Petitioner then requested the respondent bank to credit back and restore
RAMON K. ILUSORIO, petitioner, vs. HON. COURT OF APPEALS, and
THE MANILA BANKING CORPORATION,respondents.
QUISUMBING, J.:
The facts as summarized by the Court of Appeals are as follows:
Petitioner is a prominent businessman who, at the time material to this
case, was the Managing Director of Multinational Investment Bancorporation
and the Chairman and/or President of several other corporations. He was a
depositor in good standing of respondent bank, the Manila Banking
Corporation, under current Checking Account No. 06-09037-0. As he was then
running about 20 corporations, and was going out of the country a number of
times, petitioner entrusted to his secretary, Katherine[2] E. Eugenio, his credit
cards and his checkbook with blank checks. It was also Eugenio who verified
and reconciled the statements of said checking account.[3]
Between the dates September 5, 1980 and January 23, 1981, Eugenio
was able to encash and deposit to her personal account about seventeen (17)
checks drawn against the account of the petitioner at the respondent bank,
with an aggregate amount of P119,634.34. Petitioner did not bother to check
his statement of account until a business partner apprised him that he saw
Eugenio use his credit cards. Petitioner fired Eugenio immediately, and
instituted a criminal action against her for estafa thru falsification before the
Office of the Provincial Fiscal of Rizal. Private respondent, through an affidavit
executed by its employee, Mr. Dante Razon, also lodged a complaint
for estafa thru falsification of commercial documents against Eugenio on the
basis of petitioners statement that his signatures in the checks were
forged.[4] Mr. Razons affidavit states:
That I have examined and scrutinized the following checks in accordance
with prescribed verification procedures with utmost care and diligence by
comparing the signatures affixed thereat against the specimen signatures of
Mr. Ramon K. Ilusorio which we have on file at our said office on such dates,
xxx
That the aforementioned checks were among those issued by Manilabank in
favor of its client MR. RAMON K. ILUSORIO,
That the same were personally encashed by KATHERINE E. ESTEBAN, an
executive secretary of MR. RAMON K. ILUSORIO in said Investment
Corporation;
That I have met and known her as KATHERINE E. ESTEBAN the attending
verifier when she personally encashed the above-mentioned checks at our
said office;
That MR. RAMON K. ILUSORIO executed an affidavit expressly disowning
his signature appearing on the checks further alleged to have not authorized
the issuance and encashment of the same.[5]
to its account the value of the checks which were wrongfully encashed but
respondent bank refused. Hence, petitioner filed the instant case.[6]
At the trial, petitioner testified on his own behalf, attesting to the truth of
the circumstances as narrated above, and how he discovered the alleged
forgeries. Several employees of Manila Bank were also called to the witness
stand as hostile witnesses. They testified that it is the banks standard
operating procedure that whenever a check is presented for encashment or
clearing, the signature on the check is first verified against the specimen
signature cards on file with the bank.
Manila Bank also sought the expertise of the National Bureau of
Investigation (NBI) in determining the genuineness of the signatures appearing
on the checks. However, in a letter dated March 25, 1987, the NBI informed
the trial court that they could not conduct the desired examination for the
reason that the standard specimens submitted were not sufficient for purposes
of rendering a definitive opinion. The NBI then suggested that petitioner be
asked to submit seven (7) or more additional standard signatures executed
before or about, and immediately after the dates of the questioned
checks. Petitioner, however, failed to comply with this request.
After evaluating the evidence on both sides, the court a quo rendered
judgment on May 12, 1994 with the following dispositive portion:
WHEREFORE, finding no sufficient basis for plaintiff's cause herein against
defendant bank, in the light of the foregoing considerations and established
facts, this case would have to be, as it is hereby DISMISSED.
Defendants counterclaim is likewise DISMISSED for lack of sufficient basis.
SO ORDERED.[7]
Aggrieved, petitioner elevated the case to the Court of Appeals by way of
a petition for review but without success. The appellate court held that
petitioners own negligence was the proximate cause of his loss. The appellate
court disposed as follows:
WHEREFORE, the judgment appealed from is AFFIRMED. Costs against the
appellant.
