory that the funds represented by the Managers
Check were deemed
_______________
7 Petition for Review on Certiorari of RCBC at 41-49, Rollo, pp. 43-51.
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Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation

transferred to the credit of the payee or holder upon its issuance.


We quote the pertinent provision of Act No. 3936, as amended, on the rule on service of processes, to
wit:
Sec. 3. Whenever the Solicitor General shall be informed of such unclaimed balances, he shall
commence an action or actions in the name of the People of the Republic of the Philippines in the Court
of First Instance of the province or city where the bank, building and loan association or trust
corporation is located, in which shall be joined as parties the bank, building and loan association or trust
corporation and all such creditors or depositors. All or any of such creditors or depositors or banks,
building and loan association or trust corporations may be included in one action. Service of process in
such action or actions shall be made by delivery of a copy of the complaint and summons to the
president, cashier, or managing officer of each defendant bank, building and loan association or trust
corporation and by publication of a copy of such summons in a newspaper of general circulation, either
in English, in Filipino, or in a local dialect, published in the locality where the bank, building and loan
association or trust corporation is situated, if there be any, and in case there is none, in the City of
Manila, at such time as the court may order. Upon the trial, the court must hear all parties who have
appeared therein, and if it be determined that such unclaimed balances in any defendant bank, building
and loan association or trust corporation are unclaimed as hereinbefore stated, then the court shall
render judgment in favor of the Government of the Republic of the Philippines, declaring that said
unclaimed balances have escheated to the Government of the Republic of the Philippines and
commanding said bank, building and loan association or trust corporation to forthwith deposit the same
with the Treasurer of the Philippines to credit of the Government of the Republic of the Philippines to be
used as the National Assembly may direct.
At the time of issuing summons in the action above provided for, the clerk of court shall also issue a
notice signed by him, giving the title and number of said action, and referring to the complaint therein,
and directed to all persons, other than those named as
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SUPREME COURT REPORTS ANNOTATED
Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation
defendants therein, claiming any interest in any unclaimed balance mentioned in said complaint, and
requiring them to appear within sixty days after the publication or first publication, if there are several,
of such summons, and show cause, if they have any, why the unclaimed balances involved in said action
should not be deposited with the Treasurer of the Philippines as in this Act provided and notifying them
that if they do not appear and show cause, the Government of the Republic of the Philippines will apply
to the court for the relief demanded in the complaint. A copy of said notice shall be attached to, and

published with the copy of, said summons required to be published as above, and at the end of the copy
of such notice so published, there shall be a statement of the date of publication, or first publication, if
there are several, of said summons and notice. Any person interested may appear in said action and
become a party thereto. Upon the publication or the completion of the publication, if there are several,
of the summons and notice, and the service of the summons on the defendant banks, building and loan
associations or trust corporations, the court shall have full and complete jurisdiction in the Republic of
the Philippines over the said unclaimed balances and over the persons having or claiming any interest in
the said unclaimed balances, or any of them, and shall have full and complete jurisdiction to hear and
determine the issues herein, and render the appropriate judgment thereon. (Emphasis supplied.)
Hence, insofar as banks are concerned, service of processes is made by delivery of a copy of the
complaint and summons upon the president, cashier, or managing officer of the defendant bank.8 On
the other hand, as to depositors or other claimants of the unclaimed balances, service is made by
publication of a copy of the summons in a newspaper of general circulation in the locality where the
institution is situated.9 A notice about the forthcoming escheat proceedings
_______________
8 Act No. 3936, as amended by P.D. 679, Sec. 3; see also Security Savings Bank v. State of California, 263
U.S. 282 (1923).
9 Id.
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Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation
must also be issued and published, directing and requiring all persons who may claim any interest in the
unclaimed balances to appear before the court and show cause why the dormant accounts should not
be deposited with the Treasurer.
Accordingly, the CA committed reversible error when it ruled that the issuance of individual notices
upon respondents was a jurisdictional requirement, and that failure to effect personal service on them
rendered the Decision and the Order of the RTC void for want of jurisdiction. Escheat proceedings are
actions in rem,10 whereby an action is brought against the thing itself instead of the person.11 Thus, an
action may be instituted and carried to judgment without personal service upon the depositors or other
claimants.12 Jurisdiction is secured by the power of the court over the res.13 Consequently, a judgment
of escheat is conclusive upon persons notified by advertisement, as publication is considered a general
and constructive notice to all persons interested.14

