NEGOTIABLE INSTRUMENTS

FIRST DIVISION

G.R. No. 172652 November 26, 2014

METROPOLITAN BANK AND TRUST COMPANY, Petitioner,

vs.
WILFRED N. CHIOK, Respondent.

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G.R. No. 175302

BANK OF THE PHILIPPINE ISLANDS, Petitioner,

vs.
WILFRED N. CHIOK, Respondent.

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G.R. No. 175394

GLOBAL BUSINESS BANK, INC., Petitioner,

vs.
WILFRED N. CHIOK, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

The three consolidated petitions herein all assail the Decision 1 of the Court of Appeals in CA-G.R. CV No. 77508 dated May 5, 2006,
and the Resolution2 in the same case dated November 6, 2006.

Respondent Wilfred N. Chiok (Chiok) had been engaged in dollar trading for several years. He usually buys dollars from Gonzalo B.
Nuguid (Nuguid) at the exchange rate prevailing on the date of the sale. Chiok pays Nuguid either in cash or manager’s check, to be
picked up by the latter or deposited in the latter’s bank account. Nuguid delivers the dollars either on the same day or on a later
date as may be agreed upon between them, up to a week later. Chiok and Nuguid had been dealing in this manner for about six to
eight years, with their transactions running into millions of pesos. For this purpose, Chiok maintained accounts with petitioners
Metropolitan Bank and Trust Company (Metrobank) and Global Business Bank, Inc. (Global Bank), the latter being then referred to as
the Asian Banking Corporation (Asian Bank). Chiok likewise entered into a Bills Purchase Line Agreement (BPLA) with Asian Bank.
Under the BPLA, checks drawn in favor of, or negotiated to, Chiok may be purchased by Asian Bank. Upon such purchase, Chiok
receives a discounted cash equivalent of the amount of the check earlier than the normal clearing period.

On July 5, 1995, pursuant to the BPLA, Asian Bank "bills purchased" Security Bank & Trust Company (SBTC) Manager’s Check (MC)
No. 037364 in the amount of ₱25,500,000.00 issued in the name of Chiok, and credited the same amount to the latter’s Savings
Account No. 2-007-03-00201-3.

On the same day, July 5, 1995, Asian Bank issued MC No. 025935 in the amount of ₱7,550,000.00 and MC No. 025939 in the amount
of ₱10,905,350.00 to Gonzalo Bernardo, who is the same person as Gonzalo B. Nuguid. The two Asian Bank manager’s checks, with a
total value of ₱18,455,350.00 were issued pursuant toChiok’s instruction and was debited from his account. Likewise upon Chiok’s
application, Metrobank issued Cashier’s Check (CC) No. 003380 in the amount of ₱7,613,000.00 in the name of Gonzalo Bernardo.
The same was debited from Chiok’s Savings Account No. 154-42504955. The checks bought by Chiok for payee Gonzalo Bernardo are
therefore summarized as follows:
 Drawee Bank/Check
Amount (P) Source of fund
No.

Asian Bank MC No. 7,550,000.00

025935 Chiok’s Asian Bank Savings
Account No. 2-007-03-00201-3,
Asian Bank MC No. 10,905,350.00 which had been credited with the
025939 value of SBTC MC No. 037364
(aggregate value of (₱25,500,000.00) when the latter was purchased by Asian
Asian Bank MCs: Bank from Chiok pursuant to their BPLA.
18,455,350.00)

Metrobank CC No. 7,613,000.00 Chiok’s Metrobank Savings

003380 Account No. 154-425049553

TOTAL 26,068,350.00

Chiok then deposited the three checks (Asian Bank MC Nos. 025935 and 025939, and Metrobank CC No. 003380), with an aggregate
value of ₱26,068,350.00 in Nuguid’s account with Far East Bank & Trust Company (FEBTC), the predecessor-in-interest of petitioner
Bank of the Philippine Islands (BPI). Nuguid was supposed to deliver US$1,022,288.50, 4 the dollar equivalent of the three checks as
agreed upon, in the afternoon of the same day. Nuguid, however, failed to do so, prompting Chiok to request that payment on the
three checks be stopped. Chiok was allegedly advised to secure a court order within the 24-hour clearing period. On the following
day, July 6, 1995, Chiok filed a Complaint for damages with application for ex parte restraining order and/or preliminary injunction
with the Regional Trial Court (RTC) of Quezon City against the spouses Gonzalo and Marinella Nuguid, and the depositary banks,
Asian Bank and Metrobank, represented by their respective managers, Julius de la Fuente and Alice Rivera. The complaint was
docketed as Civil Case No. Q-95-24299 and was raffled to Branch 96. The complaint was later amended 5 to include the prayer of
Chiok to be declared the legal owner of the proceeds of the subject checks and to be allowed to withdraw the entire proceeds
thereof.

On the same day, July 6, 1995, the RTC issued a temporary restraining order (TRO) directing the spouses Nuguid to refrain from
presenting the said checks for payment and the depositary banks from honoring the sameuntil further orders from the court. 6

Asian Bank refused to honor MC Nos. 025935 and 025939 in deference to the TRO. Metrobank claimed that when it received the
TRO on July 6, 1995, it refused to honor CC No. 003380 and stopped payment thereon. However, in a letter also dated July 6, 1995,
Ms. Jocelyn T. Paz of FEBTC, Cubao-Araneta Branch informed Metrobank that the TRO was issued a day after the check was
presented for payment. Thus, according to Paz, the transaction was already consummated and FEBTC had already validly accepted
the same. In another letter, FEBTC informed Metrobank that "the restraining order indicates the name of the payee of the check as
GONZALO NUGUID, but the check isin fact payable to GONZALO BERNARDO. We believe there is a defect in the restraining order and
as such should not bind your bank."7 Alice Rivera of Metrobank replied to said letters, reiterating Metrobank’s position tocomply
with the TRO lest it be cited for contempt by the trial court. However, as would later be alleged in Metrobank’s Answer before the
trial court, Metrobank eventually acknowledged the check when it became clear that nothing more can be done to retrieve the
proceeds of the check. Metrobank furthermore claimed that since it is the issuer of CC No. 003380, the check is its primary
obligation and should not be affected by any prior transaction between the purchaser (Chiok) and the payee (Nuguid).

In the meantime, FEBTC, as the collecting bank, filed a complaint against Asian Bank before the Philippine Clearing House
Corporation (PCHC) Arbitration Committee for the collection of the value of Asian Bank MC No. 025935 and 025939, which FEBTC
had allegedly allowed Nuguid to withdraw on July 5, 1995, the same day the checks were deposited. The case was docketed as
Arbicom Case No. 95-082. The PCHC Arbitration Committee later relayed, in a letter dated August 4, 1995, its refusal to assume
jurisdiction over the case on the ground that any step it may take might be misinterpreted as undermining the jurisdiction of the RTC
over the case or a violation of the July 6, 1995 TRO.
On July 25, 1995, the RTC issued an Order directing the issuance of a writ of preliminary prohibitory injunction:

WHEREFORE, upon filing by the plaintiff of a sufficient bond in the amount of ₱26,068,350.00, to be executed in favor of the
defendants under the condition that the same shall answer for whatever damages they may sustain by reason of this injunction
should the Court ultimately determine that he was not entitled thereto, let a writ of preliminary prohibitory injunction issue
restraining and preventing during the pendency of the case:

a) Defendant Asian Bank frompaying Manager’s Checks No. 025935 in the amount of ₱7,550,000.00 and No. 025939 in the amount
of ₱10,905,350.00; and

b) Defendant Metro Bank frompaying Cashier’s Check No. 003380 in the amount of ₱7,613,000.00.

The application for preliminary mandatory injunctionis hereby denied and the order issued on July 7, 1995 directing defendant
Metro Bank (Annapolis, Greenhills Branch) to allow the plaintiff to withdraw the proceeds of Cashier’s Check No. 003380 in the
amount of ₱7,613,000.00 is hereby set aside.

The plaintiff’s urgent motion todeclare defendants Asian Bank and Metro Bank in contempt of court filed last July 13, 1995 is hereby
denied for lack of legal basis.

The writ of preliminary prohibitory injunction and a copy of this order shall be served on the defendants by Deputy Sheriff Jose
Martinez of this Branch.8

Upon the filing by Chiok of the requisite bond, the Writ was subsequently issued on July 26, 1995.

Before the RTC, Asian Bank pointed out that SBTC returned and issued a Stop Payment Order on SBTC MC No. 037364 (payable to
Chiok in the amount of ₱25,500,000.00) on the basis of an Affidavit of Loss & Undertaking executed by a certain Helen Tan. Under
said Affidavit of Loss & Undertaking, Tan claims that she purchased SBTC MC No. 037364 from SBTC, but the manager’s check got
lost on that day. Asian Bank argued that Chiok would therefore be liable for the dishonor of the manager’s check under the terms of
the BPLA, which provides for recourse against the seller (Chiok) of the check when it is dishonored by the drawee (SBTC) for any
reason, whether valid or not.

On October 18, 1995, FEBTC filed a Complaint-in-Intervention in Civil Case No. Q-95-24299. On February6, 1996, the RTC initially
denied FEBTC’s intervention in the case. On Motion for Reconsideration, however, the RTC, on April 15, 1996, reversed itself and
allowed the same.

In the Complaint-in-Intervention, FEBTC claimed that it allowed the immediate withdrawal of the proceeds of Asian Bank MC Nos.
025935 and 025939 on the ground that, as manager’schecks, they were the direct obligations of Asian Bank and were accepted in
advance by Asian Bank by the mere issuance thereof. FEBTC presented the checks for payment on July 5, 1995 through the PCHC.
Asian Bank, as admitted in its Answer before the RTC, received the same on that day. Consequently, Asian Bank was deemed to have
confirmed and booked payment of the subject checks in favor of FEBTC or, at the latest, during the first banking hour of July 6, 1995,
when payment should have been made. FEBTC claimed that Asian Bank exhibited bad faith when, in anticipation of the TRO, it opted
to float the checks until it received the TRO at 12:00 noon of July 6, 1995 to justify the nonpayment thereof.

In their own Answer, the spouses Nuguid claimed that Gonzalo Nuguid had delivered much more dollars than what was required for
the three checks at the time of payment. By way of special affirmative defense, the spouses Nuguid also claims that since the subject
checks had already been paid to him, Chiok is no longer entitled to an injunction (to hold the payment of the subject checks), and
Civil Case No. Q-95-24299 has already become moot.

On August 29, 2002, the RTC rendered its Decision, the dispositive portion of which states:

WHEREFORE, judgment is rendered:

1. Declaring as permanent the writ of preliminary injunction issued under the Order of July 25, 1995;

2. Ordering Global Business Bank, Inc.to pay the plaintiff [Chiok]:

a.) The amount of ₱34,691,876.71 (less the attorney’s fees of ₱255,000.00 which shall remain with Global Business Bank, Inc.), plus
interest at the legal rate of 12%/p.a. from September 30, 1999 until fully paid;

b.) The amount of ₱215,000.00, representing the excess amount debited from the plaintiff’s deposit in his account with Global
Business Bank, Inc. on July 7, 1995, plus interest of 12%/p.a. from July 7, 1995, until fully paid;

c.) Attorney’s fees equivalentof 5% of the total amount due; and

3. Ordering Metropolitan Bank & Trust Companyto pay the plaintiff:

a. The amount of his deposit of ₱7,613,000.00, plus interest of 12%/p.a. from July 5, 1995 until said amount is fully paid; and

b. Attorney’s fees of 5%of the total amount due;

4. Ordering Spouses Gonzalo B. Nuguid and Marinella O. Nuguid liable jointly and severally with Global Business Bank, Inc. and
Metropolitan Bank & Trust Company, Inc. for the respective attorney’s fees;

5. Dismissing the complaint-in-interventionof BPI for lack of merit;

6. Ordering the defendantsand the intervenorto pay, jointly and severally, the costs of suit. 9

(Emphases supplied.)

The RTC held that Nuguid failed to prove the delivery of dollars to Chiok. According to the RTC, Nuguid’s claim that Chiok was still
liable for seven dishonored China Banking Corporation (CBC) checks with a total worth of ₱72,984,020.00 is highly doubtful since
such claim was not presented as a counterclaim in the case. Furthermore, the court ruled that the certification of CBC stating the
reasons10 for the stop payment order "are indicative of Chiok’s non-liability to Nuguid." The RTC further noted that there was a
criminal case filed by Chiok against Nuguid on March 29, 1996 for estafa and other deceit on account of Nuguid’s alleged failure to
return the originals of the seven CBC checks. 11

The RTC went on to rule that manager’s checks and cashier’s checks may be the subject of a Stop Payment Order from the purchaser
on the basis of the payee’s contractual breach. As explanation for this ruling, the RTC adopted its pronouncements when it issued
the July 25, 1995 Order:

Defendant Nuguid’s argument that the injunction could render manager’s and cashier’schecks unworthy of the faith they should
have and could impair their nature as independent undertakings of the issuing banks is probably an undistinguished simplification.
While the argument may be applicable to such checks in general, it does not adequately address the situation, as here, when specific
manager’s and cashier’s checks are already covered by reciprocal undertakings between their purchaser and their payee, in which
the latter allegedly failed to perform. The agreement herein was supposedly one in which Nuguid would deliver the equivalent
amount in US dollars ($1,022,288.23) "on the same date" that the plaintiff purchased and delivered the manager’s and cashier’s
checks (₱26,068,350.00). Assuming that such a reciprocity was true, the purchaser should have the legal protection of the injunctive
writ (which, after all, the legal departments of the issuing banks themselves allegedly advised the plaintiff to obtain), since the usual
order or instruction to stop payment available in case of ordinary checks did not avail. This was probably the reason that Asian Bank
has expressly announced in its own comment/opposition of July 14, 1995 that it was not opposing the application for the prohibitory
injunction.

The dedication of such checks pursuantto specific reciprocal undertakings between their purchasers and payees authorizes
rescission by the former to prevent substantial and material damage to themselves, which authority includes stopping the payment
of the checks.12 According to the RTC, both manager’s and cashier’s checks are still subject to regular clearing under the regulations
of the Bangko Sentral ng Pilipinas. Since manager’s and cashier’s checks are the subject of regular clearing, they may consequently
be refused for cause by the drawee, which refusal is in fact provided for in the PCHC Rule Book.

The RTC found the argument by BPI that the manager’s and cashier’s checks are pre-cleared untenable under Section 60 of the New
Central Bank Act and Article 1249 of the Civil Code, which respectively provides:
Section 60. Legal Character. – Checks representing demand deposits do not have legal tender power and their acceptance in the
payment of debts, both public and private, is at the option of the creditor; Provided, however, that a check which has been cleared
and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount
credited to his account.

Art. 1249. The payment of debts inmoney 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.

In the meantime, the action derived from the original obligation shall be held in the abeyance. The RTC went on to rule that due to
the timely service of the TRO and the injunction, the value of the three checks remained with Global Bank and Metrobank. 13 The RTC
concluded that since Nuguid did not have a valid title to the proceeds of the manager’s and cashier’s checks, Chiok is entitled to be
paid back everything he had paid to the drawees for the checks. 14

With respect to Global Bank, the RTC ruled that the entire amount of ₱34,691,876.71 it recovered from SBTC from the September
15, 1997 PCHC Decision, as reflected in the September 29, 1999 Charge Slip No. 114977, less the sum of ₱225,000.00 awarded by
the arbitration committee’s decision as attorney’s fees, should be paidto Chiok, with interest at 12% per annum from September 30,
1999 until full payment. The RTC likewise ordered Global Bank to pay Chiok the amount of ₱215,390.00, an amount debited from
Chiok’s account as payment for outstanding bills purchase. 15

With respect to Metrobank, the RTC ruled that it should pay Chiok ₱7,613,000.00, the amount paid by Chiok to purchase the CC, plus
interest of 12 percent per annum from July 5,1995 until full payment. The RTC explained this finding as follows:

The same conclusion is true with respect to Metro Bank, with whom the funds amounting to ₱7,613,000.00 for the purchase of CC
No. 003380 has remained. According to Chiok, Metro Bank used such funds in its operations.

In the hearing on May 17, 2001, Lita Salonga Tan was offered as a witness for Metro Bank, but in lieu ofher testimony, the parties
agreed to stipulate on the following as her testimony, to wit:

1. That Metro Bank paid the amount of CC No. 003280;

2. That the payment on July 12, 1995 was made while the TRO of July 5, 1995 was in force;

3. [That] the payment on July 12, 1995 was on the third clearing of CC No. 003380; and

4. That the PCHC Rule book was the authority on the rules and regulations on the clearing operations of banks.

The payment to FEBTC by Metro Bank of CC No. 003380 on July 12, 1995 was an open defiance of the TRO of July 6, 1995. Metro
Bank’s Branch Manager Alice Rivera, through her letter of July 10, 1995 to FEBTC as the collecting bank, returned the CC to FEBTC in
compliance with the TRO which was received about 12:10 noon of July 6, 1999. Hence, Metro Bank should not have paid because
the TRO was served within the 24-hour period to clear checks. Moreover, the payment, being made on third clearing, was unjustified
for violating existing regulations, particularly paragraph 1 of the Clearing House Operating Memo (CHOM), effective September 1,
1984, which prohibited the reclearing of a check after its first presentation if it was returned for the reason of "stop payment" or
"closed account."

