Republic of the Philippines contained in the contract would give the
SUPREME COURT vendor the right to rescind the contract and in
Manila
EN BANC
G.R. No. L-333 April 21, 1950
JOSE G. CUAYCONG, ET AL., plaintiffs-
appellees,
vs.
RAMON S. RIUS, defendant-appellant.
Carlos B. Hilado for appellant.
Carlos M. Sison for appellees.
Delgado, Dizon, Flores and Rodrigo for
intervenors-cross-claimants.
MORAN, C.J.:
This is an action to compel acceptance of
payment of a mortgage debt. The material
facts are as follows:
On February 18, 1937, Ramon S. Rius,
defendant-appellant, sold his hacienda
"Tibidabo" located at the municipality of
Manapla, Occidental Negros, to Jose G.
Cuaycong and Vicente F. Gustilo, plaintiffs and
appellees, for the sum of P350,000, of which
P30,000 was paid upon the execution of the
deed of sale and P70,000 on March 15, 1937,
without interest. The balance in the amount of
P250,000 was to be paid with interest of 7 per
cent per annum as follows:
P50,000 plus interest for one year on
P250,000, a total of P67,000, on February 16,
1938;
P25,000 plus interest for one year on
P200,000, a total of P39,000 on February 18,
1939;
P25,000 plus interest for one year on
P175,000, a total of P37,250 on February 18,
1940;
P10,500 representing interest for one year on
P150,000 on February 18, 1942;
And the balance of P150,000 plus one year
interest, a total of P160,500 on February 18,
1943.
As security for this unpaid balance the
purchasers mortgaged the same property to
the vendor with the stipulation that their
failure to comply with any for the conditions
regarding payment or any other matter
that case all payments already made would be
lost to the vendor by the purchasers without
any right to reimbursement.
Up to December, 1941, the purchasers, or
plaintiffs and appellees herein, have been up-
to-date in their payments of the purchase
price, but on February 18, 1942, they failed to
pay the amount of P10,500 representing
interests, and on February 18, 1943, they
again failed to pay the balance of P160,500.
However, the vendor, or the defendant and
appellant herein, chose not to rescind the
contract, waiving thus his right to appropriate
for himself all the payments already made by
plaintiffs and appellees, his reason being that
it was not fair to take advantage of the
financial difficulties which war might have
brought upon the purchasers.
Upon the other hand, the purchasers, on
January 24, 1944, made an offer to the
vendor to pay in Japanese military notes the
whole balance of the mortgage debt, offer
which was reiterated on February 17, 1944,
with the warning that if after three days the
offer was not accepted, plaintiffs and appellees
would bring action and deposit the amount in
court. The value of Japanese military notes
was then already very low and had the
installments been paid when they were due
the creditor could have invested the money
profitably in buying real property. Thus,
defendant and appellant refused to accept
payment under the circumstances till the war
was over, and on February 22, 1944, an action
was filed to compel him to accept payment
and to issue a deed of cancellation of the
mortgage debt. A manager's check in the
amount of P181,000 issued by the Philippine
Bank of Commerce in favor of the clerk of
court was delivered to the latter.
Defendant filed his answer alleging among
several defenses that the consignation in court
was not made in accordance with law; that
after February 18, 1944, plaintiffs and
appellees made a proposition to defendant and
Page 1 of 20
appellant to the effect that they would sell the
property to Mrs. Caridad Jison subject to the
condition that the balance of the purchase
price still owing defendant and appellant be
paid after termination of the war if defendant
and appellant would agree to receive
immediately payment of the interests; that
this proposition was made on a Saturday and
defendant and appellant promised to give his
answer on the succeeding Monday; that when
on that day defendant and appellant was
decided to accept the proposition, plaintiffs
and appellees told him that Caridad Jison had
withdrawn the o ffer. It turned out, however,
that such withdrawal was not true, for on
February 17, 1944, a promise of sale was
made in favor of Caridad Jison with the
stimulation that P150,000 of the purchase
price would be paid by her after the war.
On March 25, 1944, plaintiffs-appellees filed a
motion for summary judgment supported by
an affidavit showing the deposit of P181,000
in court by means of manager's check.
Defendant-appellant opposed the motion
which remained in court pending for about five
months. On August 16, 1944, plaintiffs-
appellees withdrew their motion for summary
judgment. But on August 28, 1944, Caridad
Jison and her husband filed a motion for leave
to intervene, alleging the promise of sale
made to them, which motion was granted
despite the opposition of both the plaintiffs
and the defendant. And on November 16,
1944, intervenors filed a motion for summary
judgment based on the same grounds on
which plaintiffs' original motion for summary
judgment was based. In said motion, it was
asked that a judgment be rendered ordering
defendant and appellant to accept payment
with the amount deposited in court by
plaintiffs, to release the mortgage in his favor
over the hacienda "Tibidabo" and to pay the
expenses of consignation and costs.
Notwithstanding defendant's opposition, the
motion was granted and judgment was
rendered in accordance with the prayer
contained in that motion. Hence, this appeal.