Nevertheless, we find sufficient grounds to affirm the CA on the exclusion of the funds allocated for the
payment of the Managers Check in the escheat proceedings.
Escheat proceedings refer to the judicial process in which the state, by virtue of its sovereignty, steps in
and claims abandoned, left vacant, or unclaimed property, without there being an interested person
having a legal claim thereto.15 In the case of dormant accounts, the state inquires into the
_______________
10 Republic v. Court of First Instance of Manila, Branch XIII, 247-A Phil. 85; 165 SCRA 11 (1988).
11 See Ramos v. Ramos, G.R. No. 144294, 11 March 2003, 399 SCRA 43.
12 See Grey v. De la Cruz, 17 Phil. 49 (1910).
13 Id.
14 Id. (citing Hamilton v. Brown, 161 U.S. 256 (1896).
15 Blacks Law Dictionary 545 (6th ed. 1990); Act No. 3936, as amended by P.D. 679, Secs. 1 and 3. See
generally Republic v. Court of Appeals, 426 Phil. 177; 375 SCRA 484 (2002) and Roth v. Delano, 338 U.S.
226 (1949).
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SUPREME COURT REPORTS ANNOTATED
Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation
status, custody, and ownership of the unclaimed balance to determine whether the inactivity was
brought about by the fact of death or absence of or abandonment by the depositor.16 If after the
proceedings the property remains without a lawful owner interested to claim it, the property shall be
reverted to the state to forestall an open invitation to self-service by the first comers.17 However, if
interested parties have come forward and lain claim to the property, the courts shall determine whether
the credit or deposit should pass to the claimants or be forfeited in favor of the state.18 We emphasize
that escheat is not a proceeding to penalize depositors for failing to deposit to or withdraw from their
accounts. It is a proceeding whereby the state compels the surrender to it of unclaimed deposit balances
when there is substantial ground for a belief that they have been abandoned, forgotten, or without an
owner.19
Act No. 3936, as amended, outlines the proper procedure to be followed by banks and other similar
institutions in filing a sworn statement with the Treasurer concerning dormant accounts:

Sec. 2. Immediately after the taking effect of this Act and within the month of January of every odd
year, all banks, building and loan associations, and trust corporations shall forward to the Treasurer of
the Philippines a statement, under oath, of their respective managing officers, of all credits and deposits
held by them in favor of persons known to be dead, or who have not made further deposits or
withdrawals during the preceding
_______________
16 See Act No. 3936, as amended by P.D. 679, Sec. 1 and Security Savings Bank v. State of California,
supra note 8. See generally Roth v. Delano, supra.
17 Republic v. Court of Appeals, supra note 15, at pp. 183-184; p. 488.
18 See generally Roth v. Delano, supra note 15.
19 See also Anderson National Bank v. Luckett, 321 U.S. 233 (1944), cited in American Express Travel
Related Services Co., Inc. v. Kentucky, 641 F.3d 685 (6th Circ. 2011) (U.S.).
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Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation
ten years or more, arranged in alphabetical order according to the names of creditors and depositors,
and showing:
(a) The names and last known place of residence or post office addresses of the persons in whose
favor such unclaimed balances stand;
(b) The amount and the date of the outstanding unclaimed balance and whether the same is in money
or in security, and if the latter, the nature of the same;
(c) The date when the person in whose favor the unclaimed balance stands died, if known, or the date
when he made his last deposit or withdrawal; and
(d) The interest due on such unclaimed balance, if any, and the amount thereof.
A copy of the above sworn statement shall be posted in a conspicuous place in the premises of the bank,
building and loan association, or trust corporation concerned for at least sixty days from the date of
filing thereof: Provided, That immediately before filing the above sworn statement, the bank, building
and loan association, and trust corporation shall communicate with the person in whose favor the
unclaimed balance stands at his last known place of residence or post office address.