SO ORDERED.[8]
Before us, petitioner ascribes the following errors to the Court of Appeals:
A. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
RESPONDENT BANK IS ESTOPPED FROM RAISING THE DEFENSE
THAT THERE WAS NO FORGERY OF THE SIGNATURES OF THE
PETITIONER IN THE CHECK BECAUSE THE RESPONDENT FILED
A CRIMINAL COMPLAINT FOR ESTAFA THRU FALSIFICATION OF
COMMERCIAL DOCUMENTS AGAINST KATHERINE EUGENIO
USING THE AFFIDAVIT OF PETITIONER STATING THAT HIS
 SIGNATURES WERE FORGED AS PART OF THE AFFIDAVIT-
COMPLAINT.[9]
B. THE COURT OF APPEALS ERRED IN NOT APPLYING SEC. 23,
NEGOTIABLE INSTRUMENTS LAW.[10]
C. THE COURT OF APPEALS ERRED IN NOT HOLDING THE BURDEN
OF PROOF IS WITH THE RESPONDENT BANK TO PROVE THE DUE
DILIGENCE TO PREVENT DAMAGE, TO THE PETITIONER, AND
THAT IT WAS NOT NEGLIGENT IN THE SELECTION AND
SUPERVISION OF ITS EMPLOYEES.[11]
D. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT
RESPONDENT BANK SHOULD BEAR THE LOSS, AND SHOULD BE
MADE TO PAY PETITIONER, WITH RECOURSE AGAINST
KATHERINE EUGENIO ESTEBAN.[12]
Essentially the issues in this case are: (1) whether or not petitioner has a
cause of action against private respondent; and (2) whether or not private
respondent, in filing an estafa case against petitioners secretary, is barred
from raising the defense that the fact of forgery was not established.
Petitioner contends that Manila Bank is liable for damages for its
negligence in failing to detect the discrepant checks. He adds that as a general
rule a bank which has obtained possession of a check upon an unauthorized
or forged endorsement of the payees signature and which collects the amount
of the check from the drawee is liable for the proceeds thereof to the
payee. Petitioner invokes the doctrine of estoppel, saying that having itself
instituted a forgery case against Eugenio, Manila Bank is now estopped from
asserting that the fact of forgery was never proven.
For its part, Manila Bank contends that respondent appellate court did not
depart from the accepted and usual course of judicial proceedings, hence
there is no reason for the reversal of its ruling. Manila Bank additionally points
out that Section 23[13] of the Negotiable Instruments Law is inapplicable,
considering that the fact of forgery was never proven. Lastly, the bank negates
petitioners claim of estoppel.[14]
On the first issue, we find that petitioner has no cause of action against
Manila Bank. To be entitled to damages, petitioner has the burden of proving
negligence on the part of the bank for failure to detect the discrepancy in the
signatures on the checks. It is incumbent upon petitioner to establish the fact
of forgery, i.e., by submitting his specimen signatures and comparing them
with those on the questioned checks. Curiously though, petitioner failed to
submit additional specimen signatures as requested by the National Bureau of
Investigation from which to draw a conclusive finding regarding forgery. The
Court of Appeals found that petitioner, by his own inaction, was precluded from
setting up forgery. Said the appellate court:
We cannot fault the court a quo for such declaration, considering that the
plaintiffs evidence on the alleged forgery is not convincing enough. The
burden to prove forgery was upon the plaintiff, which burden he failed to
discharge. Aside from his own testimony, the appellant presented no other
evidence to prove the fact of forgery. He did not even submit his own
specimen signatures, taken on or about the date of the questioned checks,
for examination and comparison with those of the subject checks. On the
other hand, the appellee presented specimen signature cards of the
appellant, taken at various years, namely, in 1976, 1979 and 1981 (Exhibits
1, 2, 3 and 7), showing variances in the appellants unquestioned
signatures. The evidence further shows that the appellee, as soon as it was
informed by the appellant about his questioned signatures, sought to borrow
the questioned checks from the appellant for purposes of analysis and
examination (Exhibit 9), but the same was denied by the appellant. It was
also the former which sought the assistance of the NBI for an expert analysis
of the signatures on the questioned checks, but the same was unsuccessful
for lack of sufficient specimen signatures.[15]
Moreover, petitioners contention that Manila Bank was remiss in the
exercise of its duty as drawee lacks factual basis. Consistently, the CA and
the RTC found that Manila Bank employees exercised due diligence in cashing
the checks. The banks employees in the present case did not have a hint as
to Eugenios modus operandi because she was a regular customer of the bank,
having been designated by petitioner himself to transact in his
behalf. According to the appellate court, the employees of the bank exercised
due diligence in the performance of their duties. Thus, it found that:
The evidence on both sides indicates that TMBCs employees exercised due
diligence before encashing the checks. Its verifiers first verified the drawers
signatures thereon as against his specimen signature cards, and when in
doubt, the verifier went further, such as by referring to a more experienced
verifier for further verification. In some instances the verifier made a
confirmation by calling the depositor by phone. It is only after taking such
precautionary measures that the subject checks were given to the teller for
payment.