It is not necessary, in our opinion, to examine
all the questions raised by appellant in his
brief, in view of our conclusion on the question
of the validity of the conclusion on the
question of the validity of the consignation
made in court.
Under article 1127 of the Civil Code,
"Consignation should not be efficacious unless
made strictly in accordance with the provision
governing payment". And article 1170
provides that, "payment of debts of money
shall be made in the specie stipulated and,
should it not be possible to deliver such
specie, in silver or gold coin which is legal
tender in the Philippine." Under this provision,
a consignation by check is not binding upon
the creditor (Belisario vs. Natividad, 60 Phil.,
156), unless accepted by him (Gutierrez vs.
Carpio, 53 Phil., 334,336), and in the instant
case, there has been no such acceptance. In
some case it was held by this Court that where
a person entitled to make a repurchase of
some property, deposits with the court, by
way of consignation, a check for the
repurchase price, the vendee is not under a
duty to accept the check and may refuse the
consignation which cannot produce the effect
of payment. (Villanueva vs. Santos, Off. Gaz.,
March 8, 1941, p. 681)
True that the consignation in the instant case
was made by means of a manager's check.
But a manager' check is, like an ordinary
check, not legal-tender in the Philippines.
Even treasury certificates are not legal-tender
except for the payment of taxes and public
debts, under section 1626 of Act No. 2711 as
amended by Act No. 3058. In the United
States, "the general rule is that an offer of a
bank check for the amount due is not a good
tender and this is true even though the check
is certified" (62 C. J., p. 668), except "where
no objection is made on this ground" (62 C. J.,
p. 668). Again it is said that "on the same
principle a check is not good legal-tender as
against an objection duly made, whether the
check is certified or not ..." (40 Am. Jur., p.
764.)
Page 2 of 20
And furthermore, according to the second
paragraph of article 1170 of the Civil Code,
"the delivery of promissory notes payable to
order, or bills of exchange or other commercial
papers, shall produce the effects of
payment only when collected, or when by the
fault of the creditor they have lost their
value." (Emphasis ours.) "Commercial papers"
include not only ordinary checks but also
manager's checks. And here there is no proof
that the manager's check deposited in court
has ever been collected or has lost its value by
the fault of the creditor.
It is here maintained that since it was the duty
of the clerk of court to deposit the manager's
check with the National Treasurer (sec. 130,
Rev. Adm. Code), it is presumed that he
complied with such duty (Rule 123, sec. 69,
Rules of Court), and since it is the duty of a
holder of a check to present it for payment
within a reasonable time after its issue (Sec.
186, Negotiable Instruments Law) it is also
presumed that the National Treasurer has
presented the manager's check for collector
and has collected it. This argument is
defective in that a presumption cannot be
made to rest upon another presumption, but
on facts proven in the case.
"Presumption are not admissible, except when
the fact from which they are to be deduced is
fully proven." (Art. 1249, Civil Code.)
"The decision are generally agreed that a
presumption must rest upon facts proved by
direct evidence and can not be based upon, or
inferred from, another presumption." (20 Am.
Jur., p. 166)
"There seems to be no sufficient reason for
questioning the rule that a presumption
cannot be based upon a presumption,
provided the term `presumption' is used in
the sense of a deduction which the law directs
to be made from particular facts." (20 Am.
Jur., p. 169.)
"A presumption of fact must not be drawn
from premises which are uncertain, but must
be founded on facts established by direct
evidence. Presumptions may not be founded
on presumptions."(31 Corpus Juris Secundum,
p. 727.)
To the same effect is Rule 704 of the Model
Code of Evidence, drafted by the American
Law Institute.
Upon the other hand, since the deposit of the
manager's checks is invalid because of the
objection made thereto, and in truth, under
the law, collection of the check deposited is
the only fact constituting valid payment, such
fact must be made to appear on the face of
the record and not merely presumed.
There being no valid consignation in the
instant case, the previous tenders of payment
made by plaintiffs do not exempt them from
paying their obligation.
For all the foregoing, the judgment appealed
from is reversed and plaintiffs-appellees are
given thirty (30) days, from the date
judgement is entered in this Court, within
which to pay to defendant-appellant the sum
of P181,000 plus interest at the rate of 7 per
cent per annum from February 18, 1945, and
defendant-appellant is given fifteen (15) days,
from date of payment, within which to execute
a deed of cancellation of the mortgage debt.
Plaintiff's failure to make payment within the
period above given, will give defendant right
to rescind their contract of sale, and in that
case the payments already made by them will
be lost to vendor without any right to
reimbursement. Plaintiffs will pay the costs of
both instances.
Page 3 of 20
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 176697 September 10,
2014
CESAR V. AREZA and LOLITA B.
AREZA, Petitioners,
vs.
EXPRESS SAVINGS BANK, INC. and
MICHAEL POTENCIANO, Respondnets.