It also seems that Metro Bank paid the CC without first checking whether, in fact, any actual payment of the 3 checks had been
made on July 5, 1995 to the payee when the checks were deposited in payee’s account with FEBTC on July 5, 1995. The records show
no such payment was ever made to render the TRO of July 6, 1995 or the writ of preliminary injunction applied for moot and
academic.

Jessy A. Degaños – adopted by Metro Bank as its own witness in injunction hearing of July 24, 1995 – stated that the payment of the
3 checks consisted of the accounting entry made at the PCHC during the presenting process by debiting the respective accounts of
the drawees and crediting the account of collecting bank FEBTC. Yet, as already found hereinabove, such process was reversed due
to the return by the drawees of the checks which they dishonored on account of the TRO.
Also, Degaños, testifying on January 17, 2002 for intervenor BPI, was asked in what form was the withdrawal of the amounts of the
checks made by Nuguid on July 5, 1995, that is, whether:- 1) cash withdrawal; or 2) credit to Nuguid’s account; or 3) draft issued to
Nuguid. His reply was that only the bank’s branch which serviced the payee’s account could provide the answer. Yet, BPI did not
present any competent personnel from the branch concerned to enlighten the Court on this material point.

This amount of ₱7,613,000.00, having remained with Metro Bank since the service of the TRO of July 6, 1995 and the writ of
preliminary injunction issued under the Order of July 25, 1998, should be returned to Chiok with interest of 12%/p.a. from July 7,
1995 until full payment.16

(Citations omitted.)

The RTC likewise denied BPI’s complaint-in-intervention to recover the value of the three checks from drawees Global Bank and
Metrobank for lack of merit. The RTC, after reprimanding Global Bank and Metrobank for siding with BPI on this issue, held that BPI,
as a mere collecting bank of the payee with a void title to the checks, had no valid claim as to the amounts of such checks. The RTC
explained:

Firstly: BPI, being a collecting bankin relation to the 3 checks, was merely performing collection services as an agent of Nuguid, the
payee. If, as found hereinbefore, Nuguid could not have legal title to the 3 checks, it follows that BPI could not stake any claim for
title better than Nuguid’s own void title. Consequently, BPI has no right to claim the amounts of the 3 checks from the drawee-
banks.

Secondly: The purpose of the delivery of the 3 checks to BPI – which was not even accompanied by Nuguid’s endorsement – was
solely for deposit in the account of payee Nuguid. Assuming, for the sake of argument, that BPI as the collecting bank paid the value
of the checks – of which fact there has been no proof whatsoever – BPI was nonetheless, at best, a mere transferee whose title was
no better than the void title of the transferor, payee Nuguid. Under such circumstance, BPI has no legal basis to demand payment of
the amounts of the 3 checks from the draweebanks.

Thirdly: Under Sec. 49, Negotiable Instruments Law, BPI, as transferee without indorsement, was not considered a holder of the
instrument since it was neither a payee nor an indorsee. It would become so only when and if the indorsement is actually made, and
only as of then, but not before, is the issue whether BPI was a holder in due course or not is determined.

Consequently, any alleged payment by BPI as the collecting bank, through the supposed though unproved withdrawal of the
amounts of the 3 checks by Nuguid upon the deposit of the checks on July 5, 1995, is not the payment which discharges liability
under the 3 checks because BPI is neither the party primarily liable northe drawee.

Such a payment, if true, is akin to, if it is not, drawing against uncollected deposits (DAUD). In such a case, BPI was in duty bound to
send the 3 checks to the PCHC for clearing pursuant to Section 1603.c.1 of the BSP Manual of Regulations and Sec. 60, R.A. No. 7653.
It serves well to note herein that Global Bank and Metro Bank returned the checks through the PCHC on July 6, 1995, well within the
24-hour clearing period, in compliance with the TRO of July 6, 1995. Finally: As earlier noted and discussed, there is no evidence of
any prior valid payment by the collecting bank to support its claim of the amounts of the 3 checks against the defendant
banks.17 (Citation omitted.)

The RTC held Global Bank and Metrobank liable for attorney’s fees equivalent to 5% of the total amountdue them, while the spouses
Nuguid were held solidarily liable for said fees.

Defendants Global Bank, Metrobank, and the spouses Nuguid, and intervenor BPI filed separate notices of appeal, which were
approved in the Order18 dated April 3, 2003. Chiok filed a Motion to Dismiss against the appeal of Global Bank, on the ground that
the latter had ceased to operate as a banking institution.

On May 26, 2004, the Court of Appeals dismissed the appeal of the spouses Nuguid pursuant to Section 1(e), Rule 50 of the Rules of
Court, on account of their failure to file their appellant’s brief. In the same Resolution, the Court of Appeals denied Chiok’s Motion to
Dismiss.
On May 5, 2006, the Court of Appeals rendered the assailed Decision affirming the RTC Decision with modifications. The fallo of the
Decision reads:

WHEREFORE, premises considered, the Decision dated August 29, 2000 of the RTC, Branch 96, Quezon City is AFFIRMED with the
following MODIFICATIONS:

1.) The contract to buy foreign currency in the amount of $1,022,288.50 between plaintiff-appellee Wilfred N. Chiok and defendant
Gonzalo B. Nuguid is hereby rescinded. Corollarily, Manager’s Check Nos. 025935 and 025939 and Cashier’s Check No. 003380 are
ordered cancelled.

2.) Global Business Holdings, Inc. is ordered to credit Savings Account No. 2-007-03-00201-3 with:

a) The amount of ₱25,500,000.00, plus interest at 4% from September 29, 1999 until withdrawn by plaintiff-appellee;

b) The amount of ₱215,390.00, plus interest at 4% from July 7, 1995 until withdrawn by plaintiff-appellee.

3.) Metropolitan Bank & Trust Company is ordered to credit Savings Account No. 154-42504955 the amount of ₱7,613,000.00, with
interest at 6% [per annum] from July 12, 1995 until the same is withdrawn;

4.) The Spouses Gonzalo B. Nuguid and Marinella O. Nuguid are ordered to pay attorney’s fees equivalent to 5% of the total amount
due to plaintiff-appellee from both depository banks, as well as the costs of suit. 19

According to the Court of Appeals, Article 1191 of the Civil Code provides a legal basis of the right of purchasers of MCs and CCs to
make a stop payment order on the ground of the failure of the payee to perform his obligation to the purchaser. The appellate court
ruled that such claim was impliedly incorporated in Chiok’s complaint. The Court of Appeals held:

By depositing the subject checks to the account of Nuguid, Chiok had already performed his obligation under the contract, and the
subsequent failure of Nuguid to comply with what was incumbent upon him gave rise to an action for rescission pursuant to Article
1191 of the Civil Code, which states:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is
incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either
case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

xxxx

Although the complaint a quowas entitled "DAMAGES, W/ EX PARTE RESTRAINING ORDER/INJUNCTION" when the action was really
one for rescission and damages, it is an elementary rule of procedure that what controls or determines the nature of the action is
not the caption of the complaint but the allegations contained therein. And even without the prayer for a specific remedy, proper
relief may nevertheless be granted by the court if the facts alleged in the complaint and the evidence introduced so warrant.

That Chiok had intended rescission isevident from his prayer to be declared the legal owner of the proceeds of the subject checks
and to be allowed to withdraw the same. Therefore, the argument of BPI that the obligation on the part of Nuguid to deliver the
dollars still subsists is untenable. Article 1385 of the same Code provides that rescission creates the obligation to return the things
which were the object of the contract, together with their fruits, and the price with its interest. The object of the contract herein to
buy foreign currency is the peso-value of the dollars bought but in the form of negotiable instruments – Manager’s Check/Cashier’s
Check. Hence, respecting the negotiation thereof, and in order to afford complete relief to Chiok, there arose the necessity for the
issuance of the injunction restraining the payment of the subject checks with the end in view of the eventual return of the proceeds
to give effect to Article 1385. In other words, the injunctive relief was necessary in order not to render ineffectual the judgment in
the instant case. We quote with approval the following disquisition of the trial court, to wit:

xxxx
There is no question about the nature of manager’s and cashier’s checks being as good as cash, being primary obligations of the
issuing bank and accepted in advanceby their mere issuance. But even as such nature of unconditional commitment to pay on the
part of the issuing bank may be conceded, the Court opines that the injunctive relief cannot be denied to a party who purchased the
manager’s or cashier’s check to stop its payment to the payee in a suit against the payee and the issuing banks upon a claim that the
payee himself had not performed his reciprocal obligation for which the issuance and delivery of the self-same manager’sor cashier’s
check were, in the first place, made x x x.

It bears stressing that the subject checks would not have been issued were it not for the contract between Chiok and Nuguid.
Therefore, they cannot be disassociated from the contract and given a distinct and exclusive signification, as the purchase thereof is
part and parcel of the series of transactions necessary to consummate the contract. Taken in this light, it cannot be argued that the
issuing banks are bound to honor only their unconditional undertakings on the subject checks vis-à-vis the payee thereof regardless
of the failed transaction between the purchaser of the checks and the payee on the ground that the banks were not privy to the said
transaction.

Lest it be forgotten, the purchase of the checks was funded by the account of Chiok with the banks. As such, the banks were equally
obligated to treat the account of their depositor with meticulous care bearing in mind the fiduciary nature of their relationship with
the depositor. Surely, the banks would not allow their depositor to sit idly by and watch the dissipation of his livelihood considering
that the business of foreign currency exchange is a highly volatile undertaking where the probability of losing or gaining is counted
by the ticking of the clock. With the millions of money involved in this transaction, Chiok could not afford to be complacent and his
vigilance for his rights could not have been more opportune under the circumstances.20 (Citations omitted.)

The Court of Appeals proceeded to sustain the dismissal of BPI’s complaint-in-intervention, which sought to recover from Global
Bank the amounts allegedly paid to Nuguid. The Court of Appeals pointed out that BPI failed to prove the alleged withdrawal by
Nuguid of the proceeds of the two manager’s checks, as BPI’s representative, Jessy A. Degaños, failed to answer the question on the
form of the alleged withdrawal. Furthermore, BPI failed to prove that it was a holder in due course of the subject manager’s checks,
for two reasons: (1) the checks were not indorsed to it by Nuguid; and (2) BPI never presented its alleged bills purchase agreement
with Nuguid.21

The Court of Appeals likewise modified the order by the RTC for Global Bank and Metrobank to pay Chiok. The Court of Appeals held
that Chiok’s cause of action against Global Bank is limited to the proceeds of the two manager’s checks. Hence, Global Bank was
ordered to credit Chiok’s Savings Account No. 2-007-03-00201-3 with the amount of ₱25,500,000.00, the aggregate value of the two
managers’ checks, instead of the entire ₱34,691,876.71 recovered from SBTC from the September 15, 1997 PCHC Decision. The
interest was also reduced from 12% per annum to that imposed upon savings deposits, which was established during the trial as 4%
per annum.22

As regards Metrobank, the appellate court noted that there was no evidence as to the interest rate imposed upon savings deposits
at Metrobank. Metrobank was ordered to credit the amount of ₱7,613,000.00 to Chiok’s Savings Account No. 154-42504955, with
interest at 6% per annum.23

Global Bank and BPI filed separate Motions for Reconsideration of the May 5, 2006 Court of Appeals’ Decision. On November 6,
2006, the Court of Appeals denied the Motions for Reconsideration.

Metrobank (G.R. No. 172652), BPI (G.R. No. 175302), and Global Bank (G.R. No. 175394) filed with this Court separate Petitions for
Review on Certiorari. In Resolutions dated February 21, 200724 and March 12, 2007,25 this Court resolved to consolidate the three
petitions. Metrobank submitted the following issues for the consideration of this Court:

(A) WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT "IT IS LEGALLY POSSIBLE FOR A PURCHASER OF
A MANAGER’S CHECK OR CASHIER’S CHECK TO STOP PAYMENT THEREON THROUGH A COURT ORDER ON THE GROUND OF THE
PAYEE’S ALLEGED BREACH OF CONTRACTUAL OBLIGATION AMOUNTING TO AN ABSENCE OF CONSIDERATION THEREFOR."

(B) GRANTING ARGUENDO THAT A MANAGER’S CHECK OR CASHIER’S CHECK, "IN VIEW OF THE PECULIAR CIRCUMSTANCES OF THIS
CASE" MAY BE SUBJECT TO A STOP PAYMENT ORDER BY THE PURCHASER THEREOF THROUGH A COURT ORDER, WHETHER OR NOT
THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT PETITIONER HEREIN "HAD KNOWLEDGE OF CIRCUMSTANCES
THAT WOULD DEFEAT THE TITLE OF THE PAYEE TO THE CHECKS" WITHOUT, HOWEVER, CITING ANY SPECIFIC EVIDENCE WHICH
WOULD PROVE THE EXISTENCE OF SUCH KNOWLEDGE. (C) WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN
SUSTAINING THE TRIAL COURT’S ORDER FOR PETITIONER HEREIN "TO PAY (TO CHIOK) THE VALUE OF CASHIER’S CHECK NO. 003380
IN THE AMOUNT OF ₱7,613,000.00, WHICH WAS DEBITED AGAINST CHIOK’S SAVINGS ACCOUNT # 154-42504955 ON THE
OBSERVATION THAT THE PAYMENT TO FEBTC BY METROBANK OF CC NO. 003380ON JULY 12, 1995 WAS AN OPEN DEFIANCE OF THE
TRO OF JULY 6, 1995."26

BPI, on the other hand, presented the following issues:

I.

Whether or not the Court of Appeals detracted from well-settled concepts and principles in commercial law regarding the nature,
causes, and effects of a manager’s check and cashier’s checkin ruling that [the] power of the court can be invoked by the purchaser
[Chiok] in a proper action, which the Court su[b]stantially construed as a rescissory action or the power to rescind obligations under
Article 1191 of the Civil Code.

II.

Whether or not the Honorable Court of Appeals erred in ruling that where a purchaser invokes rescission due to an alleged breach of
the payee’s contractual obligation, it is deemed as "peculiar circumstance" which justifies a stop payment order issued by the
purchaser or a temporary restraining order/injunction from a Court to prevent payment of a Manager’s Check or a Cashier’s Check.

III.

Whether or not the Honorable Court of Appeals erred in ruling that judicial admissions in the pleadings of Nuguid, BPI, Asian Bank,
Metrobank and even Chiok himself that Nuguid had withdrawn the proceeds of the checks will not defeat Chiok’s "substantial right"
to restrain the drawee bank from paying BPI, the collecting bank or presenting bank in this case who paid the value of the
Cashier’s/Manager’s Checks to the payee.27

Finally, Global Bank rely upon the following grounds in its petition with this Court:

A.

THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT PETITIONER GLOBAL BANK HAD NO JUSTIFICATION FOR ITS RIGHT OF
RECOURSE AGAINST RESPONDENT CHIOK NOTWITHSTANDING THE CLEAR AND UNMISTAKABLE PROVISIONS OF THE BILLS
PURCHASE AGREEMENT.

B.

THE COURT OF APPEALS GRAVELY ERRED IN MAKING PETITIONER GLOBAL BANK LIABLE FOR INTEREST OF 4% PER ANNUM DESPITE
THE FACT THAT:

1. RESPONDENT DID NOT ASK FOR SUCH RELIEF IN HIS COMPLAINT;

2. RESPONDENT HAD WAIVED HIS RIGHT TO ANY INTEREST; AND

3. THERE IS NO EVIDENCE ON RECORD AS THE BASIS FOR ANY INTEREST. 28

Before delving into the merits of these cases, we shall first dispose of a procedural development during their pendency with the
Court.

Joint Manifestation and Motion allegedly

filed by Metrobank, Global Bank and
respondent Chiok

On May 28, 2013, this Court received a Joint Manifestation and Motion allegedly filed by petitioners Metrobank, Global Bank, and
respondent Chiok, which reads:
PETITIONERS METROPOLITAN BANK & TRUST COMPANY & GLOBAL BUSINESS BANK, INC., and RESPONDENT WILFRED N. CHIOK, by
their respective counsels, unto this Honorable Court, respectfully state that after a thorough consideration, the parties herein have
decided to forego their respective claims against each other, including, past, present and/or contingent, in relation to the above
referenced cases.

PRAYER

WHEREFORE, it is respectfully prayed that no further action be taken by this Honorable Court on the foregoing petitions, that the
instant proceedings be declared CLOSED and TERMINATED, and that an Order be rendered dismissing the above-referenced cases
with prejudice.

In the above Joint Manifestation and Motion, respondent Chiok was not represented by his counsel of record, Cruz Durian Alday and
Cruz-Matters, but was assisted by Espiritu Vitales Espiritu Law Office, with Atty. Cesar D. Vitales as signatory, by way of special
appearance and assistance.

On June 19, 2013, this Court issued a Resolution requiring petitioner BPI to comment on the Joint Manifestation and Motion filed by
its copetitioners Metrobank, Global Bank, and respondent Chiok. The Resolution reads:

Considering the joint manifestation and motion of petitioners Metropolitan Bank and Trust Company and Global Business Bank, Inc.,
and respondent, that after a thorough consideration, they have decided to forego their respective claims against each other,
including past, present and/or contingent, in these cases and praying that the instant proceedings in G.R. Nos. 172652 and 175394
be declared closed and terminated, the Court resolves to require petitioner Bank of the Philippine Islands to COMMENT thereon
within ten (10) days from notice thereof x x x.