Of course it is possible that the verifiers of TMBC might have made a mistake
in failing to detect any forgery -- if indeed there was. However, a mistake is
not equivalent to negligence if they were honest mistakes. In the instant
case, we believe and so hold that if there were mistakes, the same were not
deliberate, since the bank took all the precautions.[16]
As borne by the records, it was petitioner, not the bank, who was
negligent. Negligence is the omission to do something which a reasonable
man, guided by those considerations which ordinarily regulate the conduct of
human affairs, would do, or the doing of something which a prudent and
reasonable man would do.[17] In the present case, it appears that petitioner
accorded his secretary unusual degree of trust and unrestricted access to his
credit cards, passbooks, check books, bank statements, including custody and
possession of cancelled checks and reconciliation of accounts.Said the Court
of Appeals on this matter:
Moreover, the appellant had introduced his secretary to the bank for
purposes of reconciliation of his account, through a letter dated July 14, 1980
(Exhibit 8). Thus, the said secretary became a familiar figure in the
bank. What is worse, whenever the bank verifiers call the office of the
appellant, it is the same secretary who answers and confirms the checks.
The trouble is, the appellant had put so much trust and confidence in the said
secretary, by entrusting not only his credit cards with her but also his
checkbook with blank checks. He also entrusted to her the verification and
reconciliation of his account. Further adding to his injury was the fact that
while the bank was sending him the monthly Statements of Accounts, he was
not personally checking the same. His testimony did not indicate that he was
out of the country during the period covered by the checks. Thus, he had all
the opportunities to verify his account as well as the cancelled checks issued
thereunder -- month after month. But he did not, until his partner asked him
whether he had entrusted his credit card to his secretary because the said
partner had seen her use the same. It was only then that he was minded to
verify the records of his account. [18]
The abovecited findings are binding upon the reviewing court. We stress
the rule that the factual findings of a trial court, especially when affirmed by the
appellate court, are binding upon us[19] and entitled to utmost respect[20] and
even finality. We find no palpable error that would warrant a reversal of the
appellate courts assessment of facts anchored upon the evidence on record.
Petitioners failure to examine his bank statements appears as the
proximate cause of his own damage. Proximate cause is that cause, which, in
natural and continuous sequence, unbroken by any efficient intervening cause,
produces the injury, and without which the result would not have
occurred.[21] In the instant case, the bank was not shown to be remiss in its
duty of sending monthly bank statements to petitioner so that any error or
discrepancy in the entries therein could be brought to the banks attention at
the earliest opportunity. But, petitioner failed to examine these bank
statements not because he was prevented by some cause in not doing so, but
because he did not pay sufficient attention to the matter. Had he done so, he
could have been alerted to any anomaly committed against him. In other
words, petitioner had sufficient opportunity to prevent or detect any
misappropriation by his secretary had he only reviewed the status of his
accounts based on the bank statements sent to him regularly. In view of Article
2179 of the New Civil Code,[22] when the plaintiffs own negligence was the
immediate and proximate cause of his injury, no recovery could be had for
damages.
Petitioner further contends that under Section 23 of the Negotiable
Instruments Law a forged check is inoperative, and that Manila Bank had no
authority to pay the forged checks. True, it is a rule that when a signature is
forged or made without the authority of the person whose signature it purports
to be, the check is wholly inoperative. No right to retain the instrument, or to
give a discharge therefor, or to enforce payment thereof against any party, can
be acquired through or under such signature. However, the rule does provide
for an exception, namely: unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or want of
authority. In the instant case, it is the exception that applies. In our view,
petitioner is precluded from setting up the forgery, assuming there is forgery,
due to his own negligence in entrusting to his secretary his credit cards and
checkbook including the verification of his statements of account.