DECISION
PEREZ, J.:
Before this Court is a Petition for Review on
Certiorari under Ruic 45 of the Rules of Court,
which seeks to reverse the Decision1 and
Resolution2 dated 29 June 2006 and 12
February 2007 of the Court of Appeals in
CAG.R. CV No. 83192. The Court of Appeals
affirmed with modification the 22 April 2004
Resolution3 of the Regional Trial Court (RTC)
of Calamba, Laguna, Branch 92, in Civil Case
No. B-5886.
The factual antecedents follow.
Petitioners Cesar V. Areza and LolitaB. Areza
maintained two bank deposits with respondent
Express Savings Banks Bian branch: 1)
Savings Account No. 004-01-000185-5 and 2)
Special Savings Account No. 004-02-000092-
3.
They were engaged in the business of "buy
and sell" of brand new and second-hand motor
vehicles. On 2 May 2000, they received an
order from a certain Gerry Mambuay
(Mambuay) for the purchase of a second-hand
Mitsubishi Pajero and a brand-new Honda
CRV.
The buyer, Mambuay, paid petitioners with
nine (9) Philippine Veterans Affairs Office
(PVAO) checks payable to different payees and
drawn against the Philippine Veterans Bank
(drawee), each valued at Two Hundred
Thousand Pesos (200,000.00) for a total of
One Million Eight Hundred Thousand Pesos
(1,800,000.00).
About this occasion, petitioners claimed that
Michael Potenciano (Potenciano), the branch
manager of respondent Express Savings Bank
(the Bank) was present during the transaction
and immediately offered the services of the
Bank for the processing and eventual crediting
of the said checks to petitioners account.4 On
the other hand,Potenciano countered that he
was prevailed upon to accept the checks by
way of accommodation of petitioners who
were valued clients of the Bank.5
On 3 May 2000, petitioners deposited the said
checks in their savings account with the Bank.
The Bank, inturn, deposited the checks with its
depositary bank, Equitable-PCI Bank, in
Bian,Laguna. Equitable-PCI Bank presented
the checks to the drawee, the Philippine
Veterans Bank, which honored the checks.
On 6 May 2000, Potenciano
informedpetitioners that the checks they
deposited with the Bank werehonored. He
allegedly warned petitioners that the clearing
of the checks pertained only to the availability
of funds and did not mean that the checks
were not infirmed.6 Thus, the entire amount of
1,800,000.00 was credited to petitioners
savings account. Based on this information,
petitioners released the two cars to the buyer.
Sometime in July 2000, the subjectchecks
were returned by PVAO to the drawee on the
ground that the amount on the face of the
checks was altered from the original amount
of 4,000.00 to 200,000.00. The drawee
returned the checks to Equitable-PCI Bank by
way of Special Clearing Receipts. In August
2000, the Bank was informed by Equitable-PCI
Bank that the drawee dishonored the checks
onthe ground of material alterations.
Equitable-PCI Bank initially filed a protest with
the Philippine Clearing House. In February
2001, the latter ruled in favor of the drawee
Philippine Veterans Bank. Equitable-PCI Bank,
in turn, debited the deposit account of the
Bank in the amount of 1,800,000.00.
The Bank insisted that they informed
petitioners of said development in August
2000 by furnishing them copies of the
documents given by its depositary bank.7 On
the other hand, petitioners maintained that
Page 4 of 20
the Bank never informed them of these
developments.
On 9 March 2001, petitioners issued a check in
the amount of 500,000.00. Said check was
dishonored by the Bank for the reason
"Deposit Under Hold." According topetitioners,
the Bank unilaterally and unlawfully put their
account with the Bank on hold. On 22 March
2001, petitioners counsel sent a demand
letter asking the Bank to honor their check.
The Bank refused to heed their request and
instead, closed the Special Savings Account of
the petitioners with a balance of
1,179,659.69 and transferred said amount to
their savings account. The Bank then withdrew
the amount of 1,800,000.00representing the
returned checks from petitioners savings
account.
Acting on the alleged arbitrary and groundless
dishonoring of their checks and the unlawful
and unilateral withdrawal from their savings
account, petitioners filed a Complaint for Sum
of Money with Damages against the Bank and
Potenciano with the RTC of Calamba.
On 15 January 2004, the RTC, through Judge
Antonio S. Pozas, ruled in favor of petitioners.
The dispositive portion of the Decision reads:
WHEREFORE, the foregoing considered, the
Court orders that judgment be rendered in
favor of plaintiffs and against the defendants
jointly and severally to pay plaintiffs as
follows, to wit:
1. 1,800,000.00 representing the
amount unlawfully withdrawn by the
defendants from the account of
plaintiffs;
2. 500,000.00 as moral damages; and
3. 300,000.00 as attorneys fees.8
The trial court reduced the issue to whether or
not the rights of petitioners were violated by
respondents when the deposits of the former
were debited by respondents without any
court order and without their knowledge and
consent. According to the trial court, it is the
depositary bank which should safeguard the
right ofthe depositors over their money.