It shall be the duty of the Treasurer of the Philippines to inform the Solicitor General from time to time
the existence of unclaimed balances held by banks, building and loan associations, and trust
corporations. (Emphasis supplied.)
As seen in the afore-quoted provision, the law sets a detailed system for notifying depositors of
unclaimed balances. This notification is meant to inform them that their deposit could be escheated if
left unclaimed. Accordingly, before filing a sworn statement, banks and other similar institutions are
under obligation to communicate with owners of dormant accounts. The purpose of this initial notice is
for a bank to determine whether an inactive account has indeed been unclaimed, abandoned, forgotten,
or left without an owner. If the depositor simply does not wish to touch the funds in the meantime, but
still asserts ownership and dominion over the
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SUPREME COURT REPORTS ANNOTATED
Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation
dormant account, then the bank is no longer obligated to include the account in its sworn statement.20
It is not the intent of the law to force depositors into unnecessary litigation and defense of their rights,
as the state is only interested in escheating balances that have been abandoned and left without an
owner.
In case the bank complies with the provisions of the law and the unclaimed balances are eventually
escheated to the Republic, the bank shall not thereafter be liable to any person for the same and any
action which may be brought by any person against in any bank xxx for unclaimed balances so deposited
xxx shall be defended by the Solicitor General without cost to such bank.21 Otherwise, should it fail to
comply with the legally outlined procedure to the prejudice of the depositor, the bank may not raise the
defense provided under Section 5 of Act No. 3936, as amended.
Petitioner asserts22 that the CA committed a reversible error when it required RCBC to send prior
notices to respondents about the forthcoming escheat proceedings involving the funds allocated for the
payment of the Managers Check. It explains that, pursuant to the law, only those whose favor such
unclaimed balances stand are entitled to receive notices. Petitioner argues that, since the funds
represented by the Managers Check were deemed transferred to the credit of the payee upon issuance
of the check, the proper party entitled to the notices was the payeeRosmiland not respondents.
Petitioner then contends that, in any event, it is not liable for failing to send a separate notice to the
payee, because it did not have the address of Rosmil. Petitioner avers that it was not under any
obligation to record the address of the payee of a Managers Check.
_______________

20 See generally Security Savings Bank v. State of California, supra note 8.


21 Act No. 3936, as amended by P.D. 679 (1975), Sec. 5.
22 Petition for Review on Certiorari of RCBC at pp. 41-49, Rollo, pp. 43-51.
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Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation
In contrast, respondents Hi-Tri and Bakunawa allege23 that they have a legal interest in the fund
allocated for the payment of the Managers Check. They reason that, since the funds were part of the
Compromise Agreement between respondents and Rosmil in a separate civil case, the approval and
eventual execution of the agreement effectively reverted the fund to the credit of respondents.
Respondents further posit that their ownership of the funds was evidenced by their continued custody
of the Managers Check.
An ordinary check refers to a bill of exchange drawn by a depositor (drawer) on a bank (drawee),24
requesting the latter to pay a person named therein (payee) or to the order of the payee or to the
bearer, a named sum of money.25 The issuance of the check does not of itself operate as an assignment
of any part of the funds in the bank to the credit of the drawer.26 Here, the bank becomes liable only
after it accepts or certifies the check.27 After the check is accepted for payment, the bank would then
debit the amount to be paid to the holder of the check from the account of the depositor-drawer.
There are checks of a special type called managers or cashiers checks. These are bills of exchange
drawn by the banks manager or cashier, in the name of the bank, against the bank itself.28 Typically, a
managers or a cashiers check is procured from the bank by allocating a particular amount of funds to
be debited from the depositors account or by directly
_______________
23 Comment of Respondents at 7-8, Rollo, pp. 651-652.
24 Act No. 2031 (1911), otherwise known as the Negotiable Instruments Law, Sec. 185.
25 Moran v. Court of Appeals, G.R. No. 105836, 7 March 1994, 230 SCRA 799.
26 Act No. 2031 (1911), otherwise known as the Negotiable Instruments Law, Sec. 189.
27 Id., at Sec. 127.

28 Bank of the Philippine Islands v. Roxas, G.R. No. 157833, 15 October 2007, 536 SCRA 168;
International Corporate Bank v. Gueco, 404 Phil. 353; 351 SCRA 516 (2001).
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SUPREME COURT REPORTS ANNOTATED
Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation
paying or depositing to the bank the value of the check to be drawn. Since the bank issues the check in
its name, with itself as the drawee, the check is deemed accepted in advance.29 Ordinarily, the check
becomes the primary obligation of the issuing bank and constitutes its written promise to pay upon
demand.30
Nevertheless, the mere issuance of a managers check does not ipso facto work as an automatic transfer
of funds to the account of the payee. In case the procurer of the managers or cashiers check retains
custody of the instrument, does not tender it to the intended payee, or fails to make an effective
delivery, we find the following provision on undelivered instruments under the Negotiable Instruments
Law applicable:31
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
_______________
29 International Corporate Bank v. Gueco, supra.
30 Id.; Republic v. Philippine National Bank, 113 Phil. 828; 1 SCRA 957 (1961). A managers or a cashiers
check may be treated as a promissory note and is the substantial equivalent of a certified check (Id.;
Equitable PCI Bank v. Ong, 533 Phil. 415; 502 SCRA 119 (2006); New Pacific Timber & Supply Co., Inc. v.
Seneris, 189 Phil. 517; 101 SCRA 686 (1980). Certification signifies that the instrument was drawn upon
sufficient funds; that funds have been set apart or assigned for the satisfaction of the check in favor of
the payee; and that the funds shall be so applied when the check is presented for payment (Id.). Here,
the deposit represented by the check is transferred from the credit of the maker to that of the payee or
holder (Id.). Thus, to all intents and purposes, the payee or holder becomes the depositor of the drawee
bank, with rights and duties of one in that situation (Id.).
31 Act No. 2031 (1911). See also Malloy v. Smith, 265 Md. 460, 290 A.2d 486, 57 A.L.R.3d 1076 (Md. Ct.
App. 1972)(U.S.) citing Pikeville Nat. Bank & Trust Co. v. Shirley, 281 Ky. 150, 135 S.W.2d 426 (Ky Ct. App.
1939)(U.S.).