On September 12, 2013, respondent Chiok, this time assisted by his counsel of record, Cruz Durian Alday & Cruz-Matters, filed a
Motion for Reconsideration of our Resolution dated June 19, 2013. The signatory to the Motion for Reconsideration, Atty. Angel
Cruz, grossly misread our Resolution requiring BPI to comment on the Joint Manifestation and Motion, and apparently contemplated
that we are already granting said Motion. Atty. Cruz objected to the Joint Manifestation and Motion, labeling the same as tainted
with fraud. According to Atty. Cruz, Espiritu Vitales and Espiritu’s failure to give prior notice to him is in violation of Canon 8 of the
Code of Professional Responsibility. Atty. Cruz prays that Metrobank and Global Bank be ordered to submit a document of their
settlement showing the amounts paid to Chiok, and for the June19, 2013 Resolution of this Court be reconsidered and set aside.

On October 9, 2013, BPI filed its comment to the Joint Manifestation and Motion, opposing the samefor being an implied procedural
shortcut to a Compromise Agreement. It averred that while the courts encourage parties to amicably settle cases, such settlements
are strictly scrutinized by the courts for approval. BPI also pointed out that the Joint Manifestation and Motion was not supported by
any required appropriate Board Resolution of Metrobank and Global Bank granting the supposed signatories the authority to enter
into a compromise. BPI prayed that the Joint Manifestation and Motion of Metrobank, Global Bank, and Chiok be denied, and to
render a full Decision on the merits reversing the Decision of the Court of Appeals.

On January 20, 2014, Global Bank filed a Comment to Atty. Cruz’s Motion for Reconsideration on behalf of Chiok, praying that said
Motion be expunged from the records for failure of Atty. Cruz to indicate the number and date of issue of his MCLE Certificate of
Compliance or Certificate of Exemption for the immediately preceding compliance period.

As far as this Court is concerned, the counsel of record of respondent Chiok is still Cruz Durian Alday & Cruz-Matters. The requisites
of a proper substitution of counsel of record are stated and settled in jurisprudence:

No substitution of counsel of record is allowed unless the following essential requisites of a valid substitution of counsel concur: (1)
there must be a written request for substitution; (2) it must be filed with the written consent of the client; (3) it must be with the
written consent of the attorney to be substituted; and (4) in case the consent of the attorney to be substituted cannot be obtained,
there must be at least a proof of notice that the motion for substitution was served on him in the manner prescribed by the Rules of
Court.29 (Citation omitted.)
Therefore, while we should indeed require Atty. Cruz to indicate the number and date of issue of his MCLE Certificate of Compliance
or Certificate of Exemption for the immediately preceding compliance period, he is justified in pointing out the violation of Canon
830 of the Code of Professional Responsibility, Rule 8.02 of which provides:

Rule 8.02. – A lawyer shall not, directly or indirectly, encroach upon the professional employment of another lawyer; however, it is
the right of any lawyer, without fear or favor, to give proper advice and assistance to those seeking relief against unfaithful or
neglectful counsel.

We should also give weight to the opposition of BPI to the supposed compromise agreement. As stated above, the consolidated
petitions filed by Metrobank, BPI, and Global Bank all assail the Decision of the Court of Appeals in CA-G.R. CV No. 77508 dated May
5, 2006, and the Resolution on the same case dated November 6, 2006. BPI itself has a claim against Global Bank, which appear to
be intimately related to issues brought forth in the other consolidated petitions.

Furthermore, the failure of the parties to the Joint Manifestation and Motion to declare with particularity the terms of their
agreement prevents us from approving the same so as to allow it to attain the effect of res judicata. A judicial compromise is not a
mere contract between the parties. Thus, we have held that:

A compromise agreement intended to resolve a matter already under litigation is a judicial compromise. Having judicial mandate
and entered as its determination of the controversy, such judicial compromise has the force and effect of a judgment. It transcends
its identity as a mere contract between the parties, as it becomes a judgment that is subject to execution in accordance with the
Rules of Court. Thus, a compromise agreement that has been made and duly approved by the court attains the effect and authority
of res judicata, although no execution may be issued unless the agreement receives the approval of the court where the litigation is
pending and compliance with the terms of the agreement is decreed. 31 (Citation omitted.)

We are therefore constrained to deny the Joint Manifestation and Motion filed with this Court on May 28, 2013 and to hereby
decide the consolidated petitions on their merits.

The Court’s ruling on the merits of these

consolidated petitions

Whether or not payment of manager’s

and cashier’s checks are subject to the
condition that the payee thereof should
comply with his obligations to the
purchaser of the checks

The legal effects of a manager’s check and a cashier’s check are the same. A manager’s check, like a cashier’s check, is an order of
the bank to pay, drawn upon itself, committing in effect its total resources, integrity, and honor behind its issuance. By its peculiar
character and general use in commerce, a manager’s check or a cashier’s check is regarded substantially to be as good as the money
it represents.32 Thus, the succeeding discussions and jurisprudence on manager’s checks, unless stated otherwise, are applicable to
cashier’s checks, and vice versa. The RTC effectively ruled that payment of manager’s and cashier’s checks are subject to the
condition that the payee thereof complies with his obligations to the purchaser of the checks:

The dedication of such checks pursuant to specific reciprocal undertakings between their purchasers and payees authorizes
rescission by the former to prevent substantial and material damage to themselves, which authority includes stopping the payment
of the checks.

Moreover, it seems to be fallacious to hold that the unconditional payment of manager’s and cashier’s checks is the rule. To begin
with, both manager’sand cashier’s checks are still subject to regular clearing under the regulations of the Bangko Sentral ng Pilipinas,
a fact borne out by the BSP manual for banks and intermediaries, which provides, among others, in its Section 1603.1, c, as follows:

xxxx
c. Items for clearing. All checks and documents payable on demand and drawn against a bank/branch, institution or entity allowed to
clear may be exchanged through the Clearing Office inManila and the Regional Clearing Units in regional clearing centers designated
by the Central Bank x x x.33

The RTC added that since manager’s and cashier’s checks are the subject of regular clearing, they may consequently be refused for
cause by the drawee, which refusal is in fact provided for in Section 20 of the Rule Book of the PCHC:

Sec. 20 – REGULAR RETURN ITEM PROCEDURE

20.1 Any check/item sent for clearing through the PCHC on which payment should be refused by the Drawee Bank in accordance
with long standing and accepted banking practices, such as but not limited to the fact that:

(a) it bears the forged or unauthorized signature of the drawer(s); or

(b) it is drawn against a closed account; or

(c) it is drawn against insufficient funds; or

(d) payment thereof has been stopped; or

(e) it is post-dated or stale-dated; and

(f) it is a cashier’s/manager’s/treasurer’s check of the drawee which has been materially altered;

shall be returned through the PCHC not later than the next regular clearing for local exchanges and the acceptance of said return by
the Sending Bank shall be mandatory.

It goes without saying that under the aforecited clearing rule[,] the enumeration of causes to return checks is not exclusive but may
include other causes which are consistent with long standing and accepted banking practices. The reason of plaintiffs can well
constitute such a justifiable cause to enjoin payment.34

The RTC made an error at this point. While indeed, it cannot be said that manager’s and cashier’s checks are pre-cleared, clearing
should not be confused with acceptance. Manager’s and cashier’s checks are still the subject of clearing to ensure that the same
have not been materially altered or otherwise completely counterfeited. However, manager’s and cashier’s checks are pre-accepted
by the mere issuance thereof by the bank, which is both its drawer and drawee. Thus, while manager’s and cashier’s checks are still
subject to clearing, they cannot be countermanded for being drawn against a closed account, for being drawn against insufficient
funds, or for similar reasons such as a condition not appearing on the face of the check. Long standing and accepted banking
practicesdo not countenance the countermanding of manager’s and cashier’s checks on the basis of a mere allegation of failure of
the payee to comply with its obligations towards the purchaser. On the contrary, the accepted banking practice is that such checks
are as good as cash. Thus, in New Pacific Timber & Supply Company, Inc. v. Hon. Seneris, 35 we held:

It is a well-known and accepted practice in the business sector that a Cashier's Check is deemed as cash. Moreover, since the said
check had been certified by the drawee bank, by the certification, the funds represented by the check are transferred from the
credit of the maker to that of the payee or holder, and for all intents and purposes, the latter becomes the depositor of the drawee
bank, with rights and duties of one in such situation. Where a check is certified by the bank on which it is drawn, the certification is
equivalent to acceptance. Said certification "implies that the check is drawn upon sufficient funds in the hands of the drawee, that
they have been set apart for its satisfaction, and that they shall be so applied whenever the check is presented for payment. It is an
understanding that the check is good then, and shall continue good, and this agreement is as binding on the bank as its notes in
circulation, a certificate of deposit payable to the order of the depositor, or any other obligation it can assume. The object of
certifying a check, as regards both parties, is to enable the holder to use it as money." When the holder procures the check to be
certified, "the check operates as an assignment of a part of the funds to the creditors." Hence, the exception to the rule enunciated
under Section 63 of the Central Bank Act to the effect "that a check which has been cleared and credited to the account of the
creditor shall be equivalent to a delivery to the creditor in cash in an amount equal to the amount credited to his account" shall
apply in this case. x x x. (Emphases supplied, citations omitted.)
Even more telling is the Court’s pronouncement in Tan v. Court of Appeals, 36 which unequivocally settled the unconditional nature of
the credit created by the issuance of manager’s or cashier’s checks:

A cashier’s check is a primary obligation of the issuing bank and accepted in advanceby its mere issuance. By its very nature, a
cashier’s check is the bank’s order to pay drawn upon itself, committing in effect its total resources, integrity and honor behind the
check. A cashier’s check by its peculiar character and general use in the commercial world is regarded substantially to be as good
asthe money which it represents. In this case, therefore, PCIB by issuing the check created an unconditional creditin favor of any
collecting bank. (Emphases supplied, citations omitted.)

Furthermore, under the principle of ejusdem generis, where a statute describes things of a particular class or kind accompanied by
words of a generic character, the generic word willusually be limited to things of a similar nature with those particularly
enumerated, unless there be something in the context of the statute which would repel such inference.37 Thus, any long standing
and accepted banking practice which can be considered as a valid cause to return manager’s or cashier’s checks should be of a
similar nature to the enumerated cause applicable to manager’s or cashier’s checks: material alteration. As stated above, an
example ofa similar cause is the presentation of a counterfeit check.

Whether or not the purchaser of

manager’s and cashier’s checks has the
right to have the checks cancelled by
filing an action for rescission of its
contract with the payee

The Court of Appeals affirmed the order of the RTC for Global Bank and Metrobank to pay Chiok for the amounts of the subject
manager’s and cashier’s checks. However, since it isclear to the appellate court that the payment of manager’s and cashier’s checks
cannot be considered to be subject to the condition the payee thereof complies with his obligations to the purchaser of the checks,
the Court of Appeals provided another legal basis for such liability – rescission under Article 1191 of the Civil Code:

WHEREFORE, premises considered, the Decision dated August 29, 2000 of the RTC, Branch 96, Quezon City is AFFIRMED with the
following MODIFICATIONS:

1.) The contract to buy foreign currency in the amount of $1,022,288.50 between plaintiff-appellee Wilfred N. Chiok and defendant
Gonzalo B. Nuguid is hereby rescinded. Corollarily, Manager’s Check Nos. 025935 and 025939 and Cashier’s Check No. 003380 are
ordered cancelled.38

According to the Court of Appeals, while such rescission was not mentioned in Chiok’s Amended Complaint, the same was evident
from his prayer to be declared the legal owner of the proceeds of the subject checks and to be allowed to withdraw the same. Since
rescission creates the obligation to return the things which are the object of the contract, together with the fruits, the price and the
interest,39 injunctive relief was necessary to restrain the payment of the subject checks with the end in view of the return of the
proceeds to Chiok.40

Thus, as it was construed by the Court of Appeals, the Amended Complaint of Chiok was in reality an action for rescission of the
contract to buy foreign currency between Chiok and Nuguid. The Court of Appeals then proceeded to cancel the manager’s and
cashier’s checks as a consequence of the granting of the action for rescission, explaining that "the subject checks would not have
been issued were it not for the contract between Chiok and Nuguid. Therefore, they cannot be disassociated from the contract and
given a distinct and exclusive signification, as the purchase thereof is part and parcel of the series of transactions necessary to
consummate the contract."41

We disagree with the above ruling.

The right to rescind invoked by the Court of Appeals is provided by Article 1191 of the Civil Code, which reads:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is
incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either
case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles
1385 and 1388 and the Mortgage Law.

The cause of action supplied by the above article, however, is clearly predicated upon the reciprocity of the obligations of the
injured party and the guilty party. Reciprocal obligations are those which arise from the same cause, and in which each party is a
debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other. They are to be
performed simultaneously such that the performance of one is conditioned upon the simultaneous fulfillment of the other. 42 When
Nuguid failed to deliver the agreed amount to Chiok, the latter had a cause of action against Nuguid to ask for the rescission of their
contract. On the other hand, Chiok did not have a cause of action against Metrobank and Global Bank that would allow him to
rescind the contracts of sale of the manager’s or cashier’s checks, which would have resulted in the crediting of the amounts thereof
back to his accounts.

Otherwise stated, the right of rescission43 under Article 1191 of the Civil Code can only be exercised in accordance with the principle
of relativity of contracts under Article 1131 of the same code, which provides:

Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations
arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. x x x.

In several cases, this Court has ruled that under the civil law principle of relativity of contracts under Article 1131, contracts can only
bind the parties who entered into it, and it cannot favor or prejudice a third person, even if he is aware of such contract and has
acted with knowledge thereof.44 Metrobank and Global Bank are not parties to the contract to buy foreign currency between Chiok
and Nuguid. Therefore, they are not bound by such contract and cannot be prejudiced by the failure of Nuguid to comply with the
terms thereof.

Neither could Chiok be validly granted a writ of injunction against Metrobank and Global Bank to enjoin said banks from honoring
the subject manager’s and cashier’s checks. It is elementary that "(a)n injunction should never issue when an action for damages
would adequately compensate the injuries caused. The very foundation of the jurisdiction to issue the writ of injunction rests in the
fact that the damages caused are irreparable and that damages would not adequately compensate." 45 Chiok could have and should
have proceeded directly against Nuguid to claim damages for breach of contract and to have the very account where he deposited
the subject checks garnished under Section 7(d)46 and Section 8,47 Rule 57 of the Rules of Court. Instead, Chiok filed an action to
enjoin Metrobank and Global Bank from complying with their primary obligation under checks in which they are liable as both
drawer and drawee.

It is undisputed that Chiok personally deposited the subject manager’s and cashier’s checks to Nuguid’s account.1âwphi1 If the
intention of Chiok was for Nuguid to be allowed to withdraw the proceeds of the checks after clearing, he could have easily
deposited personal checks, instead of going through the trouble of purchasing manager’s and cashier’s checks. Chiok therefore
knew, and actually intended, that Nuguid will be allowed to immediately withdraw the proceeds of the subject checks. The deposit
of the checks which were practically as good as cash was willingly and voluntarily made by Chiok, without any assurance that Nuguid
will comply with his end of the bargain on the same day. The explanation for such apparently reckless action was admitted by Chiok
in the Amended Complaint itself:

That plaintiff [Chiok] due to the numberof years (five to seven years) of business transactions with defendant [Nuguid] has reposed
utmost trust and confidence on the latterthat their transactions as of June 1995 reaches millions of pesos. x x x.48 (Emphases
supplied.)

As between two innocent persons, one of whom must suffer the consequences of a breach of trust, the one who made it possible by
his act of confidence must bear the loss. 49 Evidently, it was the utmost trust and confidence reposed by Chiok to Nuguid that caused
this entire debacle, dragging three banks into the controversy, and having their resources threatened because of an alleged default
in a contract they were not privy to.
Whether or not the peculiar
circumstances of this case justify the
deviation from the general principles on
causes and effects of manager’s and
cashier’s checks

The Court of Appeals, while admitting that the general principles on the causes and effects of manager’s and cashier’s checks do not
allow the countermanding of such checks on the basis of an alleged failure of consideration of the payee to the purchaser,
nevertheless held that the peculiar circumstances of this case justify a deviation from said general principles, applying the
aforementioned case of Mesina. The Court of Appeals held:

At the core of the appeal interposed by the intervenor BPI, as well as the depository banks, Global Bank and Metrobank, is the issue
of whether or not it is legally possible for a purchaser of a Manager’s Check or Cashier’s Check to stop payment thereon through a
court order on the ground of the payee’s alleged breach of contractual obligation amounting to an absence of consideration
therefor.

In view of the peculiar circumstances of this case, and in the interest of substantial justice, We are constrained to rule in the
affirmative.

xxxx

In the case of Mesina v. Intermediate Appellate Court, cited by BPI in its appeal brief, the Supreme Court had the occasion to rule
that general principles on causes and effects of a cashier’s check, i.e., that it cannot be countermanded in the hands of a holder in
due course and that it is a bill of exchange drawn by the bank against itself, cannot be applied without considering that the bank was
aware of facts (in this case, the cashier’s check was stolen) that would not entitle the payee thereof to collect on the check and,
consequently, the bank has the right to refuse payment when the check is presented by the payee.