Invoking Article 1977 of the Civil Code, the
trial court stated that the depositary cannot
make use of the thing deposited without the
express permission of the depositor. The trial
court also held that respondents should have
observed the 24-hour clearing house rule that
checks should be returned within 24-hours
after discovery of the forgery but in no event
beyond the period fixed by law for filing a
legal action. In this case, petitioners deposited
the checks in May 2000, and respondents
notified them of the problems on the check
three months later or in August 2000. In sum,
the trial court characterized said acts of
respondents as attended with bad faith when
they debited the amount of 1,800,000.00
from the account of petitioners.
Respondents filed a motion for reconsideration
while petitioners filed a motion for execution
from the Decision of the RTC on the ground
that respondents motion for reconsideration
did not conform with Section 5, Rule 16 of the
Rules of Court; hence, it was a mere scrap of
paper that did not toll the running of the
period to appeal.
On 22 April 2004, the RTC, through Pairing
Judge Romeo C. De Leon granted the motion
for reconsideration, set aside the Pozas
Decision, and dismissed the complaint. The
trial court awarded respondents their
counterclaim of moral and exemplary damages
of 100,000.00 each. The trial court first
applied the principle of liberality when it
disregarded the alleged absence of a notice of
hearing in respondents motion for
reconsideration. On the merits, the trial court
considered the relationship of the Bank and
petitioners with respect to their savings
account deposits as a contract of loan with the
bank as the debtor and petitioners as
creditors. As such, Article 1977 of the Civil
Code prohibiting the depository from making
use of the thing deposited without the express
permission of the depositor is not applicable.
Instead, the trial court applied Article 1980
which provides that fixed, savings and current
deposits ofmoney in banks and similar
institutions shall be governed by the
Page 5 of 20
provisions governing simple loan. The trial
court then opined thatthe Bank had all the
right to set-off against petitioners savings
deposits the value of their nine checks that
were returned.
On appeal, the Court of Appeals affirmed the
ruling of the trial court but deleted the award
of damages. The appellate court made the
following ratiocination:
Any argument as to the notice of hearing has
been resolved when the pairing judge issued
the order on February 24, 2004 setting the
hearing on March 26, 2004. A perusal of the
notice of hearing shows that request was
addressed to the Clerk of Court and plaintiffs
counsel for hearing to be set on March 26,
2004.
The core issues in this case revolve on
whether the appellee bank had the right to
debit the amount of 1,800,000.00 from the
appellants accounts and whether the banks
act of debiting was done "without the
plaintiffs knowledge."
We find that the elements of legal
compensation are all present in the case at
bar. Hence, applying the case of the Bank of
the Philippine Islands v. Court of Appeals, the
obligors bound principally are at the same
time creditors of each other. Appellee bank
stands as a debtor of appellant, a depositor.
At the same time, said bank is the creditor of
the appellant with respect to the dishonored
treasury warrant checks which amount were
already credited to the account of appellants.
When the appellants had withdrawn the
amount of the checks they deposited and later
on said checks were returned, they became
indebted to the appellee bank for the
corresponding amount.
It should be noted that [G]erry Mambuay was
the appellants walkin buyer. As sellers,
appellants oughtto have exercised due
diligence in assessing his credit or personal
background. The 24-hour clearing house rule
is not the one that governs in this case since
the nine checks were discovered by the
drawee bank to contain material alterations.
Appellants merely allege that they were not
informed of any development on the checks
returned. However, this Court believes that
the bank and appellants had opportunities to
communicate about the checks considering
that several transactions occurred from the
time of alleged return of the checks to the
date of the debit.
However, this Court agrees withappellants
that they should not pay moral and exemplary
damages to each of the appellees for lack of
basis. The appellants were not shown to have
acted in bad faith.9
Petitioners filed the present petition for review
on certiorariraising both procedural and
substantive issues, to wit:
1. Whether or not the Honorable Court
of Appeals committed a reversible error
of law and grave abuse of discretion in
upholding the legality and/or propriety
of the Motion for Reconsideration filed
in violation of Section 5, Rule 15 ofthe
Rules on Civil Procedure;
2. Whether or not the Honorable Court
of Appeals committed a grave abuse of
discretion in declaring that the private
respondents "had the right to debit the
amount of 1,800,000.00 from the
appellants accounts" and the banks act
of debiting was done with the plaintiffs
knowledge.10
Before proceeding to the substantive issue, we
first resolve the procedural issue raised by
petitioners.
Sections 5, Rule 15 of the Rules of Court
states:
Section 5. Notice of hearing. The notice of
hearing shall be addressed to all parties
concerned, and shall specify the time and date
of the hearing which must not be later than
ten (10) days after the filing of the motion.
Petitioners claim that the notice of hearing
was addressed to the Clerk of Court and not to
the adverse party as the rules require.
Petitioners add that the hearing on the motion
for reconsideration was scheduled beyond 10
days from the date of filing.
Page 6 of 20
As held in Maturan v. Araula,11 the rule
requiring that the notice be addressed to the
adverse party has beensubstantially complied
with when a copy of the motion for
reconsideration was furnished to the counsel
of the adverse party, coupled with the fact
that the trial court acted on said notice of
hearing and, as prayed for, issued an
order12 setting the hearing of the motion on 26
March 2004.