Petitioners reliance on Associated Bank vs. Court of
Appeals[23] and Philippine Bank of Commerce vs. CA[24] to buttress his
contention that respondent Manila Bank as the collecting or last endorser
generally suffers the loss because it has the duty to ascertain the genuineness
of all prior endorsements is misplaced. In the cited cases, the fact of forgery
was not in issue. In the present case, the fact of forgery was not established
with certainty. In those cited cases, the collecting banks were held to be
negligent for failing to observe precautionary measures to detect the forgery.
In the case before us, both courts below uniformly found that Manila Banks
personnel diligently performed their duties, having compared the signature in
the checks from the specimen signatures on record and satisfied themselves
that it was petitioners.
On the second issue, the fact that Manila Bank had filed a case
for estafa against Eugenio would not estop it from asserting the fact that
forgery has not been clearly established. Petitioner cannot hold private
respondent in estoppel for the latter is not the actual party to the criminal
action. In a criminal action, the State is the plaintiff, for the commission of a
felony is an offense against the State.[25] Thus, under Section 2, Rule 110 of
the Rules of Court the complaint or information filed in court is required to be
brought in the name of the People of the Philippines. [26]
Further, as petitioner himself stated in his petition, respondent bank filed
the estafa case against Eugenio on the basis of petitioners own
affidavit,[27] but without admitting that he had any personal knowledge of the
alleged forgery. It is, therefore, easy to understand that the filing of
the estafa case by respondent bank was a last ditch effort to salvage its ties
with the petitioner as a valuable client, by bolstering the estafa case which he
filed against his secretary.
All told, we find no reversible error that can be ascribed to the Court of
Appeals.
WHEREFORE, the instant petition is DENIED for lack of merit. The
assailed decision of the Court of Appeals dated January 28, 1999 in CA-G.R.
CV No. 47942, is AFFIRMED.
Costs against petitioner.
SO ORDERED.
 BANK OF AMERICA NT & SA, G.R. No. 150228
Petitioner,
-versus- Promulgated:
July 30, 2009
PHILIPPINE RACING CLUB,
Respondent.
x-----------------------------------------------------------------------------------------x
DECISION
LEONARDO-DE CASTRO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court from the
Decision[1] promulgated on July 16, 2001 by the former Second Division of the Court
of Appeals (CA), in CA-G.R. CV No. 45371 entitled Philippine Racing Club, Inc. v.
Bank of America NT & SA, affirming the Decision[2] dated March 17, 1994 of the
Regional Trial Court (RTC) of Makati, Branch 135 in Civil Case No. 89-5650, in favor
of the respondent. Likewise, the present petition assails the Resolution[3] promulgated
on September 28, 2001, denying the Motion for Reconsideration of the CA Decision.
The facts of this case as narrated in the assailed CA Decision are as follows:
Plaintiff-appellee PRCI is a domestic corporation which
maintains several accounts with different banks in the Metro Manila
area. Among the accounts maintained was Current Account No.
58891-012 with defendant-appellant BA (Paseo de Roxas
Branch). The authorized joint signatories with respect to said
Current Account were plaintiff-appellees President (Antonia Reyes)
and Vice President for Finance (Gregorio Reyes).
respondent, the dispositive portion of which reads:
On or about the 2nd week of December 1988, the President
and Vice President of plaintiff-appellee corporation were scheduled
to go out of the country in connection with the corporations
business. In order not to disrupt operations in their absence, they
pre-signed several checks relating to Current Account No. 58891-
012. The intention was to insure continuity of plaintiff-appellees
operations by making available cash/money especially to settle
obligations that might become due. These checks were entrusted to
the accountant with instruction to make use of the same as the need
arose. The internal arrangement was, in the event there was need to
make use of the checks, the accountant would prepare the
corresponding voucher and thereafter complete the entries on the
pre-signed checks.
It turned out that on December 16, 1988, a John Doe
presented to defendant-appellant bank for encashment a couple of
plaintiff-appellee corporations checks (Nos. 401116 and 401117)
with the indicated value of P110,000.00 each. It is admitted that
these 2 checks were among those presigned by plaintiff-appellee
corporations authorized signatories.