While the factual milieu of the Mesinacase is different from the case at bench, the inference drawn therein by the High Court is
nevertheless applicable. The refusal of Nuguid to deliver the dollar equivalent of the three checks in the amount of $1,022,288.50 in
the afternoon of July 5, 1995 amounted to a failure of consideration that would not entitle Nuguid to collect on the subject checks.

xxxx

Let it be emphasized that in resolving the matter before Us, We do not detract from well-settled concepts and principles in
commercial law regarding the nature, causes and effects of a manager’s check and cashier’s check. Such checks are primary
obligations of the issuing bank and accepted in advance by the mere issuance thereof. They are a bank’s order to pay drawn upon
itself, committing in effect its total resources, integrity, and honor. By their peculiar character and general use in the commercial
world, they are regarded substantially as good as the money they represent. However, in view of the peculiar circumstances of the
case at bench, We are constrained to set aside the foregoing concepts and principles in favor of the exercise of the right to rescind a
contract upon the failure of consideration thereof. 50 (Emphases ours, citations omitted.)

In deviating from general banking principles and disposing the case on the basis of equity, the courts a quo should have at least
ensured that their dispositions were indeed equitable. This Court observes that equity was not served in the dispositions below
wherein Nuguid, the very person found to have violated his contract by not delivering his dollar obligation, was absolved from his
liability, leaving the banks who are not parties to the contract to suffer the losses of millions of pesos.

The Court of Appeals’ reliance in the 1986 case of Mesina was likewise inappropriate. In Mesina, respondent Jose Go purchased
from Associated Bank a cashier’s check for ₱800,000.00, payable to bearer. 51 Jose Go inadvertently left the check on the top desk of
the bank manager

when he left the bank. The bank manager entrusted the check for safekeeping to a certain bank official named Albert Uy, who then
had a certain Alexander Lim as visitor. Uy left his deskto answer a phone call and to go to the men’s room. When Uy returned to his
desk, Lim was gone. Jose Go inquired for his check from Uy, but the check was nowhereto be found. At the advice of Uy, Jose Go
accomplished a Stop Payment Order and executed an affidavit of loss. Uy reported the loss to the police. Petitioner Marcelo Mesina
tried to encash the check with Prudential Bank, but the check was dishonored by Associated Bank by sending it back to Prudential
Bank with the words "Payment Stopped" stamped on it. When the police asked Mesina how he came to possess the check, he said it
was paid to him by Alexander Lim in a "certain transaction"but refused to elucidate further. Associated Bank filed an action for
Interpleader against Jose Go and Mesina to determine which of them is entitled to the proceeds of the check. It was in the appeal on
said interpleader case that this Court allowed the deviation from the general principles on cashier’s checks on account of the bank’s
awareness of certain facts that would prevent the payee to collect on the check.

There is no arguing that the peculiar circumstances in Mesina indeed called for such deviation on account of the drawee bank’s
awareness of certain relevant facts. There is, however, no comparable peculiar circumstance in the case at bar that would justify
applying the Mesina disposition. In Mesina, the cashier’s check was stolen while it was in the possession of the drawee bank. In the
case at bar, the manager’s and cashier’s checks were personally deposited by Chiok in the account of Nuguid. The only knowledge
that can be attributed to the drawee banks is whatever was relayed by Chiok himself when he asked for a Stop Payment Order.
Chiok testified on this matter, to wit:

Q: Now, Mr. witness, since according to you the defendant failed to deliver [this] amount of ₱1,023,288.23 what action have you
undertaken to protect yourinterest Mr. witness?

A: I immediately call my lawyer, Atty. Espiritu to seek his legal advise in this matter.

Q: Prior to that matter that you soughtthe advise of your lawyer, Atty. Espiritu insofar as the issuing bank is concerned, namely,
Asian Bank, what did you do in order to protect your interest? A: I immediately call the bank asking them if what is the procedure for
stop payment and the bank told me that you have to secure a court order as soon as possible before the clearing of these
checks.52 (Emphasis supplied.)

Asian Bank, which is now Global Bank, obeyed the TRO and denied the clearing of the manager’s checks. As such, Global Bank may
not be held liable on account of the knowledge of whatever else Chiok told them when he asked for the procedure to secure a Stop
Payment Order. On the other hand, there was no mention that Metrobank was ever notified of the alleged failure of consideration.
Only Asian Bank was notified of such fact. Furthermore, the mere allegation of breach on the part of the payee of his personal
contract with the purchaser should not be considered a sufficient cause to immediately nullify such checks, thereby eroding their
integrity and honor as being as good as cash.

In view of all the foregoing, we resolve that Chiok’s complaint should be denied insofar as it prayed for the withdrawal of the
proceeds of the subject manager’s and cashier’s checks. Accordingly, the writ of preliminary prohibitory injunction enjoining
Metrobank and Global Bank from honoring the subject manager’s and cashier’s checks should be lifted.

Since we have ruled that Chiok cannot claim the amounts of the checks from Metrobank and Global Bank, the issue concerning the
setting off of Global Bank’s judgment debt to Chiok with the outstanding obligations of Chiok is hereby mooted. We furthermore
note that Global Bank had not presented 53 such issue as a counterclaim in the case at bar, preventing us from ruling on the same.

BPI’s right to the proceeds of the

manager’s checks from Global Bank

While our ruling in Mesinais inapplicable to the case at bar, a much more relevant case as regards the effect of a Stop Payment
Order upon a manager’s check would be Security Bank and Trust Company v. Rizal Commercial Banking Corporation,54 which was
decided by this Court in 2009. In said case, SBTC issued a manager’s check for ₱8 million, payable to "CASH," as proceeds of the loan
granted to Guidon Construction and Development Corporation (GCDC). On the same day, the manager’s check was deposited by
Continental Manufacturing Corporation (CMC) in its current account with Rizal Commercial Banking Corporation (RCBC). RCBC
immediately honored the manager’s check and allowed CMC to withdraw the same. GCDC issued a Stop Payment Order to SBTC on
the next day, claiming that the check was released to a third party by mistake. SBTC dishonored and returned the manager’s check
to RCBC. The check was returned back and forth between the two banks, resulting in automatic debits and credits in each bank’s
clearing balance. RCBC filed a complaint for damages against SBTC. When the case reached this Court, we held:

At the outset, it must be noted that the questioned check issued by SBTC is not just an ordinary check but a manager’s check. A
manager’s check is one drawn by a bank’s manager upon the bank itself. It stands on the same footing as a certified check, which is
deemed to have been accepted by the bank that certified it. As the bank’s own check, a manager’s check becomes the primary
obligation of the bank and is accepted in advance by the act of its issuance.

In this case, RCBC, in immediately crediting the amount of ₱8 million to CMC’s account, relied on the integrity and honor of the
check as it is regarded in commercial transactions. Where the questioned check, which was payable to"Cash," appeared regular on
its face, and the bank found nothing unusual in the transaction, as the drawer usually issued checks in big amounts made payable to
cash, RCBC cannot be faulted in paying the value of the questioned check.

In our considered view, SBTC cannot escape liability by invoking Monetary Board Resolution No. 2202 dated December 21, 1979,
prohibiting drawings against uncollected deposits. For we must point out that the Central Bank at that timeissued a Memorandum
dated July 9, 1980, which interpreted said Monetary Board Resolution No. 2202. In its pertinent portion, saidMemorandum reads:

MEMORANDUM TO ALL BANKS

July 9, 1980

For the guidance of all concerned, Monetary Board Resolution No. 2202 dated December 31, 1979 prohibiting, as a matter of policy,
drawing against uncollected deposit effective July 1, 1980, uncollected deposits representing manager’s/cashier’s/treasurer’schecks,
treasury warrants, postal money orders and duly funded "on us" checks which may be permitted at the discretion of each bank,
covers drawings against demand deposits as well as withdrawals from savings deposits.

Thus, it is clear from the July 9, 1980 Memorandum that banks were given the discretion to allow immediate drawings on
uncollected deposits of manager’s checks, among others. Consequently, RCBC, in allowing the immediate withdrawal against the
subject manager’s check, only exercised a prerogative expressly granted to it bythe Monetary Board.

Moreover, neither Monetary Board Resolution No. 2202 nor the July 9, 1980 Memorandum alters the extraordinary nature of the
manager’s check and the relativerights of the parties thereto. SBTC’s liability as drawer remains the same— by drawing the
instrument, it admits the existence of the payee and his then capacity to indorse; and engages that on due presentment, the
instrument will be accepted, or paid, or both, according to its tenor.55(Emphases supplied, citations omitted.)

As in SBTC, BPI in the case at bar relied on the integrity and honor of the manager’s and cashier’s checks asthey are regarded in
commercial transactions when it immediately credited their amounts to Nuguid’s account.

The Court of Appeals, however, sustained the dismissal of BPI’s complaint-in-intervention to recover the amounts of the manager’s
checks from Global Bank on account of BPI’s failure to prove the supposed withdrawal by Nuguid of the value of the checks:

BPI’s cause of action against Asian Bank (now Global Bank) is derived from the supposed withdrawal by Nuguid of the proceeds of
the two Manager’s Checks it issued and the refusal of Asian Bank to make good the same. That the admissions in the pleadings to
the effect that Nuguid had withdrawn the said proceeds failed to satisfy the trial court is understandable. Such withdrawal is
anessential fact that, if properly substantiated, would have defeated Chiok’s right toan injunction. BPI could so easily have presented
withdrawal slips or, with Nuguid’s consent, statements of account orthe passbook itself, which would indubitably show that money
actually changed hands at the crucial period before the issuance of the TRO. But it did not. 56

We disagree with this ruling. As provided for in Section 4, Rule 129 of the Rules of Court, admissions in pleadings are judicial
admissions and do not require proof:

Section 4. Judicial admissions. – An admission, verbal or written, made by a party in the course of the proceedings in the same case,
does not require proof. The admission may be contradicted only by showing that it was made through palpable mistake or that no
such admission was made.

Nuguid has admitted that FEBTC (now BPI) has paid him the value of the subject checks. 57 This statement by Nuguid is certainly
against his own interest as he can be held liable for said amounts. Unfortunately, Nuguid allowed his appeal with the Court of
Appeals to lapse, without taking steps to have it reinstated. This course of action, which is highly unlikely if Nuguid had not
withdrawn the value of the manager’s and cashier’s checks deposited into his account, likewise prevents us from ordering Nuguid to
deliver the amounts of the checks to Chiok. Parties who did not appeal will not be affected by the decision of an appellate court
rendered to appealing parties.58

Another reason given by the Court of Appeals for sustaining the dismissal of BPI’s complaint-in-intervention was that BPI failed to
prove that it was a holder in due course with respect to the manager’s checks. 59

We agree with the finding of the Court of Appeals that BPI is not a holder in due course with respect to manager’s checks. Said
checks were never indorsed by Nuguid to FEBTC, the predecessor-in-interest of BPI, for the reason that they were deposited by
Chiok directly to Nuguid’s account with FEBTC. However, inview of our ruling that Nuguid has withdrawn the value of the checks
from his account, BPI has the rights of an equitable assignee for value under Section 49 of the Negotiable Instruments Law, which
provides:

Section 49. Transfer without indorsement; effect of. – Where the holder of an instrument payable to his order transfers it for value
without indorsing it, the transfer vests in the transferee suchtitle as the transferor had therein, and the transferee acquires in
addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder
in due course, the negotiation takes effect as of the time when the indorsement is actually made.

As an equitable assignee, BPI acquires the instrument subject to defenses and equities available among prior parties 60 and, in
addition, the right to have the indorsement of Nuguid. Since the checks in question are manager’s checks, the drawer and the
drawee thereof are both Global Bank. Respondent Chiok cannot be considered a prior party as he is not the check’s drawer, drawee,
indorser, payee or indorsee. Global Bank is consequently primarily liable upon the instrument, and cannot hide behind respondent
Chiok’s defenses. As discussed above, manager’s checks are pre-accepted. By issuing the manager’s check, therefore, Global Bank
committed in effect its total resources, integrity and honor towards its payment. 61

Resultantly, Global Bank should pay BPI the amount of ₱18,455,350.00, representing the aggregate face value ofMC No. 025935 and
MC No. 025939. Since Global Bank was merely following the TRO and preliminary injunction issued by the RTC, it cannot be held
liable for legal interest during the time said amounts are in its possession. Instead, we are adopting the formulation of the Court of
Appeals that the amounts be treated as savings deposits in Global Bank. The interest rate, however, should not be fixed at 4% as
determined by the Court of Appeals, since said rates have fluctuated since July 7, 1995, the date Global Bank refused to honor the
subject manager’s checks. Thus, Global Bank should pay BPI interest based on the rates it actually paid its depositors from July 7,
1995 until the finality of this Decision, in accordance with the same compounding rules it applies to its depositors. The legal rate
of6% per annum shall apply after the finality of this Decision. 62

We have to stress that respondent Chiok is not left without recourse. Respondent Chiok’s cause of action to recover the value of the
checks is against Nuguid. Unfortunately, Nuguid allowed his appeal with the Court of Appeals to lapse, without taking steps tohave it
reinstated. As stated above, parties who did not appeal will not be affected by the decision of the appellate court rendered to
appealing parties.63 Moreover, since Nuguid was not impleaded as a party to the present consolidated cases, he cannot be bound by
our judgment herein. Respondent Chiok should therefore pursue his remedy against Nuguid in a separate action to recover the
amounts of the checks.

Despite the reversal of the Court of Appeals Decision, the liability of Nuguid therein to respondent Chiok for attorney’s fees
equivalent to 5% of the total amount due remains valid, computed from the amounts stated in said Decision. This is a consequence
of the finality of the Decision of the Court of Appeals with respect to him.

WHEREFORE, the Court resolves to DENY the Joint Manifestation and Motion filed with this Court on May 28, 2013.

The petitions in G.R. No. 172652 and G.R. No. 175302 are GRANTED. The Decision of the Court of Appeals in CA-G.R. CV No. 77508
dated May 5, 2006, and the Resolution on the same case dated November 6, 2006 are hereby REVERSED AND SET ASIDE, and a new
one is issued ordering the DENIAL of the Amended Complaint in Civil Case No. Q-95-24299 in Branch 96 of the Regional Trial Court of
Quezon City for lack of merit. The Writ of Preliminary Prohibitory Injunction enjoining Asian Banking Corporation (now Global
Business Bank, Inc.) from honoring MC No. 025935 and MC No. 025939, and Metropolitan Bank & Trust Company from honoring CC
No. 003380, is hereby LIFTED and SET ASIDE.
Global Business Bank, Inc. is ORDERED TO PAY the Bank of the Philippine Islands, as successor-in-interest of Far East Bank & Trust
Company, the amount of ₱18,455,350.00, representing the aggregate face value of MC No. 025935 and MC No. 025939, with
interest based on the rates it actually paid its depositors from July 7, 1995 until the finality of this Decision, in accordance with the
same compounding rules it applies to its depositors.

The petition in G.R. No. 175394 is hereby rendered MOOT.

The liabilities of spouses Gonzalo B. Nuguid and Marinella O. Nuguid under the Decision and Resolution of the Court of Appeals in
CAG.R. CV No. 77508 remain VALID and SUBSISTING, computed from the amounts adjudged by the Court of Appeals, without
prejudice to any further action that may be filed by Wilfred N. Chiok.

SO ORDERED

G.R. No. 184458 January 14, 2015

RODRIGO RIVERA, Petitioner,

vs.
SPOUSES SALVADOR CHUA AND VIOLETA S. CHUA, Respondents.

x-----------------------x

G.R. No. 184472

SPS. SALVADOR CHUA and VIOLETA S. CHUA, Petitioners,

vs.
RODRIGO RIVERA, Respondent.

DECISION

PEREZ, J.:

Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of Court assailing the Decision 1 of the Court
of Appeals in CA-G.R. SP No. 90609 which affirmed with modification the separate rulings of the Manila City trial courts, the Regional
Trial Court, Branch 17 in Civil Case No. 02-1052562 and the Metropolitan Trial Court (MeTC), Branch 30, in Civil Case No. 163661,3 a
case for collection of a sum of money due a promissory note. While all three (3) lower courts upheld the validity and authenticity of
the promissory note as duly signed by the obligor, Rodrigo Rivera (Rivera), petitioner in G.R. No. 184458, the appellate court
modified the trial courts’ consistent awards: (1) the stipulated interest rate of sixty percent (60%) reduced to twelve percent (12%)
per annumcomputed from the date of judicial or extrajudicial demand, and (2) reinstatement of the award of attorney’s fees also in
a reduced amount of ₱50,000.00.

In G.R. No. 184458, Rivera persists in his contention that there was no valid promissory note and questions the entire ruling of the
lower courts. On the other hand, petitioners in G.R. No. 184472, Spouses Salvador and Violeta Chua (Spouses Chua), take exception
to the appellate court’s reduction of the stipulated interest rate of sixty percent (60%) to twelve percent (12%) per annum.

We proceed to the facts.

The parties were friends of long standing having known each other since 1973: Rivera and Salvador are kumpadres, the former is the
godfather of the Spouses Chua’s son.