We would reiterate later that there is
substantial compliance with the foregoing Rule
if a copy of the said motion for reconsideration
was furnished to the counsel of the adverse
party.13
Now to the substantive issues to which
procedural imperfection must, in this case,
give way.
The central issue is whether the Bank had the
right to debit 1,800,000.00 from petitioners
accounts.
On 6 May 2000, the Bank informed petitioners
that the subject checks had been honored.
Thus, the amountof 1,800,000.00 was
accordingly credited to petitioners accounts,
prompting them to release the purchased cars
to the buyer.
Unknown to petitioners, the Bank deposited
the checks in its depositary bank, Equitable-
PCI Bank. Three months had passed when the
Bank was informed by its depositary bank that
the drawee had dishonored the checks on the
ground of material alterations.
The return of the checks created a chain of
debiting of accounts, the last loss eventually
falling upon the savings account of petitioners
with respondent bank. The trial court inits
reconsidered decision and the appellate court
were one in declaring that petitioners should
bear the loss.
We reverse.
The fact that material alteration caused the
eventual dishonor of the checks issued by
PVAO is undisputed. In this case, before the
alteration was discovered, the checks were
already cleared by the drawee bank, the
Philippine Veterans Bank. Three months had
lapsed before the drawee dishonored the
checks and returned them to Equitable-PCI
Bank, the respondents depositary bank. And
itwas not until 10 months later when
petitioners accounts were debited. A question
thus arises: What are the liabilities of the
drawee, the intermediary banks, and the
petitioners for the altered checks?
LIABILITY OF THE DRAWEE
Section 63 of Act No. 2031 orthe Negotiable
Instruments Law provides that the acceptor,
by accepting the instrument, engages that he
will pay it according to the tenor of his
acceptance. The acceptor is a drawee who
accepts the bill. In Philippine National Bank v.
Court of Appeals,14 the payment of the amount
of a check implies not only acceptance but
also compliance with the drawees obligation.
In case the negotiable instrument isaltered
before acceptance, is the drawee liable for the
original or the altered tenor of acceptance?
There are two divergent intepretations
proffered by legal analysts.15 The first view is
supported by the leading case of National City
Bank ofChicago v. Bank of the Republic.16 In
said case, a certain Andrew Manning stole a
draft and substituted his name for that of the
original payee. He offered it as payment to a
jeweler in exchange for certain jewelry. The
jeweler deposited the draft to the defendant
bank which collectedthe equivalent amount
from the drawee. Upon learning of the
alteration, the drawee sought to recover from
the defendant bank the amount of the draft,
as money paid by mistake. The court denied
recovery on the ground that the drawee by
accepting admitted the existence of the payee
and his capacity to endorse.17 Still, in Wells
Fargo Bank & Union Trust Co. v. Bank of
Italy,18 the court echoed the courts
interpretation in National City Bank of
Chicago, in this wise:
We think the construction placed upon the
section by the Illinois court is correct and that
it was not the legislative intent that the
obligation of the acceptor should be limited to
the tenorof the instrument as drawn by the
Page 7 of 20
maker, as was the rule at common law,but
that it should be enforceable in favor of a
holder in due course against the acceptor
according to its tenor at the time of its
acceptance or certification.
The foregoing opinion and the Illinois decision
which it follows give effect to the literal words
of the Negotiable Instruments Law. As stated
in the Illinois case: "The court must take the
act as it is written and should give to the
words their natural and common meaning . . .
ifthe language of the act conflicts with statutes
or decisions in force before its enactment the
courts should not give the act a strained
construction in order to make it harmonize
with earlier statutes or decisions." The
wording of the act suggests that a change in
the common law was intended. A careful
reading thereof, independent of any common-
law influence, requires that the words
"according to the tenor of his acceptance" be
construed as referring to the instrument as it
was at the time it came into the hands of the
acceptor for acceptance, for he accepts no
other instrument than the one presented to
him the altered form and it alone he
engages to pay. This conclusion is in harmony
with the law of England and the continental
countries. It makes for the usefulness and
currency of negotiable paper without seriously
endangering accepted banking practices, for
banking institutions can readily protect
themselves against liability on altered
instruments either by qualifying their
acceptance or certification or by relying on
forgery insurance and specialpaper which will
make alterations obvious. All of the arguments
advanced against the conclusion herein
announced seem highly technical in the face of
the practical facts that the drawee bank has
authenticated an instrument in a certain form,
and that commercial policy favors the
protection of anyone who, in due course,
changes his position on the faith of that
authentication.19
The second view is that the acceptor/drawee
despite the tenor of his acceptance is liable
only to the extent of the bill prior to
alteration.20 This view appears to be in
consonance with Section 124 of the Negotiable
Instruments Law which statesthat a material
alteration avoids an instrument except as
against an assenting party and subsequent
indorsers, but a holder in due course may
enforce payment according to its original
tenor. Thus, when the drawee bank pays a
materially altered check, it violates the terms
of the check, as well as its duty tocharge its
clients account only for bona fide
disbursements he had made. If the drawee did
not pay according to the original tenor of the
instrument, as directed by the drawer, then it
has no right to claim reimbursement from the
drawer, much less, the right to deduct the
erroneous payment it made from the drawers
account which it was expected to treat with
utmost fidelity.21 The drawee, however, still
has recourse to recover its loss. It may pass
the liability back to the collecting bank which
is what the drawee bank exactly did in this
case. It debited the account of Equitable-PCI
Bank for the altered amount of the checks.