The two (2) checks had similar entries with similar
infirmities and irregularities. On the space where the name of the
payee should be indicated (Pay To The Order Of) the following 2-
line entries were instead typewritten: on the upper line was the word
CASH while the lower line had the following typewritten words,
viz: ONE HUNDRED TEN THOUSAND PESOS ONLY. Despite
the highly irregular entries on the face of the checks, defendant-
appellant bank, without as much as verifying and/or confirming the
legitimacy of the checks considering the substantial amount
involved and the obvious infirmity/defect of the checks on their
faces, encashed said checks. A verification process, even by was of
a telephone call to PRCI office, would have taken less than ten (10)
minutes. But this was not done by BA. Investigation conducted by
plaintiff-appellee corporation yielded the fact that there was no
transaction involving PRCI that call for the payment of P220,000.00
to anyone. The checks appeared to have come into the hands of an
employee of PRCI (one Clarita Mesina who was subsequently
criminally charged for qualified theft) who eventually completed
without authority the entries on the pre-signed checks. PRCIs
demand for defendant-appellant to pay fell on deaf ears. Hence, the
complaint.[4]
After due proceedings, the trial court rendered a Decision in favor of
PREMISES CONSIDERED, judgment is hereby rendered
in favor of plaintiff and against the defendant, and the latter is
ordered to pay plaintiff:
(1) The sum of Two Hundred Twenty Thousand
(P220,000.00) Pesos, with legal interest to be computed from date
of the filing of the herein complaint;
(2) The sum of Twenty Thousand (P20,000.00) Pesos by
way of attorneys fees;
(3) The sum of Ten Thousand (P10,000.00) Pesos for
litigation expenses, and
(4) To pay the costs of suit.

SO ORDERED.[5]
Petitioner appealed the aforesaid trial court Decision to the CA which,
however, affirmed said decision in toto in its July 16, 2001 Decision. Petitioners
Motion for Reconsideration of the CA Decision was subsequently denied on
September 28, 2001.
Petitioner now comes before this Court arguing that:
I. The Court of Appeals gravely erred in holding that the
proximate cause of respondents loss was petitioners
encashment of the checks.
A. The Court of Appeals gravely erred in holding that
petitioner was liable for the amount of the checks
despite the fact that petitioner was merely fulfilling its
obligation under law and contract.
B. The Court of Appeals gravely erred in holding that
petitioner had a duty to verify the encashment, despite
the absence of any obligation to do so.
C. The Court of Appeals gravely erred in not applying
Section 14 of the Negotiable Instruments Law, despite
its clear applicability to this case;
II. The Court of Appeals gravely erred in not holding that
the proximate cause of respondents loss was its own
grossly negligent practice of pre-signing checks without
payees and amounts and delivering these pre-signed checks
to its employees (other than their signatories).
III. The Court of Appeals gravely erred in affirming the trial
courts award of attorneys fees despite the absence of any
applicable ground under Article 2208 of the Civil Code.
IV. The Court of Appeals gravely erred in not awarding
attorneys fees, moral and exemplary damages, and costs of
suit in favor of petitioner, who clearly deserves them.[6]
From the discussions of both parties in their pleadings, the key issue to be
resolved in the present case is whether the proximate cause of the wrongful
encashment of the checks in question was due to (a) petitioners failure to make a
verification regarding the said checks with the respondent in view of the misplacement
of entries on the face of the checks or (b) the practice of the respondent of pre-signing
blank checks and leaving the same with its employees.