On 24 February 1995, Rivera obtained a loan from the Spouses Chua:

PROMISSORY NOTE
120,000.00

FOR VALUE RECEIVED, I, RODRIGO RIVERA promise to pay spouses SALVADOR C. CHUA and VIOLETA SY CHUA, the sum of One
Hundred Twenty Thousand Philippine Currency (₱120,000.00) on December 31, 1995.

It is agreed and understood that failure on my part to pay the amount of (120,000.00) One Hundred Twenty Thousand Pesos on
December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT (5%) interest monthly from the date of default until the
entire obligation is fully paid for.

Should this note be referred to a lawyer for collection, I agree to pay the further sum equivalent to twenty percent (20%) of the total
amount due and payable as and for attorney’s fees which in no case shall be less than ₱5,000.00 and to pay in addition the cost of
suit and other incidental litigation expense.

Any action which may arise in connection with this note shall be brought in the proper Court of the City of Manila.

Manila, February 24, 1995[.]

(SGD.) RODRIGO RIVERA4

In October 1998, almost three years from the date of payment stipulated in the promissory note, Rivera, as partial payment for the
loan, issued and delivered to the SpousesChua, as payee, a check numbered 012467, dated 30 December 1998, drawn against
Rivera’s current account with the Philippine Commercial International Bank (PCIB) in the amount of ₱25,000.00.

On 21 December 1998, the Spouses Chua received another check presumably issued by Rivera, likewise drawn against Rivera’s PCIB
current account, numbered 013224, duly signed and dated, but blank as to payee and amount. Ostensibly, as per understanding by
the parties, PCIB Check No. 013224 was issued in the amount of ₱133,454.00 with "cash" as payee. Purportedly, both checks were
simply partial payment for Rivera’s loan in the principal amount of ₱120,000.00.

Upon presentment for payment, the two checks were dishonored for the reason "account closed."

As of 31 May 1999, the amount due the Spouses Chua was pegged at ₱366,000.00 covering the principal of ₱120,000.00 plus five
percent (5%) interest per month from 1 January 1996 to 31 May 1999.

The Spouses Chua alleged that they have repeatedly demanded payment from Rivera to no avail. Because of Rivera’s unjustified
refusal to pay, the Spouses Chua were constrained to file a suit on 11 June 1999. The case was raffled before the MeTC, Branch 30,
Manila and docketed as Civil Case No. 163661.

In his Answer with Compulsory Counterclaim, Rivera countered that: (1) he never executed the subject Promissory Note; (2) in all
instances when he obtained a loan from the Spouses Chua, the loans were always covered by a security; (3) at the time of the filing
of the complaint, he still had an existing indebtedness to the Spouses Chua, secured by a real estate mortgage, but not yet in
default; (4) PCIB Check No. 132224 signed by him which he delivered to the Spouses Chua on 21 December 1998, should have been
issued in the amount of only 1,300.00, representing the amount he received from the Spouses Chua’s saleslady; (5) contrary to the
supposed agreement, the Spouses Chua presented the check for payment in the amount of ₱133,454.00; and (6) there was no
demand for payment of the amount of ₱120,000.00 prior to the encashment of PCIB Check No. 0132224. 5

In the main, Rivera claimed forgery of the subject Promissory Note and denied his indebtedness thereunder.

The MeTC summarized the testimonies of both parties’ respective witnesses:

[The spouses Chua’s] evidence include[s] documentary evidence and oral evidence (consisting of the testimonies of [the spouses]
Chua and NBI Senior Documents Examiner Antonio Magbojos). x x x

xxxx

Witness Magbojos enumerated his credentials as follows: joined the NBI (1987); NBI document examiner (1989); NBI Senior
Document Examiner (1994 to the date he testified); registered criminologist; graduate of 18th Basic Training Course [i]n Questioned
Document Examination conducted by the NBI; twice attended a seminar on US Dollar Counterfeit Detection conducted by the US
Embassy in Manila; attended a seminar on Effective Methodology in Teaching and Instructional design conducted by the NBI
Academy; seminar lecturer on Questioned Documents, Signature Verification and/or Detection; had examined more than a hundred
thousand questioned documents at the time he testified.

Upon [order of the MeTC], Mr. Magbojos examined the purported signature of [Rivera] appearing in the Promissory Note and
compared the signature thereon with the specimen signatures of [Rivera] appearing on several documents. After a thorough study,
examination, and comparison of the signature on the questioned document (Promissory Note) and the specimen signatures on the
documents submitted to him, he concluded that the questioned signature appearing in the Promissory Note and the specimen
signatures of [Rivera] appearing on the other documents submitted were written by one and the same person. In connection with
his findings, Magbojos prepared Questioned Documents Report No. 712-1000 dated 8 January 2001, with the following conclusion:
"The questioned and the standard specimen signatures RODGRIGO RIVERA were written by one and the same person."

[Rivera] testified as follows: he and [respondent] Salvador are "kumpadres;" in May 1998, he obtained a loan from [respondent]
Salvador and executed a real estate mortgage over a parcel of land in favor of [respondent Salvador] as collateral; aside from this
loan, in October, 1998 he borrowed ₱25,000.00 from Salvador and issued PCIB Check No. 126407 dated 30 December 1998; he
expressly denied execution of the Promissory Note dated 24 February 1995 and alleged that the signature appearing thereon was
not his signature; [respondent Salvador’s] claim that PCIB Check No. 0132224 was partial payment for the Promissory Note was not
true, the truth being that he delivered the check to [respondent Salvador] with the space for amount left blank as he and
[respondent] Salvador had agreed that the latter was to fill it in with the amount of ₱1,300.00 which amount he owed [the spouses
Chua]; however, on 29 December 1998 [respondent] Salvador called him and told him that he had written ₱133,454.00 instead of
₱1,300.00; x x x. To rebut the testimony of NBI Senior Document Examiner Magbojos, [Rivera] reiterated his averment that the
signature appearing on the Promissory Note was not his signature and that he did not execute the Promissory Note. 6

After trial, the MeTC ruled in favor of the Spouses Chua:

WHEREFORE, [Rivera] is required to pay [the spouses Chua]: ₱120,000.00 plus stipulated interest at the rate of 5% per month from 1
January 1996, and legal interest at the rate of 12% percent per annum from 11 June 1999, as actual and compensatory damages;
20% of the whole amount due as attorney’s fees.7

On appeal, the Regional Trial Court, Branch 17, Manila affirmed the Decision of the MeTC, but deleted the award of attorney’s fees
to the Spouses Chua:

WHEREFORE, except as to the amount of attorney’s fees which is hereby deleted, the rest of the Decision dated October 21, 2002 is
hereby AFFIRMED.8

Both trial courts found the Promissory Note as authentic and validly bore the signature of Rivera. Undaunted, Rivera appealed to the
Court of Appeals which affirmed Rivera’s liability under the Promissory Note, reduced the imposition of interest on the loan from
60% to 12% per annum, and reinstated the award of attorney’s fees in favor of the Spouses Chua:

WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the interest rate of 60% per
annum is hereby reduced to12% per annum and the award of attorney’s fees is reinstated atthe reduced amount of ₱50,000.00
Costs against [Rivera].9

Hence, these consolidated petitions for review on certiorariof Rivera in G.R. No. 184458 and the Spouses Chua in G.R. No. 184472,
respectively raising the following issues:

A. In G.R. No. 184458

1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE RULING OF THE RTC AND M[e]TC THAT THERE
WAS A VALID PROMISSORY NOTE EXECUTED BY [RIVERA].

2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT DEMAND IS NO LONGER NECESSARY AND IN
APPLYING THE PROVISIONS OF THE NEGOTIABLE INSTRUMENTS LAW.
3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN AWARDING ATTORNEY’S FEES DESPITE THE FACT THAT THE
SAME HAS NO BASIS IN FACT AND IN LAW AND DESPITE THE FACT THAT [THE SPOUSES CHUA] DID NOT APPEAL FROM THE DECISION
OF THE RTC DELETING THE AWARD OF ATTORNEY’S FEES.10

B. In G.R. No. 184472

[WHETHER OR NOT] THE HONORABLE COURT OF APPEALS COMMITTED GROSS LEGAL ERROR WHEN IT MODIFIED THE APPEALED
JUDGMENT BY REDUCING THE INTEREST RATE FROM 60% PER ANNUM TO 12% PER ANNUM IN SPITE OF THE FACT THAT RIVERA
NEVER RAISED IN HIS ANSWER THE DEFENSE THAT THE SAID STIPULATED RATE OF INTEREST IS EXORBITANT, UNCONSCIONABLE,
UNREASONABLE, INEQUITABLE, ILLEGAL, IMMORAL OR VOID.11

As early as 15 December 2008, wealready disposed of G.R. No. 184472 and denied the petition, via a Minute Resolution, for failure
to sufficiently show any reversible error in the ruling of the appellate court specifically concerning the correct rate of interest on
Rivera’s indebtedness under the Promissory Note.12

On 26 February 2009, Entry of Judgment was made in G.R. No. 184472.

Thus, what remains for our disposition is G.R. No. 184458, the appeal of Rivera questioning the entire ruling of the Court of Appeals
in CA-G.R. SP No. 90609.

Rivera continues to deny that heexecuted the Promissory Note; he claims that given his friendship withthe Spouses Chua who were
money lenders, he has been able to maintain a loan account with them. However, each of these loan transactions was respectively
"secured by checks or sufficient collateral."

Rivera points out that the Spouses Chua "never demanded payment for the loan nor interest thereof (sic) from [Rivera] for almost
four (4) years from the time of the alleged default in payment [i.e., after December 31, 1995]."13

On the issue of the supposed forgery of the promissory note, we are not inclined to depart from the lower courts’ uniform rulings
that Rivera indeed signed it.

Rivera offers no evidence for his asseveration that his signature on the promissory note was forged, only that the signature is not his
and varies from his usual signature. He likewise makes a confusing defense of having previously obtained loans from the Spouses
Chua who were money lenders and who had allowed him a period of "almost four (4) years" before demanding payment of the loan
under the Promissory Note.

First, we cannot give credence to such a naked claim of forgery over the testimony of the National Bureau of Investigation (NBI)
handwriting expert on the integrity of the promissory note. On that score, the appellate court aptly disabled Rivera’s contention:

[Rivera] failed to adduce clear and convincing evidence that the signature on the promissory note is a forgery. The fact of forgery
cannot be presumed but must be proved by clear, positive and convincing evidence. Mere variance of signatures cannot be
considered as conclusive proof that the same was forged. Save for the denial of Rivera that the signature on the note was not his,
there is nothing in the records to support his claim of forgery. And while it is true that resort to experts is not mandatory or
indispensable to the examination of alleged forged documents, the opinions of handwriting experts are nevertheless helpful in the
court’s determination of a document’s authenticity.

To be sure, a bare denial will not suffice to overcome the positive value of the promissory note and the testimony of the NBI witness.
In fact, even a perfunctory comparison of the signatures offered in evidence would lead to the conclusion that the signatures were
made by one and the same person.

It is a basic rule in civil cases that the party having the burden of proof must establish his case by preponderance of evidence, which
simply means "evidence which is of greater weight, or more convincing than that which is offered in opposition to it."

Evaluating the evidence on record, we are convinced that [the Spouses Chua] have established a prima faciecase in their favor,
hence, the burden of evidence has shifted to [Rivera] to prove his allegation of forgery. Unfortunately for [Rivera], he failed to
substantiate his defense.14 Well-entrenched in jurisprudence is the rule that factual findings of the trial court, especially when
affirmed by the appellate court, are accorded the highest degree of respect and are considered conclusive between the parties. 15 A
review of such findings by this Court is not warranted except upon a showing of highly meritorious circumstances, such as: (1) when
the findings of a trial court are grounded entirely on speculation, surmises or conjectures; (2) when a lower court's inference from its
factual findings is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion in the appreciation of facts;
(4) when the findings of the appellate court go beyond the issues of the case, or fail to notice certain relevant facts which, if properly
considered, will justify a different conclusion; (5) when there is a misappreciation of facts; (6) when the findings of fact are
conclusions without mention of the specific evidence on which they are based, are premised on the absence of evidence, or are
contradicted by evidence on record.16 None of these exceptions obtains in this instance. There is no reason to depart from the
separate factual findings of the three (3) lower courts on the validity of Rivera’s signature reflected in the Promissory Note.

Indeed, Rivera had the burden ofproving the material allegations which he sets up in his Answer to the plaintiff’s claim or cause of
action, upon which issue is joined, whether they relate to the whole case or only to certain issues in the case.17

In this case, Rivera’s bare assertion is unsubstantiated and directly disputed by the testimony of a handwriting expert from the NBI.
While it is true that resort to experts is not mandatory or indispensable to the examination or the comparison of handwriting, the
trial courts in this case, on its own, using the handwriting expert testimony only as an aid, found the disputed document valid.18

Hence, the MeTC ruled that:

[Rivera] executed the Promissory Note after consideration of the following: categorical statement of [respondent] Salvador that
[Rivera] signed the Promissory Note before him, in his ([Rivera’s]) house; the conclusion of NBI Senior Documents Examiner that the
questioned signature (appearing on the Promissory Note) and standard specimen signatures "Rodrigo Rivera" "were written by one
and the same person"; actual view at the hearing of the enlarged photographs of the questioned signature and the standard
specimen signatures.19

Specifically, Rivera insists that: "[i]f that promissory note indeed exists, it is beyond logic for a money lender to extend another loan
on May 4, 1998 secured by a real estate mortgage, when he was already in default and has not been paying any interest for a loan
incurred in February 1995."20

We disagree.

It is likewise likely that precisely because of the long standing friendship of the parties as "kumpadres," Rivera was allowed another
loan, albeit this time secured by a real estate mortgage, which will cover Rivera’s loan should Rivera fail to pay. There is nothing
inconsistent with the Spouses Chua’s two (2) and successive loan accommodations to Rivera: one, secured by a real estate mortgage
and the other, secured by only a Promissory Note.

Also completely plausible is thatgiven the relationship between the parties, Rivera was allowed a substantial amount of time before
the Spouses Chua demanded payment of the obligation due under the Promissory Note.

In all, Rivera’s evidence or lack thereof consisted only of a barefaced claim of forgery and a discordant defense to assail the
authenticity and validity of the Promissory Note. Although the burden of proof rested on the Spouses Chua having instituted the civil
case and after they established a prima facie case against Rivera, the burden of evidence shifted to the latter to establish his
defense.21 Consequently, Rivera failed to discharge the burden of evidence, refute the existence of the Promissory Note duly signed
by him and subsequently, that he did not fail to pay his obligation thereunder. On the whole, there was no question left on where
the respective evidence of the parties preponderated—in favor of plaintiffs, the Spouses Chua. Rivera next argues that even
assuming the validity of the Promissory Note, demand was still necessary in order to charge him liable thereunder. Rivera argues
that it was grave error on the part of the appellate court to apply Section 70 of the Negotiable Instruments Law (NIL). 22

We agree that the subject promissory note is not a negotiable instrument and the provisions of the NIL do not apply to this case.
Section 1 of the NIL requires the concurrence of the following elements to be a negotiable instrument:

(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.

On the other hand, Section 184 of the NIL defines what negotiable promissory note is: SECTION 184. Promissory Note, Defined. – A
negotiable promissory note within the meaning of this Act is an unconditional promise in writing made by one person to another,
signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to
bearer. Where a note is drawn to the maker’s own order, it is not complete until indorsed by him.

The Promissory Note in this case is made out to specific persons, herein respondents, the Spouses Chua, and not to order or to
bearer, or to the order of the Spouses Chua as payees. However, even if Rivera’s Promissory Note is not a negotiable instrument and
therefore outside the coverage of Section 70 of the NIL which provides that presentment for payment is not necessary to charge the
person liable on the instrument, Rivera is still liable under the terms of the Promissory Note that he issued.

The Promissory Note is unequivocal about the date when the obligation falls due and becomes demandable—31 December 1995. As
of 1 January 1996, Rivera had already incurred in delay when he failed to pay the amount of ₱120,000.00 due to the Spouses Chua
on 31 December 1995 under the Promissory Note.

Article 1169 of the Civil Code explicitly provides:

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands
from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declare; or

(2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be
delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with
what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins. (Emphasis
supplied)

There are four instances when demand is not necessary to constitute the debtor in default: (1) when there is an express stipulation
to that effect; (2) where the law so provides; (3) when the period is the controlling motive or the principal inducement for the
creation of the obligation; and (4) where demand would be useless. In the first two paragraphs, it is not sufficient that the law or
obligation fixes a date for performance; it must further state expressly that after the period lapses, default will commence.

We refer to the clause in the Promissory Note containing the stipulation of interest:

It is agreed and understood that failure on my part to pay the amount of (₱120,000.00) One Hundred Twenty Thousand Pesos on
December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT (5%) interest monthly from the date of default until the
entire obligation is fully paid for.23

which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the "date of default" until the entire obligation is
fully paid for. The parties evidently agreed that the maturity of the obligation at a date certain, 31 December 1995, will give rise to
the obligation to pay interest. The Promissory Note expressly provided that after 31 December 1995, default commences and the
stipulation on payment of interest starts.