LIABILITY OF DEPOSITARY BANK AND
COLLECTING BANK
A depositary bank is the first bank to take an
item even though it is also the payor bank,
unless the item is presented for immediate
payment over the counter.22 It is also the
bank to which a check is transferred for
deposit in an account at such bank, evenif the
check is physically received and indorsed first
by another bank.23 A collecting bank is defined
as any bank handling an item for collection
except the bank on which the check is
drawn.24
When petitioners deposited the check with the
Bank, they were designating the latter as the
collecting bank. This is in consonance with the
rule that a negotiable instrument, such as a
check, whether a manager's check or ordinary
check, is not legal tender. As such, after
receiving the deposit, under its own rules, the
Bank shall credit the amount in petitioners
account or infuse value thereon only after the
Page 8 of 20
drawee bank shall have paid the amount of
the check or the check has been cleared for
deposit.25
The Bank and Equitable-PCI Bank are both
depositary and collecting banks.
A depositary/collecting bank where a check is
deposited, and which endorses the check upon
presentment with the drawee bank, is an
endorser. Under Section 66 of the Negotiable
Instruments Law, an endorser warrants "that
the instrument is genuine and in all respects
what it purports to be; that he has good title
to it; that all prior parties had capacity to
contract; and that the instrument is at the
time of his endorsement valid and subsisting."
It has been repeatedly held that in check
transactions, the depositary/collecting bank or
last endorser generally suffers the loss
because it has the duty to ascertain the
genuineness of all prior endorsements
considering that the act of presenting the
check for payment to the drawee is an
assertion that the party making the
presentment has done its duty to ascertain the
genuineness of the endorsements.26 If any of
the warranties made by the
depositary/collecting bank turns out to be
false, then the drawee bank may recover from
it up to the amount of the check.27
The law imposes a duty of diligence on the
collecting bank to scrutinize checks deposited
with it for the purpose of determining their
genuineness and regularity. The collecting
bank being primarily engaged in banking holds
itself out to the public as the expert and the
law holds it to a high standard of conduct.28
As collecting banks, the Bank and Equitable-
PCI Bank are both liable for the amount of the
materially altered checks. Since Equitable-PCI
Bank is not a party to this case and the Bank
allowed its account with EquitablePCI Bank to
be debited, it has the option toseek recourse
against the latter in another forum.
24-HOUR CLEARING RULE
Petitioners faulted the drawee bank for not
following the 24-hour clearing period because
it was only in August 2000 that the drawee
bank notified Equitable-PCI that there were
material alterations in the checks.
We do not subscribe to the position taken by
petitioners that the drawee bank was at fault
because it did not follow the 24-hour clearing
period which provides that when a drawee
bank fails to return a forged or altered check
to the collecting bank within the 24-hour
clearing period, the collecting bank is absolved
from liability.
Section 21 of the Philippine Clearing House
Rules and Regulations provides: Sec. 21.
Special Return Items Beyond The
Reglementary Clearing Period.- Items which
have been the subject of material alteration or
items bearing forged endorsement when such
endorsement is necessary for negotiation shall
be returned by direct presentation or demand
to the Presenting Bank and not through the
regular clearing house facilities within the
period prescribed by law for the filing of a
legal action by the returning bank/branch,
institution or entity sending the same.
Antonio Viray, in his book Handbook on Bank
Deposits, elucidated:
It is clear that the so-called "24-hour" rule has
been modified. In the case of Hongkong &
Shanghai vs. Peoples Bank reiterated in
Metropolitan Bank and Trust Co. vs. FNCB, the
Supreme Court strictly enforced the 24-hour
rule under which the drawee bank forever
loses the right to claim against
presenting/collecting bank if the check is not
returned at the next clearing day orwithin 24
hours. Apparently, the commercial banks felt
strict enforcement of the 24-hour rule is too
harsh and therefore made representations and
obtained modification of the rule, which
modification is now incorporated in the Manual
of Regulations. Since the same commercial
banks controlled the Philippine Clearing House
Corporation, incorporating the amended rule
in the PCHC Rules naturally followed.