Petitioner insists that it merely fulfilled its obligation under law and contract
when it encashed the aforesaid checks. Invoking Sections 126[7] and 185[8] of the
Negotiable Instruments Law (NIL), petitioner claims that its duty as a drawee bank to
a drawer-client maintaining a checking account with it is to pay orders for checks
bearing the drawer-clients genuine signatures. The genuine signatures of the clients
duly authorized signatories affixed on the checks signify the order for payment. Thus,
pursuant to the said obligation, the drawee bank has the duty to determine whether the
signatures appearing on the check are the drawer-clients or its duly authorized
signatories. If the signatures are genuine, the bank has the unavoidable legal and
contractual duty to pay. If the signatures are forged and falsified, the drawee bank has
the corollary, but equally unavoidable legal and contractual, duty not to pay. [9]
Furthermore, petitioner maintains that there exists a duty on the drawee bank
to inquire from the drawer before encashing a check only when the check bears a
material alteration. A material alteration is defined in Section 125 of the NIL to be one
which changes the date, the sum payable, the time or place of payment, the number or
relations of the parties, the currency in which payment is to be made or one which adds
a place of payment where no place of payment is specified, or any other change or
addition which alters the effect of the instrument in any respect. With respect to the
checks at issue, petitioner points out that they do not contain any material
alteration.[10] This is a fact which was affirmed by the trial court itself.[11]
There is no dispute that the signatures appearing on the subject checks were
genuine signatures of the respondents authorized joint signatories; namely, Antonia
Reyes and Gregorio Reyes who were respondents President and Vice-President for
Finance, respectively. Both pre-signed the said checks since they were both scheduled
to go abroad and it was apparently their practice to leave with the company accountant
checks signed in black to answer for company obligations that might fall due during
the signatories absence. It is likewise admitted that neither of the subject checks
contains any material alteration or erasure.
However, on the blank space of each check reserved for the payee, the
following typewritten words appear: ONE HUNDRED TEN THOUSAND PESOS
ONLY. Above the same is the typewritten word, CASH. On the blank reserved for the
amount, the same amount of One Hundred Ten Thousand Pesos was indicated with
the use of a check writer. The presence of these irregularities in each check should
have alerted the petitioner to be cautious before proceeding to encash them which it
did not do.
It is well-settled that banks are engaged in a business impressed with public
interest, and it is their duty to protect in return their many clients and depositors who
transact business with them. They have the obligation to treat their clients account
meticulously and with the highest degree of care, considering the fiduciary nature of
their relationship. The diligence required of banks, therefore, is more than that of a
good father of a family.[12]
 Petitioner asserts that it was not duty-bound to verify with the respondent
since the amount below the typewritten word CASH, expressed in words, is the very
same amount indicated in figures by means of a check writer on the amount portion of
the check. The amount stated in words is, therefore, a mere reiteration of the amount
stated in figures. Petitioner emphasizes that a reiteration of the amount in words is
merely a repetition and that a repetition is not an alteration which if present and
material would have enjoined it to commence verification with respondent. [13]
We do not agree with petitioners myopic view and carefully crafted
defense. Although not in the strict sense material alterations, the misplacement of the
typewritten entries for the payee and the amount on the same blank and the repetition
of the amount using a check writer were glaringly obvious irregularities on the face of
the check. Clearly, someone made a mistake in filling up the checks and the repetition
of the entries was possibly an attempt to rectify the mistake. Also, if the check had
been filled up by the person who customarily accomplishes the checks of respondent,
it should have occurred to petitioners employees that it would be unlikely such
mistakes would be made. All these circumstances should have alerted the bank to the
possibility that the holder or the person who is attempting to encash the checks did not
have proper title to the checks or did not have authority to fill up and encash the
same. As noted by the CA, petitioner could have made a simple phone call to its client
to clarify the irregularities and the loss to respondent due to the encashment of the
stolen checks would have been prevented.
In the case at bar, extraordinary diligence demands that petitioner should have
ascertained from respondent the authenticity of the subject checks or the accuracy of
the entries therein not only because of the presence of highly irregular entries on the
face of the checks but also of the decidedly unusual circumstances surrounding their
encashment. Respondents witness testified that for checks in amounts greater than
Twenty Thousand Pesos (P20,000.00) it is the companys practice to ensure that the
payee is indicated by name in the check.[14] This was not rebutted by petitioner. Indeed,
it is highly uncommon for a corporation to make out checks payable to CASH for
substantial amounts such as in this case. If each irregular circumstance in this case
were taken singly or isolated, the banks employees might have been justified in
ignoring them. However, the confluence of the irregularities on the face of the checks
and circumstances that depart from the usual banking practice of respondent should
have put petitioners employees on guard that the checks were possibly not issued by
the respondent in due course of its business. Petitioners subtle sophistry cannot
exculpate it from behavior that fell extremely short of the highest degree of care and
diligence required of it as a banking institution.