The date of default under the Promissory Note is 1 January 1996, the day following 31 December 1995, the due date of the
obligation. On that date, Rivera became liable for the stipulated interest which the Promissory Note says is equivalent to 5% a
month. In sum, until 31 December 1995, demand was not necessary before Rivera could be held liable for the principal amount of
₱120,000.00. Thereafter, on 1 January 1996, upon default, Rivera became liable to pay the Spouses Chua damages, in the form of
stipulated interest.

The liability for damages of those who default, including those who are guilty of delay, in the performance of their obligations is laid
down on Article 117024 of the Civil Code.

Corollary thereto, Article 2209 solidifies the consequence of payment of interest as an indemnity for damages when the obligor
incurs in delay:

Art. 2209. If the obligation consists inthe 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 the interest agreed upon, and in the absence of stipulation, the
legal interest, which is six percent per annum. (Emphasis supplied)

Article 2209 is specifically applicable in this instance where: (1) the obligation is for a sum of money; (2) the debtor, Rivera, incurred
in delay when he failed to pay on or before 31 December 1995; and (3) the Promissory Note provides for an indemnity for damages
upon default of Rivera which is the payment of a 5%monthly interest from the date of default.

We do not consider the stipulation on payment of interest in this case as a penal clause although Rivera, as obligor, assumed to pay
additional 5% monthly interest on the principal amount of ₱120,000.00 upon default.

Article 1226 of the Civil Code provides:

Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in
case of noncompliance, if there isno stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the
penalty or is guilty of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.

The penal clause is generally undertaken to insure performance and works as either, or both, punishment and reparation. It is an
exception to the general rules on recovery of losses and damages. As an exception to the general rule, a penal clause must be
specifically set forth in the obligation.25

In high relief, the stipulation in the Promissory Note is designated as payment of interest, not as a penal clause, and is simply an
indemnity for damages incurred by the Spouses Chua because Rivera defaulted in the payment of the amount of ₱120,000.00. The
measure of damages for the Rivera’s delay is limited to the interest stipulated in the Promissory Note. In apt instances, in default of
stipulation, the interest is that provided by law.26

In this instance, the parties stipulated that in case of default, Rivera will pay interest at the rate of 5% a month or 60% per annum.
On this score, the appellate court ruled:

It bears emphasizing that the undertaking based on the note clearly states the date of payment tobe 31 December 1995. Given this
circumstance, demand by the creditor isno longer necessary in order that delay may exist since the contract itself already expressly
so declares. The mere failure of [Spouses Chua] to immediately demand or collect payment of the value of the note does not
exonerate [Rivera] from his liability therefrom. Verily, the trial court committed no reversible error when it imposed interest from 1
January 1996 on the ratiocination that [Spouses Chua] were relieved from making demand under Article 1169 of the Civil Code.

xxxx

As observed by [Rivera], the stipulated interest of 5% per month or 60% per annum in addition to legal interests and attorney’s fees
is, indeed, highly iniquitous and unreasonable. Stipulated interest rates are illegal if they are unconscionable and the Court is
allowed to temper interest rates when necessary. Since the interest rate agreed upon is void, the parties are considered to have no
stipulation regarding the interest rate, thus, the rate of interest should be 12% per annum computed from the date of judicial or
extrajudicial demand.27
The appellate court found the 5% a month or 60% per annum interest rate, on top of the legal interest and attorney’s fees, steep,
tantamount to it being illegal, iniquitous and unconscionable. Significantly, the issue on payment of interest has been squarely
disposed of in G.R. No. 184472 denying the petition of the Spouses Chua for failure to sufficiently showany reversible error in the
ruling of the appellate court, specifically the reduction of the interest rate imposed on Rivera’s indebtedness under the Promissory
Note. Ultimately, the denial of the petition in G.R. No. 184472 is res judicata in its concept of "bar by prior judgment" on whether
the Court of Appeals correctly reduced the interest rate stipulated in the Promissory Note.

Res judicata applies in the concept of "bar by prior judgment" if the following requisites concur: (1) the former judgment or order
must be final; (2) the judgment or order must be on the merits; (3) the decision must have been rendered by a court having
jurisdiction over the subject matter and the parties; and (4) there must be, between the first and the second action, identity of
parties, of subject matter and of causes of action.28

In this case, the petitions in G.R. Nos. 184458 and 184472 involve an identity of parties and subject matter raising specifically errors
in the Decision of the Court of Appeals. Where the Court of Appeals’ disposition on the propriety of the reduction of the interest rate
was raised by the Spouses Chua in G.R. No. 184472, our ruling thereon affirming the Court of Appeals is a "bar by prior judgment."

At the time interest accrued from 1 January 1996, the date of default under the Promissory Note, the then prevailing rate of legal
interest was 12% per annum under Central Bank (CB) Circular No. 416 in cases involving the loan or for bearance of money.29 Thus,
the legal interest accruing from the Promissory Note is 12% per annum from the date of default on 1 January 1996. However, the
12% per annumrate of legal interest is only applicable until 30 June 2013, before the advent and effectivity of Bangko Sentral ng
Pilipinas (BSP) Circular No. 799, Series of 2013 reducing the rate of legal interest to 6% per annum. Pursuant to our ruling in Nacar v.
Gallery Frames,30 BSP Circular No. 799 is prospectively applied from 1 July 2013. In short, the applicable rate of legal interest from 1
January 1996, the date when Rivera defaulted, to date when this Decision becomes final and executor is divided into two periods
reflecting two rates of legal interest: (1) 12% per annum from 1 January 1996 to 30 June 2013; and (2) 6% per annum FROM 1 July
2013 to date when this Decision becomes final and executory.

As for the legal interest accruing from 11 June 1999, when judicial demand was made, to the date when this Decision becomes final
and executory, such is likewise divided into two periods: (1) 12% per annum from 11 June 1999, the date of judicial demand to 30
June 2013; and (2) 6% per annum from 1 July 2013 to date when this Decision becomes final and executor. 31 We base this imposition
of interest on interest due earning legal interest on Article 2212 of the Civil Code which provides that "interest due shall earn legal
interest from the time it is judicially demanded, although the obligation may be silent on this point."

From the time of judicial demand, 11 June 1999, the actual amount owed by Rivera to the Spouses Chua could already be
determined with reasonable certainty given the wording of the Promissory Note. 32

We cite our recent ruling in Nacar v. Gallery Frames:33

I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasi-delicts is breached, the
contravenor can be held liable for damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in determining
the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well
as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or for bearance 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 6% per annum to be computed
from default, i.e., from judicial or extra judicial demand under and subject to the provisions ofArticle 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 6% per annum.1âwphi1 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 6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a for bearance of credit. And, in addition to the above,
judgments that have become final and executory prior to July 1, 2013, shall not be disturbed and shall continue to be implemented
applying the rate of interest fixed therein. (Emphasis supplied)

On the reinstatement of the award of attorney’s fees based on the stipulation in the Promissory Note, weagree with the reduction
thereof but not the ratiocination of the appellate court that the attorney’s fees are in the nature of liquidated damages or penalty.
The interest imposed in the Promissory Note already answers as liquidated damages for Rivera’s default in paying his obligation. We
award attorney’s fees, albeit in a reduced amount, in recognition that the Spouses Chua were compelled to litigate and incurred
expenses to protect their interests.34 Thus, the award of ₱50,000.00 as attorney’s fees is proper.

For clarity and to obviate confusion, we chart the breakdown of the total amount owed by Rivera to the Spouses Chua:

Face value of the Stipulated Interest A & B Interest due earning legal Attorney’s fees Total
Promissory Note interest A & B Amount

February 24, 1995 to A. January 1, 1996 to
December 31, 1995 June 30, 2013
B. July 1 2013 to date when
this Decision becomes final
and executory
A. June 11, 1999 (date of Wholesale
judicial demand) to June 30, Amount
2013
B. July 1, 2013 to date when
this Decision becomes final
and executory

₱120,000.00 A. 12 % per annumon the
principal amount of
₱120,000.00
B. 6% per annumon the
principal amount of
₱120,000.00
A. 12% per annumon the ₱50,000.00 Total amount of
total amount of column 2 Columns 1-4
B. 6% per annumon the
total amount of column 235

The total amount owing to the Spouses Chua set forth in this Decision shall further earn legal interest at the rate of 6% per annum
computed from its finality until full payment thereof, the interim period being deemed to be a forbearance of credit.

WHEREFORE, the petition in G.R. No. 184458 is DENIED. The Decision of the Court of Appeals in CA-G.R. SP No. 90609 is MODIFIED.
Petitioner Rodrigo Rivera is ordered to pay respondents Spouse Salvador and Violeta Chua the following:

(1) the principal amount of ₱120,000.00;

(2) legal interest of 12% per annumof the principal amount of ₱120,000.00 reckoned from 1 January 1996 until 30 June 2013;

(3) legal interest of 6% per annumof the principal amount of ₱120,000.00 form 1 July 2013 to date when this Decision becomes final
and executory;

(4) 12% per annumapplied to the total of paragraphs 2 and 3 from 11 June 1999, date of judicial demand, to 30 June 2013, as
interest due earning legal interest;

(5) 6% per annumapplied to the total amount of paragraphs 2 and 3 from 1 July 2013 to date when this Decision becomes final and
executor, asinterest due earning legal interest;

(6) Attorney’s fees in the amount of ₱50,000.00; and

(7) 6% per annum interest on the total of the monetary awards from the finality of this Decision until full payment thereof.

Costs against petitioner Rodrigo Rivera.

SO ORDERED

G.R. No. 166018 June 4, 2014

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE BRANCHES, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent;

x-----------------------x

G.R. No. 167728

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE BRANCHES, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

These petitions for review on certiorari1 assail the Decision2 and Resolution dated July 8, 2004 and October 25, 2004, respectively, of
the Court of Appeals in CA-G.R. SP No. 77580, as well as the Decision3 and Resolution dated September 2, 2004 and April 4, 2005,
respectively, of the Court of Appeals in CA-G.R. SP No. 70814. The respective Decisions in the said cases similarly reversed and set
aside the decisions of the Court of Tax Appeals (CTA) in CTA Case Nos. 5951 4 and 6009,5 respectively, and dismissed the petitions of
petitioner Hongkong and Shanghai Banking Corporation Limited-Philippine Branches (HSBC). The corresponding Resolutions, on the
other hand, denied the respective motions for reconsideration of the said Decisions.

HSBC performs, among others, custodial services on behalf of its investor-clients, corporate and individual, resident or non-resident
of the Philippines, with respect to their passive investments in the Philippines, particularly investments in shares of stocks in
domestic corporations. As a custodian bank, HSBC serves as the collection/payment agent with respect to dividends and other
income derived from its investor-clients’ passive investments.6

HSBC’s investor-clients maintain Philippine peso and/or foreign currency accounts, which are managed by HSBC through instructions
given through electronic messages. The said instructions are standard forms known in the banking industry as SWIFT, or "Society for
Worldwide Interbank Financial Telecommunication." In purchasing shares of stock and other investment in securities, the investor-
clients would send electronic messages from abroad instructing HSBC to debit their local or foreign currency accounts and to pay the
purchase price therefor upon receipt of the securities.7

Pursuant to the electronic messages of its investor-clients, HSBC purchased and paid Documentary Stamp Tax (DST) from September
to December 1997 and also from January to December 1998 amounting to ₱19,572,992.10 and ₱32,904,437.30, respectively, broken
down as follows:

A. September to December 1997

September 1997 P 6,981,447.90

 October 1997 6,209,316.60

November 1997 3,978,510.30

December 1997 2,403,717.30

Total ₱19,572,992.10

B. January to December 1998

January 1998 P 3,328,305.60

February 1998 4,566,924.90

March 1998 5,371,797.30

April 1998 4,197,235.50

May 1998 2,519,587.20

June 1998 2,301,333.00

July 1998 1,586,404.50

August 1998 1,787,359.50

September 1998 1,231,828.20

October 1998 1,303,184.40

November 1998 2,026,379.70

December 1998 2,684,097.50

Total ₱32,904,437.30

On August 23, 1999, the Bureau of Internal Revenue (BIR), thru its then Commissioner, Beethoven Rualo, issued BIR Ruling No. 132-
99 to the effect that instructions or advises from abroad on the management of funds located in the Philippines which do not involve
transfer of funds from abroad are not subject to DST. BIR Ruling No. 132-99 reads:

Date: August 23, 1999

FERRY TOLEDO VICTORINO GONZAGA

& ASSOCIATES
G/F AFC Building, Alfaro St.
Salcedo Village, Makati
Metro Manila
Attn: Atty. Tomas C. Toledo
Tax Counsel

Gentlemen:

This refers to your letter dated July 26, 1999 requesting on behalf of your clients, the CITIBANK & STANDARD CHARTERED BANK, for
a ruling as to whether or not the electronic instructions involving the following transactions of residents and non-residents of the
Philippines with respect to their local or foreign currency accounts are subject to documentary stamp tax under Section 181 of the
1997 Tax Code, viz:

A. Investment purchase transactions:

An overseas client sends instruction to its bank in the Philippines to either:

(i) debit its local or foreign currency account and to pay a named recipient in the Philippines; or

(ii) receive funds from another bank in the Philippines for deposit into its account and to pay a named recipient in the Philippines."

The foregoing transactions are carried out under instruction from abroad and [do] not involve actual fund transfer since the funds
are already in the Philippine accounts. The instructions are in the form of electronic messages (i.e., SWIFT MT100 or MT 202 and/or
MT 521). In both cases, the payment is against the delivery of investments purchased. The purchase of investments and the payment
comprise one single transaction. DST has already been paid under Section 176 for the investment purchase.

B. Other transactions:

An overseas client sends an instruction to its bank in the Philippines to either:

(i) debit its local or foreign currency account and to pay a named recipient, who may be another bank, a corporate entity or an
individual in the Philippines; or

(ii) receive funds from another bank in the Philippines for deposit to its account and to pay a named recipient, who may be another
bank, a corporate entity or an individual in the Philippines."

The above instruction is in the form of an electronic message (i.e., SWIFT MT 100 or MT 202) or tested cable, and may not refer to
any particular transaction.

The opening and maintenance by a non-resident of local or foreign currency accounts with a bank in the Philippines is permitted by
the Bangko Sentral ng Pilipinas, subject to certain conditions.

In reply, please be informed that pursuant to Section 181 of the 1997 Tax Code, which provides that –

SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others.– Upon any acceptance or payment of any bill of exchange or
order for the payment of money purporting to be drawn in a foreign country but payable in the Philippines, there shall be collected a
documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos (₱200), or fractional part thereof, of the face value of
any such bill of exchange, or order, or Philippine equivalent of such value, if expressed in foreign currency. (Underscoring supplied.)

a documentary stamp tax shall be imposed on any bill of exchange or order for payment purporting to be drawn in a foreign country
but payable in the Philippines.

Under the foregoing provision, the documentary stamp tax shall be levied on the instrument, i.e., a bill of exchange or order for the
payment of money, which purports to draw money from a foreign country but payable in the Philippines. In the instant case,
however, while the payor is residing outside the Philippines, he maintains a local and foreign currency account in the Philippines
from where he will draw the money intended to pay a named recipient. The instruction or order to pay shall be made through an
electronic message, i.e., SWIFT MT 100 or MT 202 and/or MT 521. Consequently, there is no negotiable instrument to be made,
signed or issued by the payee. In the meantime, such electronic instructions by the non-resident payor cannot be considered as a
transaction per se considering that the same do not involve any transfer of funds from abroad or from the place where the
instruction originates. Insofar as the local bank is concerned, such instruction could be considered only as a memorandum and shall
be entered as such in its books of accounts. The actual debiting of the payor’s account, local or foreign currency account in the
Philippines, is the actual transaction that should be properly entered as such.

Under the Documentary Stamp Tax Law, the mere withdrawal of money from a bank deposit, local or foreign currency account, is
not subject to DST, unless the account so maintained is a current or checking account, in which case, the issuance of the check or
bank drafts is subject to the documentary stamp tax imposed under Section 179 of the 1997 Tax Code. In the instant case, and
subject to the physical impossibility on the part of the payor to be present and prepare and sign an instrument purporting to pay a
certain obligation, the withdrawal and payment shall be made in cash. In this light, the withdrawal shall not be subject to
documentary stamp tax. The case is parallel to an automatic bank transfer of local funds from a savings account to a checking
account maintained by a depositor in one bank.

Likewise, the receipt of funds from another bank in the Philippines for deposit to the payee’s account and thereafter upon
instruction of the non-resident depositor-payor, through an electronic message, the depository bank to debit his account and pay a
named recipient shall not be subject to documentary stamp tax.

It should be noted that the receipt of funds from another local bank in the Philippines by a local depository bank for the account of
its client residing abroad is part of its regular banking transaction which is not subject to documentary stamp tax. Neither does the
receipt of funds makes the recipient subject to the documentary stamp tax. The funds are deemed to be part of the deposits of the
client once credited to his account, and which, thereafter can be disposed in the manner he wants. The payor-client’s further
instruction to debit his account and pay a named recipient in the Philippines does not involve transfer of funds from abroad.
Likewise, as stated earlier, such debit of local or foreign currency account in the Philippines is not subject to the documentary stamp
tax under the aforementioned Section 181 of the Tax Code.

In the light of the foregoing, this Office hereby holds that the instruction made through an electronic message by non-resident
payor-client to debit his local or foreign currency account maintained in the Philippines and to pay a certain named recipient also
residing in the Philippines is not the transaction contemplated under Section 181 of the 1997 Tax Code. Such being the case, such
electronic instruction purporting to draw funds from a local account intended to be paid to a named recipient in the Philippines is
not subject to documentary stamp tax imposed under the foregoing Section.