As the rule now stands, the 24-hour rule is
still in force, that is, any check which should
be refused by the drawee bank in accordance
with long standing and accepted banking
Page 9 of 20
practices shall be returned through the
PCHC/local clearing office, as the case may be,
not later than the next regular clearing (24-
hour). The modification, however, is that
items which have been the subject of material
alteration or bearing forged endorsement may
be returned even beyond 24 hours so long
that the same is returned within the
prescriptive period fixed by law. The
consensus among lawyers is that the
prescriptiveperiod is ten (10)years because a
check or the endorsement thereon is a written
contract. Moreover, the item need not be
returned through the clearing house but by
direct presentation to the presenting bank.29
In short, the 24-hour clearing ruledoes not
apply to altered checks.
LIABILITY OF PETITIONERS
The 2008 case of Far East Bank & Trust
Company v. Gold Palace Jewellery Co.30 is in
point. A foreigner purchased several pieces of
jewelry from Gold Palace Jewellery using a
United Overseas Bank (Malaysia) issued draft
addressed to the Land Bank of the Philippines
(LBP). Gold Palace Jewellery deposited the
draft in the companys account with Far East
Bank. Far East Bank presented the draft for
clearing to LBP. The latter cleared the same
and Gold Palace Jewellerys account was
credited with the amount stated in the draft.
Consequently, Gold Palace Jewellery released
the pieces of jewelries to the foreigner. Three
weeks later, LBP informed Far East Bank that
the amount in the foreign draft had been
materially altered from 300,000.00 to
380,000.00. LBP returnedthe check to Far
East Bank. Far East Bank refunded LBP the
380,000.00 paid by LBP. Far East Bank
initially debited 168,053.36 from Gold Palace
Jewellerys account and demanded the
payment of the difference between the
amount in the altered draft and the amount
debited from Gold Palace Jewellery.
However, for the reasons already discussed
above, our pronouncement in the Far East
Bank and Trust Companycase that "the
drawee is liable on its payment of the check
according to the tenor of the check at the time
of payment, which was the raised amount"31 is
inapplicable to the factual milieu obtaining
herein.
We only adopt said decision in so far as it
adjudged liability on the part of the collecting
bank, thus:
Thus, considering that, in this case, Gold
Palace is protected by Section 62 of the NIL,
its collecting agent, Far East, should not have
debited the money paid by the drawee bank
from respondent company's account. When
Gold Palace deposited the check with Far East,
the latter, under the terms of the deposit and
the provisions of the NIL, became an agent of
the former for the collection of the amount in
the draft. The subsequent payment by the
drawee bank and the collection of the amount
by the collecting bank closed the transaction
insofar as the drawee and the holder of the
check or his agent are concerned, converted
the check into a mere voucher, and, as
already discussed, foreclosed the recovery by
the drawee of the amount paid. This closure of
the transaction is a matter of course;
otherwise, uncertainty in commercial
transactions, delay and annoyance will arise if
a bank at some future time will call on the
payee for the return of the money paid to him
on the check.
As the transaction in this case had been closed
and the principalagent relationship between
the payee and the collecting bank had already
ceased, the latter in returning the amount to
the drawee bank was already acting on its
own and should now be responsible for its own
actions. x x x Likewise, Far East cannot invoke
the warranty of the payee/depositor who
indorsed the instrument for collection to shift
the burden it brought upon itself. This is
precisely because the said indorsement is only
for purposes of collection which, under Section
36 of the NIL, is a restrictive indorsement. It
did not in any way transfer the title of the
instrument to the collecting bank. Far East did
not own the draft, it merely presented it for
payment. Considering that the warranties of a
Page 10 of 20
general indorser as provided in Section 66 of
the NIL are based upon a transfer of title and
are available only to holders in due course,
these warranties did not attach to the
indorsement for deposit and collection made
by Gold Palace to Far East. Without any legal
right to do so, the collecting bank, therefore,
could not debit respondent's account for the
amount it refunded to the drawee bank.
The foregoing considered, we affirm the ruling
of the appellate court to the extent that Far
East could not debit the account of Gold
Palace, and for doing so, it must return what it
had erroneously taken.32
Applying the foregoing ratiocination, the Bank
cannot debit the savings account of
petitioners. A depositary/collecting bank may
resist or defend against a claim for breach of
warranty if the drawer, the payee, or either
the drawee bank or depositary bank was
negligent and such negligence substantially
contributed tothe loss from alteration. In the
instant case, no negligence can be attributed
to petitioners. We lend credence to their claim
that at the time of the sales transaction, the
Banks branch manager was present and even
offered the Banks services for the processing
and eventual crediting of the checks. True to
the branch managers words, the checks were
cleared three days later when deposited by
petitioners and the entire amount ofthe checks
was credited to their savings account.
ON LEGAL COMPENSATION
Petitioners insist that the Bank cannotbe
considered a creditor of the petitioners
because it should have made a claim of the
amount of 1,800,000.00 from Equitable-PCI
Bank, its own depositary bank and the
collecting bank in this case and not from
them.