531

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Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation
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 in 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. (Emphasis supplied.)
Petitioner acknowledges that the Managers Check was procured by respondents, and that the amount
to be paid for the check would be sourced from the deposit account of Hi-Tri.32 When Rosmil did not
accept the Managers Check offered by respondents, the latter retained custody of the instrument
instead of cancelling it. As the Managers Check neither went to the hands of Rosmil nor was it further
negotiated to other persons, the instrument remained undelivered. Petitioner does not dispute the fact
that respondents retained custody of the instrument.33
Since there was no delivery, presentment of the check to the bank for payment did not occur. An order
to debit the account of respondents was never made. In fact, petitioner confirms that the Managers
Check was never negotiated or presented for payment to its Ermita Branch, and that the allocated fund
is still held by the bank.34 As a result, the assigned fund is deemed to remain part of the account of HiTri, which procured the Managers Check. The doctrine that the deposit represented by a managers
check automatically
_______________
32 Petition for Review on Certiorari of RCBC at 27-29, Rollo, pp. 29-31.
33 Id., at p. 53, Rollo, p. 55.
34 Letter of RCBC to Hi-Tri at 2, Petition for Review on Certiorari of RCBC, Annex N, Rollo, p. 180.
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SUPREME COURT REPORTS ANNOTATED


Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation
passes to the payee is inapplicable, because the instrumentalthough accepted in advanceremains
undelivered. Hence, respondents should have been informed that the deposit had been left inactive for
more than 10 years, and that it may be subjected to escheat proceedings if left unclaimed.
After a careful review of the RTC records, we find that it is no longer necessary to remand the case for
hearing to determine whether the claim of respondents was valid. There was no contention that they
were the procurers of the Managers Check. It is undisputed that there was no effective delivery of the
check, rendering the instrument incomplete. In addition, we have already settled that respondents
retained ownership of the funds. As it is obvious from their foregoing actions that they have not
abandoned their claim over the fund, we rule that the allocated deposit, subject of the Managers
Check, should be excluded from the escheat proceedings. We reiterate our pronouncement that the
objective of escheat proceedings is state forfeiture of unclaimed balances. We further note that there is
nothing in the records that would show that the OSG appealed the assailed CA judgments. We take this
failure to appeal as an indication of disinterest in pursuing the escheat proceedings in favor of the
Republic.
WHEREFORE the Petition is DENIED. The 26 November 2009 Decision and 27 May 2010 Resolution of the
Court of Appeals in CA-G.R. SP No. 107261 are hereby AFFIRMED.
SO ORDERED.
Carpio (Chairperson), Brion, Perez and Reyes, JJ., concur.
Petition denied, judgment and resolution affirmed.
Notes.Although the law does not categorically state that only the Government, through the Solicitor
General, may attack the title of an alien transferee of land, it is nonetheless correct to hold that only the
Government, through the Solici533

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Rizal Commercial Banking Corporation vs. Hi-Tri Development Corporation
tor General, has the personality to file a case challenging the capacity of a person to acquire or to own
land based on non-citizenship. (Balais-Mabanag vs. The Register of Deeds of Quezon City, 617 SCRA 1
[2010])

Upon issuance of a check, in the absence of evidence to the contrary, it is presumed that the same was
issued for valuable consideration which may consist either in some right, interest, profit or benefit
accruing to the party who makes the contract, or some forbearance, detriment, loss or some
responsibility, to act, or labor, or service given, suffered or undertaken by the other side. (Cayanan vs.
North Star International Travel, Inc., 658 SCRA 644 [2011])
It is highly inconceivable that an experienced businessman would issue various checks in sizeable
amounts to a payee if these are without consideration. (Id.)
o0o
Copyright 2014 Central Book Supply, Inc. All rights reserved. [Rizal Commercial Banking Corporation
vs. Hi-Tri Development Corporation, 672 SCRA 514(2012)]

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