This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that
the facts are different, this ruling shall be considered null and void.

Very truly yours,

(Sgd.) BEETHOVEN L. RUALO

Commissioner of Internal Revenue8

With the above BIR Ruling as its basis, HSBC filed on October 8, 1999 an administrative claim for the refund of the amount of
₱19,572,992.10 allegedly representing erroneously paid DST to the BIR for the period covering September to December 1997.

Subsequently, on January 31, 2000, HSBC filed another administrative claim for the refund of the amount of ₱32,904,437.30
allegedly representing erroneously paid DST to the BIR for the period covering January to December 1998.

As its claims for refund were not acted upon by the BIR, HSBC subsequently brought the matter to the CTA as CTA Case Nos. 5951
and 6009, respectively, in order to suspend the running of the two-year prescriptive period.

The CTA Decisions dated May 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in CTA Case No. 5951 favored HSBC.
Respondent Commissioner of Internal Revenue was ordered to refund or issue a tax credit certificate in favor of HSBC in the reduced
amounts of ₱30,360,570.75 in CTA Case No. 6009 and ₱16,436,395.83 in CTA Case No. 5951, representing erroneously paid DST that
have been sufficiently substantiated with documentary evidence. The CTA ruled that HSBC is entitled to a tax refund or tax credit
because Sections 180 and 181 of the 1997 Tax Code do not apply to electronic message instructions transmitted by HSBC’s non-
resident investor-clients:
The instruction made through an electronic message by a nonresident investor-client, which is to debit his local or foreign currency
account in the Philippines and pay a certain named recipient also residing in the Philippines is not the transaction contemplated in
Section 181 of the Code. In this case, the withdrawal and payment shall be made in cash. It is parallel to an automatic bank transfer
of local funds from a savings account to a checking account maintained by a depositor in one bank. The act of debiting the account is
not subject to the documentary stamp tax under Section 181. Neither is the transaction subject to the documentary stamp tax under
Section 180 of the same Code. These electronic message instructions cannot be considered negotiable instruments as they lack the
feature of negotiability, which, is the ability to be transferred (Words and Phrases).

These instructions are considered as mere memoranda and entered as such in the books of account of the local bank, and the actual
debiting of the payor’s local or foreign currency account in the Philippines is the actual transaction that should be properly entered
as such.9

The respective dispositive portions of the Decisions dated May 2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in CTA
Case No. 5951 read:

II. CTA Case No. 6009

WHEREFORE, in the light of all the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Respondent is hereby ORDERED
to REFUND or ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the amount of ₱30,360,570.75 representing erroneous
payment of documentary stamp tax for the taxable year 1998.10

II. CTA Case No. 5951

WHEREFORE, in the light of the foregoing, the instant petition is hereby partially granted. Accordingly, respondent is hereby
ORDERED to REFUND, or in the alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner in the reduced amount of
₱16,436,395.83 representing erroneously paid documentary stamp tax for the months of September 1997 to December 1997. 11

However, the Court of Appeals reversed both decisions of the CTA and ruled that the electronic messages of HSBC’s investor-clients
are subject to DST. The Court of Appeals explained:

At bar, [HSBC] performs custodial services in behalf of its investor-clients as regards their passive investments in the Philippines
mainly involving shares of stocks in domestic corporations. These investor-clients maintain Philippine peso and/or foreign currency
accounts with [HSBC]. Should they desire to purchase shares of stock and other investments securities in the Philippines, the
investor-clients send their instructions and advises via electronic messages from abroad to [HSBC] in the form of SWIFT MT 100, MT
202, or MT 521 directing the latter to debit their local or foreign currency account and to pay the purchase price upon receipt of the
securities (CTA Decision, pp. 1-2; Rollo, pp. 41-42). Pursuant to Section 181 of the NIRC, [HSBC] was thus required to pay [DST] based
on its acceptance of these electronic messages – which, as [HSBC] readily admits in its petition filed before the [CTA], were
essentially orders to pay the purchases of securities made by its client-investors (Rollo, p. 60).

Appositely, the BIR correctly and legally assessed and collected the [DST] from [HSBC] considering that the said tax was levied
against the acceptances and payments by [HSBC] of the subject electronic messages/orders for payment. The issue of whether such
electronic messages may be equated as a written document and thus be subject to tax is beside the point. As We have already
stressed, Section 181 of the law cited earlier imposes the [DST] not on the bill of exchange or order for payment of money but on the
acceptance or payment of the said bill or order. The acceptance of a bill or order is the signification by the drawee of its assent to
the order of the drawer to pay a given sum of money while payment implies not only the assent to the said order of the drawer and
a recognition of the drawer’s obligation to pay such aforesaid sum, but also a compliance with such obligation (Philippine National
Bank vs. Court of Appeals, 25 SCRA 693 [1968]; Prudential Bank vs. Intermediate Appellate Court, 216 SCRA 257 [1992]). What is vital
to the valid imposition of the [DST] under Section 181 is the existence of the requirement of acceptance or payment by the drawee
(in this case, [HSBC]) of the order for payment of money from its investor-clients and that the said order was drawn from a foreign
country and payable in the Philippines. These requisites are surely present here.

It would serve the parties well to understand the nature of the tax being imposed in the case at bar. In Philippine Home Assurance
Corporation vs. Court of Appeals (301 SCRA 443 [1999]), the Supreme Court ruled that [DST is] levied on the exercise by persons of
certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of
specific instruments, independently of the legal status of the transactions giving rise thereto. In the same case, the High Court also
declared – citing Du Pont vs. United States (300 U.S. 150, 153 [1936])

The tax is not upon the business transacted but is an excise upon the privilege, opportunity, or facility offered at exchanges for the
transaction of the business. It is an excise upon the facilities used in the transaction of the business separate and apart from the
business itself. x x x.

To reiterate, the subject [DST] was levied on the acceptance and payment made by [HSBC] pursuant to the order made by its client-
investors as embodied in the cited electronic messages, through which the herein parties’ privilege and opportunity to transact
business respectively as drawee and drawers was exercised, separate and apart from the circumstances and conditions related to
such acceptance and subsequent payment of the sum of money authorized by the concerned drawers. Stated another way, the
[DST] was exacted on [HSBC’s] exercise of its privilege under its drawee-drawer relationship with its client-investor through the
execution of a specific instrument which, in the case at bar, is the acceptance of the order for payment of money. The acceptance of
a bill or order for payment may be done in writing by the drawee in the bill or order itself, or in a separate instrument (Prudential
Bank vs. Intermediate Appellate Court, supra.)Here, [HSBC]’s acceptance of the orders for the payment of money was veritably
‘done in writing in a separate instrument’ each time it debited the local or foreign currency accounts of its client-investors pursuant
to the latter’s instructions and advises sent by electronic messages to [HSBC]. The [DST] therefore must be paid upon the execution
of the specified instruments or facilities covered by the tax – in this case, the acceptance by [HSBC] of the order for payment of
money sent by the client-investors through electronic messages. x x x. 12

Hence, these petitions.

HSBC asserts that the Court of Appeals committed grave error when it disregarded the factual and legal conclusions of the CTA.
According to HSBC, in the absence of abuse or improvident exercise of authority, the CTA’s ruling should not have been disturbed as
the CTA is a highly specialized court which performs judicial functions, particularly for the review of tax cases. HSBC further argues
that the Commissioner of Internal Revenue had already settled the issue on the taxability of electronic messages involved in these
cases in BIR Ruling No. 132-99 and reiterated in BIR Ruling No. DA-280-2004.13

The Commissioner of Internal Revenue, on the other hand, claims that Section 181 of the 1997 Tax Code imposes DST on the
acceptance or payment of a bill of exchange or order for the payment of money. The DST under Section 18 of the 1997 Tax Code is
levied on HSBC’s exercise of a privilege which is specifically taxed by law. BIR Ruling No. 132-99 is inconsistent with prevailing law
and long standing administrative practice, respondent is not barred from questioning his own revenue ruling. Tax refunds like tax
exemptions are strictly construed against the taxpayer.14

The Court finds for HSBC.

The Court agrees with the CTA that the DST under Section 181 of the Tax Code is levied on the acceptance or payment of "a bill of
exchange purporting to be drawn in a foreign country but payable in the Philippines" and that "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." A bill of exchange is one of
two general forms of negotiable instruments under the Negotiable Instruments Law. 15

The Court further agrees with the CTA that the electronic messages of HSBC’s investor-clients containing instructions to debit their
respective local or foreign currency accounts in the Philippines and pay a certain named recipient also residing in the Philippines is
not the transaction contemplated under Section 181 of the Tax Code as such instructions are "parallel to an automatic bank transfer
of local funds from a savings account to a checking account maintained by a depositor in one bank." The Court favorably adopts the
finding of the CTA that the electronic messages "cannot be considered negotiable instruments as they lack the feature of
negotiability, which, is the ability to be transferred" and that the said electronic messages are "mere memoranda" of the transaction
consisting of the "actual debiting of the [investor-client-payor’s] local or foreign currency account in the Philippines" and "entered as
such in the books of account of the local bank," HSBC.16

More fundamentally, the instructions given through electronic messages that are subjected to DST in these cases are not negotiable
instruments as they do not comply with the requisites of negotiability under Section 1 of the Negotiable Instruments Law, which
provides:
Sec. 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 electronic messages are not signed by the investor-clients as supposed drawers of a bill of exchange; they do not contain an
unconditional order to pay a sum certain in money as the payment is supposed to come from a specific fund or account of the
investor-clients; and, they are not payable to order or bearer but to a specifically designated third party. Thus, the electronic
messages are not bills of exchange. As there was no bill of exchange or order for the payment drawn abroad and made payable here
in the Philippines, there could have been no acceptance or payment that will trigger the imposition of the DST under Section 181 of
the Tax Code.

Section 181 of the 1997 Tax Code, which governs HSBC’s claim for tax refund for taxable year 1998 subject of G.R. No. 167728,
provides:

SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others. – Upon any acceptance or payment of any bill of exchange or
order for the payment of money purporting to be drawn in a foreign country but payable in the Philippines, there shall be collected a
documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos (₱200), or fractional part thereof, of the face value of
any such bill of exchange, or order, or the Philippine equivalent of such value, if expressed in foreign currency. (Emphasis supplied.)

Section 230 of the 1977 Tax Code, as amended, which governs HSBC’s claim for tax refund for DST paid during the period September
to December 1997 and subject of G.R. No. 166018, is worded exactly the same as its counterpart provision in the 1997 Tax Code
quoted above.

The origin of the above provision is Section 117 of the Tax Code of 1904, 17 which provided: SECTION 117. The acceptor or acceptors
of any bill of exchange or order for the payment of any sum of money drawn or purporting to be drawn in any foreign country but
payable in the Philippine Islands, shall, before paying or accepting the same, place thereupon a stamp in payment of the tax upon
such document in the same manner as is required in this Act for the stamping of inland bills of exchange or promissory notes, and no
bill of exchange shall be paid nor negotiated until such stamp shall have been affixed thereto. 18 (Emphasis supplied.)

It then became Section 30(h) of the 1914 Tax Code 19:

SEC. 30. Stamp tax upon documents and papers. – Upon documents, instruments, and papers, and upon acceptances, assignments,
sales, and transfers of the obligation, right, or property incident thereto documentary taxes for and in respect of the transaction so
had or accomplished shall be paid as hereinafter prescribed, by the persons making, signing, issuing, accepting, or transferring the
same, and at the time such act is done or transaction had:

xxxx

(h) Upon any acceptance or payment upon acceptance of any bill of exchange or order for the payment of money purporting to be
drawn in a foreign country but payable in the Philippine Islands, on each two hundred pesos, or fractional part thereof, of the face
value of any such bill of exchange or order, or the Philippine equivalent of such value, if expressed in foreign currency, two
centavos[.] (Emphasis supplied.)

It was implemented by Section 46 in relation to Section 39 of Revenue Regulations No. 26,20 as amended:

SEC. 39. A Bill of Exchange is one that "denotes checks, drafts, and all other kinds of orders for the payment of money, payable at
sight or on demand, or after a specific period after sight or from a stated date."
SEC. 46. Bill of Exchange, etc. – When any bill of exchange or order for the payment of money drawn in a foreign country but payable
in this country whether at sight or on demand or after a specified period after sight or from a stated date, is presented for
acceptance or payment, there must be affixed upon acceptance or payment of documentary stamp equal to P0.02 for each ₱200 or
fractional part thereof. (Emphasis supplied.)

It took its present form in Section 218 of the Tax Code of 1939, 21 which provided:

SEC. 218. Stamp Tax Upon Acceptance of Bills of Exchange and Others. – Upon any acceptance or payment of any bill of exchange or
order for the payment of money purporting to be drawn in a foreign country but payable in the Philippines, there shall be collected a
documentary stamp tax of four centavos on each two hundred pesos, or fractional part thereof, of the face value of any such bill of
exchange or order, or the Philippine equivalent of such value, if expressed in foreign currency. (Emphasis supplied.)

It then became Section 230 of the 1977 Tax Code,22 as amended by Presidential Decree Nos. 1457 and 1959,which, as stated earlier,
was worded exactly as Section 181 of the current Tax Code:

SEC. 230. Stamp tax upon acceptance of bills of exchange and others. – Upon any acceptance or payment of any bill of exchange or
order for the payment of money purporting to be drawn in a foreign country but payable in the Philippines, there shall be collected a
documentary stamp tax of thirty centavos on each two hundred pesos, or fractional part thereof, of the face value of any such bill of
exchange, or order, or the Philippine equivalent of such value, if expressed in foreign currency. (Emphasis supplied.)

The pertinent provision of the present Tax Code has therefore remained substantially the same for the past one hundred
years.1âwphi1 The identical text and common history of Section 230 of the 1977 Tax Code, as amended, and the 1997 Tax Code, as
amended, show that the law imposes DST on either (a) the acceptance or (b) the payment of a foreign bill of exchange or order for
the payment of money that was drawn abroad but payable in the Philippines.

DST is an excise tax on the exercise of a right or privilege to transfer obligations, rights or properties incident thereto.23 Under
Section 173 of the 1997 Tax Code, the persons primarily liable for the payment of the DST are those (1) making, (2) signing, (3)
issuing, (4) accepting, or (5) transferring the taxable documents, instruments or papers. 24

In general, DST is levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of
specific legal relationships through the execution of specific instruments. Examples of such privileges, the exercise of which, as
effected through the issuance of particular documents, are subject to the payment of DST are leases of lands, mortgages, pledges
and trusts, and conveyances of real property.25

As stated above, Section 230 of the 1977 Tax Code, as amended, now Section 181 of the 1997 Tax Code, levies DST on either (a) the
acceptance or (b) the payment of a foreign bill of exchange or order for the payment of money that was drawn abroad but payable
in the Philippines. In other words, it levies DST as an excise tax on the privilege of the drawee to accept or pay a bill of exchange or
order for the payment of money, which has been drawn abroad but payable in the Philippines, and on the corresponding privilege of
the drawer to have acceptance of or payment for the bill of exchange or order for the payment of money which it has drawn abroad
but payable in the Philippines.

Acceptance applies only to bills of exchange.26 Acceptance of a bill of exchange has a very definite meaning in law.27 In particular,
Section 132 of the Negotiable Instruments Law provides:

Sec. 132. Acceptance; how made, by and so forth. – The acceptance of a bill [of exchange28] is the signification by the drawee of his
assent to the order of the drawer. The acceptance must be in writing and signed by the drawee. It must not express that the drawee
will perform his promise by any other means than the payment of money.

Under the law, therefore, what is accepted is a bill of exchange, and the acceptance of a bill of exchange is both the manifestation of
the drawee’s consent to the drawer’s order to pay money and the expression of the drawee’s promise to pay. It is "the act by which
the drawee manifests his consent to comply with the request contained in the bill of exchange directed to him and it contemplates
an engagement or promise to pay."29 Once the drawee accepts, he becomes an acceptor.30 As acceptor, he engages to pay the bill of
exchange according to the tenor of his acceptance. 31
Acceptance is made upon presentment of the bill of exchange, or within 24 hours after such presentment. 32Presentment for
acceptance is the production or exhibition of the bill of exchange to the drawee for the purpose of obtaining his acceptance. 33

Presentment for acceptance is necessary only in the instances where the law requires it. 34 In the instances where presentment for
acceptance is not necessary, the holder of the bill of exchange can proceed directly to presentment for payment.

Presentment for payment is the presentation of the instrument to the person primarily liable for the purpose of demanding and
obtaining payment thereof.35

Thus, whether it be presentment for acceptance or presentment for payment, the negotiable instrument has to be produced and
shown to the drawee for acceptance or to the acceptor for payment.

Revenue Regulations No. 26 recognizes that the acceptance or payment (of bills of exchange or orders for the payment of money
that have been drawn abroad but payable in the Philippines) that is subjected to DST under Section 181 of the 1997 Tax Code is
done after presentment for acceptance or presentment for payment, respectively. In other words, the acceptance or payment of the
subject bill of exchange or order for the payment of money is done when there is presentment either for acceptance or for payment
of the bill of exchange or order for the payment of money.