The Bank cannot set-off the amount it paid to
Equitable-PCI Bank with petitioners savings
account. Under Art. 1278 of the New Civil
Code, compensation shall take place when two
persons, in their own right, are creditors and
debtors of each other. And the requisites for
legal compensation are:
Art. 1279. In order that compensation may be
proper, it is necessary:
(1) That each one of the obligors be
bound principally, and that he be at the
same time a principal creditor of the
other;
(2) That both debts consist in a sum of
money, or if the things due are
consumable, they be of the same kind,
and also of the same quality if the latter
has been stated;
(3) That the two debts be due;
(4) That they be liquidated and
demandable;
(5) That over neither of them there be
any retention or controversy,
commenced by third persons and
communicated in due time to the
debtor.
It is well-settled that the relationship of the
depositors and the Bank or similar institution
is that of creditor-debtor. Article 1980 of the
New Civil Code provides that fixed, savings
and current deposits of money in banks and
similar institutions shall be governed by the
provisions concerning simple loans. The bank
is the debtorand the depositor is the creditor.
The depositor lends the bank money and the
bank agrees to pay the depositor on demand.
The savings deposit agreement between the
bank and the depositor is the contract that
determines the rights and obligations of the
parties.33
But as previously discussed, petitioners are
not liable for the deposit of the altered checks.
The Bank, asthe depositary and collecting
bank ultimately bears the loss. Thus, there
being no indebtedness to the Bank on the part
of petitioners, legal compensation cannot take
place. DAMAGES
The Bank incurred a delay in informing
petitioners of the checks dishonor. The Bank
was informed of the dishonor by Equitable-PCI
Bank as early as August 2000 but it was only
on 7 March 2001 when the Bank informed
petitioners that it will debit from their account
the altered amount. This delay is tantamount
Page 11 of 20
to negligence on the part of the collecting respondents, as well as its failure toobserve
bank which would entitle petitioners to an the 24-hour clearing rule.
award for damages under Article 1170 of the WHEREFORE, the petition is GRANTED. The
New Civil Code which reads: Decision and Resolution dated 29 June 2006
Art. 1170. Those who in the performance of and 12 February 2007 respectively of the
their obligations are guilty of fraud, Court of Appeals in CA-G.R. CV No. 83192 are
negligence, or delay, and those who in any REVERSED and SET ASIDE. The 15 January
manner contravene the tenor thereof, are 2004 Decision of the Regional Trial Court of
liable for damages. Calamba City, Branch 92 in Civil Case No. B-
The damages in the form of actual or 5886 rendered by Judge Antonio S. Pozas is
compensatory damages represent the amount REINSTATEDonly insofar as it ordered
debited by the Bank from petitioners account. respondents to jointly and severally pay
We delete the award of moral damages. petitioners 1,800,000.00 representing the
Contrary to the lower courts finding, there amount withdrawn from the latters account.
was no showing that the Bank acted The award of moral damages and attorneys
fraudulently or in bad faith. It may have been fees are DELETED.
remiss in its duty to diligently protect the SO ORDERED.
account of its depositors but its honest but
mistaken belief that petitioners account
should be debited is not tantamount to bad
faith. We also delete the award of attorneys
fees for it is not a sound public policy to place
a premium on the right to litigate. No
damages can becharged to those who exercise
such precious right in good faith, even if done
erroneously.34
To recap, the drawee bank, Philippine
Veterans Bank in this case, is only liable to the
extent of the check prior to
alteration.1wphi1 Since Philippine Veterans
Bank paid the altered amount of the check, it
may pass the liability back as it did, to
Equitable-PCI Bank,the collecting bank. The
collecting banks, Equitable-PCI Bank and the
Bank, are ultimately liable for the amount of
the materially altered check. It cannot further
pass the liability back to the petitioners absent
any showing in the negligence on the part of
the petitioners which substantially contributed
to the loss from alteration.
Based on the foregoing, we affirm the
Pozasdecision only insofar as it ordered
respondents to jointly and severally pay
petitioners 1,800,000.00, representing the
amount withdrawn from the latters account.
We do not conform with said ruling regarding
the finding of bad faith on the part of

Page 12 of 20
 Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 170325 September 26,
2008
PHILIPPINE NATIONAL BANK, Petitioner,
vs.
ERLANDO T. RODRIGUEZ and NORMA
RODRIGUEZ, Respondents.
DECISION
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 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 P2,345,804.00.
These were payable to forty seven (47)
individual payees who were all members of
PEMSLA.4
Petitioner PNB eventually found out about
these fraudulent acts. To put a stop to this
scheme, PNB closed the current 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,
Page 13 of 20
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.
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.
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;
Page 14 of 20
 (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.
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
plaintiffs-appellees and PEMSLAs business
arrangement that 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 insufficiency 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;
Page 15 of 20
 2. Moral damages in the amount
of P200,000;
3. Attorneys fees in the amount
of P100,000; and
4. Costs of suit.
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.
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:
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
Page 16 of 20
 (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 (Underscoring 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 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 well-known 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.
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
Page 17 of 20
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
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 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 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 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
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intended recipients of the checks proceeds.
The bank failed to satisfy 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.
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 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.alf-ITC
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
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
Page 19 of 20
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 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.

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