Applying the above concepts to the matter subjected to DST in these cases, the electronic messages received by HSBC from its
investor-clients abroad instructing the former to debit the latter's local and foreign currency accounts and to pay the purchase price
of shares of stock or investment in securities do not properly qualify as either presentment for acceptance or presentment for
payment. There being neither presentment for acceptance nor presentment for payment, then there was no acceptance or payment
that could have been subjected to DST to speak of.

Indeed, there had been no acceptance of a bill of exchange or order for the payment of money on the part of HSBC. To reiterate,
there was no bill of exchange or order for the payment drawn abroad and made payable here in the Philippines. Thus, there was no
acceptance as the electronic messages did not constitute the written and signed manifestation of HSBC to a drawer's order to pay
money. As HSBC could not have been an acceptor, then it could not have made any payment of a bill of exchange or order for the
payment of money drawn abroad but payable here in the Philippines. In other words, HSBC could not have been held liable for DST
under Section 230 of the 1977 Tax Code, as amended, and Section 181 of the 1997 Tax Code as it is not "a person making, signing,
issuing, accepting, or, transferring" the taxable instruments under the said provision. Thus, HSBC erroneously paid DST on the said
electronic messages for which it is entitled to a tax refund.

WHEREFORE, the petitions are hereby GRANTED and the Decisions dated May 2, 2002 in CTA Case No. 6009 and dated December
18, 2002 in CT A Case No. 5951 of the Court of Tax Appeals are REINSTATED.

SO ORDERED

G.R. No. 187769 June 4, 2014

ALVIN PATRIMONIO, Petitioner,

vs.
NAPOLEON GUTIERREZ and OCTAVIO MARASIGAN III, Respondents.

DECISION

BRION, J.:

Assailed in this petition for review on certiorari1 under Rule 45 of the Revised Rules of Court is the decision 2 dated September 24,
2008 and the resolution3 dated April 30, 2009 of the Court of Appeals (CA) in CA-G.R. CV No. 82301. The appellate court affirmed the
decision of the Regional Trial Court (RTC) of Quezon City, Branch 77, dismissing the complaint for declaration of nullity of loan filed
by petitioner Alvin Patrimonio and ordering him to pay respondent Octavio Marasigan III (Marasigan) the sum of ₱200,000.00.

The Factual Background

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

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

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

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

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

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

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

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

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

The Ruling of the RTC

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

Nonetheless, the RTC declared Marasigan as a holder in due course and accordingly dismissed the petitioner’s complaint for
declaration of nullity of the loan. It ordered the petitioner to pay Marasigan the face value of the check with a right to claim
reimbursement from Gutierrez.
The petitioner elevated the case to the Court of Appeals (CA), insisting that Marasigan is not a holder in due course. He contended
that when Marasigan received the check, he knew that the same was without a date, and hence, incomplete. He also alleged that
the loan was actually between Marasigan and Gutierrez with his check being used only as a security.

The Ruling of the CA

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

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

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

The Petition

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

The Issues

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

1. Whether the contract of loan in the amount of ₱200,000.00 granted by respondent Marasigan to petitioner, through respondent
Gutierrez, may be nullified for being void;

2. Whether there is basis to hold the petitioner liable for the payment of the ₱200,000.00 loan;

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

4. Whether Marasigan is a holder in due course.

The Court’s Ruling

The petition is impressed with merit.

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

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

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

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

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

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

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

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

xxxx

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

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

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

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

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

A review of the records reveals that Gutierrez did not have any authority to borrow money in behalf of the
petitioner.1âwphi1Records do not show that the petitioner executed any special power of attorney (SPA) in favor of Gutierrez. In
fact, the petitioner’s testimony confirmed that he never authorized Gutierrez (or anyone for that matter), whether verbally or in
writing, to borrow money in his behalf, nor was he aware of any such transaction:

ALVIN PATRIMONIO (witness)

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

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

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

Marasigan’s submission fails to persuade us.

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

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

xxxx

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

xxxx

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

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

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

xxxx

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

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

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

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

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

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

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

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

Another significant point that the lower courts failed to consider is that a contract of loan, like any other contract, is subject to the
rules governing the requisites and validity of contracts in general.13 Article 1318 of the Civil Code14enumerates the essential
requisites for a valid contract, namely:

1. consent of the contracting parties;

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

3. cause of the obligation which is established.

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

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

With the loan issue out of the way, we now proceed to determine whether the petitioner can be made liable under the check he
signed.

II. Liability Under the Instrument

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

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

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

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

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

Marasigan is Not a Holder in Due Course

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

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

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

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

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

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

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

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

As held in De Ocampo v. Gatchalian:20

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

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

The term ‘bad faith’ does not necessarily involve furtive motives, but means bad faith in a commercial sense. The manner in which
the defendants conducted their Liberty Loan department provided an easy way for thieves to dispose of their plunder. It was a case
of "no questions asked." Although gross negligence does not of itself constitute bad faith, it is evidence from which bad faith may be
inferred. The circumstances thrust the duty upon the defendants to make further inquiries and they had no right to shut their eyes
deliberately to obvious facts. (emphasis supplied).
In the present case, Marasigan’s knowledge that the petitioner is not a party or a privy to the contract of loan, and correspondingly
had no obligation or liability to him, renders him dishonest, hence, in bad faith. The following exchange is significant on this point:

WITNESS: AMBET NABUS

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

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

xxxx

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

xxxx

Q: What was your reply, if any?

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

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

Q: What was his answer?

A: It was Alvin’s check.

Q: What was your reply, if any?

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

xxxx

Q: What was his reply?

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

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

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

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

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

Our own examination of the records tells us that Gutierrez has exceeded the authority to fill up the blanks and use the
check.1âwphi1 To repeat, petitioner gave Gutierrez pre-signed checks to be used in their business provided that he could only use
them upon his approval. His instruction could not be any clearer as Gutierrez’ authority was limited to the use of the checks for the
operation of their business, and on the condition that the petitioner’s prior approval be first secured.

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

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

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

WITNESS: No, sir.

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

A: No, sir.

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

A: No, sir.

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

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

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

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

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

SO ORDERED

G.R. No. 176697 September 10, 2014

CESAR V. AREZA and LOLITA B. AREZA, Petitioners,

vs.
EXPRESS SAVINGS BANK, INC. and MICHAEL POTENCIANO, Respondnets.

DECISION

PEREZ, J.:
Before this Court is a Petition for Review on Certiorari under Ruic 45 of the Rules of Court, which seeks to reverse the Decision1 and
Resolution2 dated 29 June 2006 and 12 February 2007 of the Court of Appeals in CAG.R. CV No. 83192. The Court of Appeals
affirmed with modification the 22 April 2004 Resolution3 of the Regional Trial Court (RTC) of Calamba, Laguna, Branch 92, in Civil
Case No. B-5886.

The factual antecedents follow.

Petitioners Cesar V. Areza and LolitaB. Areza maintained two bank deposits with respondent Express Savings Bank’s Biñan branch: 1)
Savings Account No. 004-01-000185-5 and 2) Special Savings Account No. 004-02-000092-3.

They were engaged in the business of "buy and sell" of brand new and second-hand motor vehicles. On 2 May 2000, they received
an order from a certain Gerry Mambuay (Mambuay) for the purchase of a second-hand Mitsubishi Pajero and a brand-new Honda
CRV.

The buyer, Mambuay, paid petitioners with nine (9) Philippine Veterans Affairs Office (PVAO) checks payable to different payees and
drawn against the Philippine Veterans Bank (drawee), each valued at Two Hundred Thousand Pesos (₱200,000.00) for a total of One
Million Eight Hundred Thousand Pesos (₱1,800,000.00).

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

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

On 6 May 2000, Potenciano informedpetitioners that the checks they deposited with the Bank werehonored. He allegedly warned
petitioners that the clearing of the checks pertained only to the availability of funds and did not mean that the checks were not
infirmed.6 Thus, the entire amount of ₱1,800,000.00 was credited to petitioners’ savings account. Based on this information,
petitioners released the two cars to the buyer.

Sometime in July 2000, the subjectchecks were returned by PVAO to the drawee on the ground that the amount on the face of the
checks was altered from the original amount of ₱4,000.00 to ₱200,000.00. The drawee returned the checks to Equitable-PCI Bank by
way of Special Clearing Receipts. In August 2000, the Bank was informed by Equitable-PCI Bank that the drawee dishonored the
checks onthe ground of material alterations. Equitable-PCI Bank initially filed a protest with the Philippine Clearing House. In
February 2001, the latter ruled in favor of the drawee Philippine Veterans Bank. Equitable-PCI Bank, in turn, debited the deposit
account of the Bank in the amount of ₱1,800,000.00.

The Bank insisted that they informed petitioners of said development in August 2000 by furnishing them copies of the documents
given by its depositary bank.7 On the other hand, petitioners maintained that the Bank never informed them of these developments.

On 9 March 2001, petitioners issued a check in the amount of ₱500,000.00. Said check was dishonored by the Bank for the reason
"Deposit Under Hold." According topetitioners, the Bank unilaterally and unlawfully put their account with the Bank on hold. On 22
March 2001, petitioners’ counsel sent a demand letter asking the Bank to honor their check. The Bank refused to heed their request
and instead, closed the Special Savings Account of the petitioners with a balance of ₱1,179,659.69 and transferred said amount to
their savings account. The Bank then withdrew the amount of ₱1,800,000.00representing the returned checks from petitioners’
savings account.

Acting on the alleged arbitrary and groundless dishonoring of their checks and the unlawful and unilateral withdrawal from their
savings account, petitioners filed a Complaint for Sum of Money with Damages against the Bank and Potenciano with the RTC of
Calamba.
On 15 January 2004, the RTC, through Judge Antonio S. Pozas, ruled in favor of petitioners. The dispositive portion of the Decision
reads:

WHEREFORE, the foregoing considered, the Court orders that judgment be rendered in favor of plaintiffs and against the defendants
jointly and severally to pay plaintiffs as follows, to wit:

1. ₱1,800,000.00 representing the amount unlawfully withdrawn by the defendants from the account of plaintiffs;

2. ₱500,000.00 as moral damages; and

3. ₱300,000.00 as attorney’s fees.8

The trial court reduced the issue to whether or not the rights of petitioners were violated by respondents when the deposits of the
former were debited by respondents without any court order and without their knowledge and consent. According to the trial court,
it is the depositary bank which should safeguard the right ofthe depositors over their money. Invoking Article 1977 of the Civil Code,
the trial court stated that the depositary cannot make use of the thing deposited without the express permission of the depositor.
The trial court also held that respondents should have observed the 24-hour clearing house rule that checks should be returned
within 24-hours after discovery of the forgery but in no event beyond the period fixed by law for filing a legal action. In this case,
petitioners deposited the checks in May 2000, and respondents notified them of the problems on the check three months later or in
August 2000. In sum, the trial court characterized said acts of respondents as attended with bad faith when they debited the amount
of ₱1,800,000.00 from the account of petitioners.

Respondents filed a motion for reconsideration while petitioners filed a motion for execution from the Decision of the RTC on the
ground that respondents’ motion for reconsideration did not conform with Section 5, Rule 16 of the Rules of Court; hence, it was a
mere scrap of paper that did not toll the running of the period to appeal.

On 22 April 2004, the RTC, through Pairing Judge Romeo C. De Leon granted the motion for reconsideration, set aside the Pozas
Decision, and dismissed the complaint. The trial court awarded respondents their counterclaim of moral and exemplary damages of
₱100,000.00 each. The trial court first applied the principle of liberality when it disregarded the alleged absence of a notice of
hearing in respondents’ motion for reconsideration. On the merits, the trial court considered the relationship of the Bank and
petitioners with respect to their savings account deposits as a contract of loan with the bank as the debtor and petitioners as
creditors. As such, Article 1977 of the Civil Code prohibiting the depository from making use of the thing deposited without the
express permission of the depositor is not applicable. Instead, the trial court applied Article 1980 which provides that fixed, savings
and current deposits ofmoney in banks and similar institutions shall be governed by the provisions governing simple loan. The trial
court then opined thatthe Bank had all the right to set-off against petitioners’ savings deposits the value of their nine checks that
were returned.

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

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

The core issues in this case revolve on whether the appellee bank had the right to debit the amount of ₱1,800,000.00 from the
appellants’ accounts and whether the bank’s act of debiting was done "without the plaintiffs’ knowledge."

We find that the elements of legal compensation are all present in the case at bar. Hence, applying the case of the Bank of the
Philippine Islands v. Court of Appeals, the obligors bound principally are at the same time creditors of each other. Appellee bank
stands as a debtor of appellant, a depositor. At the same time, said bank is the creditor of the appellant with respect to the
dishonored treasury warrant checks which amount were already credited to the account of appellants. When the appellants had
withdrawn the amount of the checks they deposited and later on said checks were returned, they became indebted to the appellee
bank for the corresponding amount.
It should be noted that [G]erry Mambuay was the appellants’ walkin buyer. As sellers, appellants oughtto have exercised due
diligence in assessing his credit or personal background. The 24-hour clearing house rule is not the one that governs in this case
since the nine checks were discovered by the drawee bank to contain material alterations.

Appellants merely allege that they were not informed of any development on the checks returned. However, this Court believes that
the bank and appellants had opportunities to communicate about the checks considering that several transactions occurred from
the time of alleged return of the checks to the date of the debit.

However, this Court agrees withappellants that they should not pay moral and exemplary damages to each of the appellees for lack
of basis. The appellants were not shown to have acted in bad faith. 9

Petitioners filed the present petition for review on certiorariraising both procedural and substantive issues, to wit:

1. Whether or not the Honorable Court of Appeals committed a reversible error of law and grave abuse of discretion in upholding
the legality and/or propriety of the Motion for Reconsideration filed in violation of Section 5, Rule 15 ofthe Rules on Civil Procedure;

2. Whether or not the Honorable Court of Appeals committed a grave abuse of discretion in declaring that the private respondents
"had the right to debit the amount of ₱1,800,000.00 from the appellants’ accounts" and the bank’s act of debiting was done with the
plaintiff’s knowledge.10

Before proceeding to the substantive issue, we first resolve the procedural issue raised by petitioners.

Sections 5, Rule 15 of the Rules of Court states:

Section 5. Notice of hearing. – The notice of hearing shall be addressed to all parties concerned, and shall specify the time and date
of the hearing which must not be later than ten (10) days after the filing of the motion.

Petitioners claim that the notice of hearing was addressed to the Clerk of Court and not to the adverse party as the rules require.
Petitioners add that the hearing on the motion for reconsideration was scheduled beyond 10 days from the date of filing.

As held in Maturan v. Araula,11 the rule requiring that the notice be addressed to the adverse party has beensubstantially complied
with when a copy of the motion for reconsideration was furnished to the counsel of the adverse party, coupled with the fact that the
trial court acted on said notice of hearing and, as prayed for, issued an order 12 setting the hearing of the motion on 26 March 2004.

We would reiterate later that there is substantial compliance with the foregoing Rule if a copy of the said motion for reconsideration
was furnished to the counsel of the adverse party.13

Now to the substantive issues to which procedural imperfection must, in this case, give way.

The central issue is whether the Bank had the right to debit ₱1,800,000.00 from petitioners’ accounts.

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

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

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

We reverse.

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

LIABILITY OF THE DRAWEE

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

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

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

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

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

LIABILITY OF DEPOSITARY BANK AND COLLECTING BANK

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

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

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

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

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

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

24-HOUR CLEARING RULE

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

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

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

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

It is clear that the so-called "24-hour" rule has been modified. In the case of Hongkong & Shanghai vs. People’s Bank reiterated in
Metropolitan Bank and Trust Co. vs. FNCB, the Supreme Court strictly enforced the 24-hour rule under which the drawee bank
forever loses the right to claim against presenting/collecting bank if the check is not returned at the next clearing day orwithin 24
hours. Apparently, the commercial banks felt strict enforcement of the 24-hour rule is too harsh and therefore made
representations and obtained modification of the rule, which modification is now incorporated in the Manual of Regulations. Since
the same commercial banks controlled the Philippine Clearing House Corporation, incorporating the amended rule in the PCHC Rules
naturally followed.
As the rule now stands, the 24-hour rule is still in force, that is, any check which should be refused by the drawee bank in accordance
with long standing and accepted banking practices shall be returned through the PCHC/local clearing office, as the case may be, not
later than the next regular clearing (24-hour). The modification, however, is that items which have been the subject of material
alteration or bearing forged endorsement may be returned even beyond 24 hours so long that the same is returned within the
prescriptive period fixed by law. The consensus among lawyers is that the prescriptiveperiod is ten (10)years because a check or the
endorsement thereon is a written contract. Moreover, the item need not be returned through the clearing house but by direct
presentation to the presenting bank.29

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

LIABILITY OF PETITIONERS

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

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

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

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

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

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

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

ON LEGAL COMPENSATION

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

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

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

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

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

(3) That the two debts be due;

(4) That they be liquidated and demandable;

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

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

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

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

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

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

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

To recap, the drawee bank, Philippine Veterans Bank in this case, is only liable to the extent of the check prior to
alteration.1âwphi1 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 latter’s account. We do not conform with said ruling regarding the
finding of bad faith on the part of respondents, as well as its failure toobserve the 24-hour clearing rule.

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

SO ORDERED.