Indeed, taking this with the testimony of petitioners operations manager that
in case of an irregularity on the face of the check (such as when blanks were not
properly filled out) the bank may or may not call the client depending on how busy
the bank is on a particular day,[15]we are even more convinced that petitioners
safeguards to protect clients from check fraud are arbitrary and subjective. Every client
should be treated equally by a banking institution regardless of the amount of his
deposits and each client has the right to expect that every centavo he entrusts to a bank
would be handled with the same degree of care as the accounts of other
clients. Perforce, we find that petitioner plainly failed to adhere to the high standard
of diligence expected of it as a banking institution.
In defense of its cashier/tellers questionable action, petitioner insists that
pursuant to Sections 14[16] and 16[17] of the NIL, it could validly presume, upon
presentation of the checks, that the party who filled up the blanks had authority and
that a valid and intentional delivery to the party presenting the checks had taken
place. Thus, in petitioners view, the sole blame for this debacle should be shifted to
respondent for having its signatories pre-sign and deliver the subject
checks.[18] Petitioner argues that there was indeed delivery in this case because,
following American jurisprudence, the gross negligence of respondents accountant in
safekeeping the subject checks which resulted in their theft should be treated as a
voluntary delivery by the maker who is estopped from claiming non-delivery of the
instrument.[19]
Petitioners contention would have been correct if the subject checks were
correctly and properly filled out by the thief and presented to the bank in good order. In
that instance, there would be nothing to give notice to the bank of any infirmity in the
title of the holder of the checks and it could validly presume that there was proper
delivery to the holder. The bank could not be faulted if it encashed the checks under
those circumstances. However, the undisputed facts plainly show that there were
circumstances that should have alerted the bank to the likelihood that the checks were
not properly delivered to the person who encashed the same. In all, we see no reason
to depart from the finding in the assailed CA Decision that the subject checks are
properly characterized as incomplete and undelivered instruments thus making Section
15[20] of the NIL applicable in this case.
However, we do agree with petitioner that respondents officers practice of
pre-signing of blank checks should be deemed seriously negligent behavior and a
highly risky means of purportedly ensuring the efficient operation of businesses. It
should have occurred to respondents officers and managers that the pre-signed blank
checks could fall into the wrong hands as they did in this case where the said checks
were stolen from the company accountant to whom the checks were entrusted.
Nevertheless, even if we assume that both parties were guilty of negligent
acts that led to the loss, petitioner will still emerge as the party foremost liable in this
case. In instances where both parties are at fault, this Court has consistently applied
the doctrine of last clear chance in order to assign liability.
In Westmont Bank v. Ong,[21] we ruled:
[I]t is petitioner [bank] which had the last clear chance to stop the
fraudulent encashment of the subject checks had it exercised due
diligence and followed the proper and regular banking procedures
 in clearing checks. As we had earlier ruled, the one who had a last
clear opportunity to avoid the impending harm but failed to do
so is chargeable with the consequences thereof.[22] (emphasis
ours)
In the case at bar, petitioner cannot evade responsibility for the loss by
attributing negligence on the part of respondent because, even if we concur that the
latter was indeed negligent in pre-signing blank checks, the former had the last clear
chance to avoid the loss. To reiterate, petitioners own operations manager admitted
that they could have called up the client for verification or confirmation before
honoring the dubious checks. Verily, petitioner had the final opportunity to avert the
injury that befell the respondent. Failing to make the necessary verification due to the
volume of banking transactions on that particular day is a flimsy and unacceptable
excuse, considering that the banking business is so impressed with public interest
where the trust and confidence of the public in general is of paramount importance
such that the appropriate standard of diligence must be a high degree of diligence, if
not the utmost diligence.[23] Petitioners negligence has been undoubtedly established
and, thus, pursuant to Art. 1170 of the NCC,[24] it must suffer the consequence of said
negligence.
In the interest of fairness, however, we believe it is proper to consider respondents
own negligence to mitigate petitioners liability. Article 2179 of the Civil Code
provides:
Art. 2179. When the plaintiffs own negligence was the immediate
and proximate cause of his injury, he cannot recover damages. But
if his negligence was only contributory, the immediate and
proximate cause of the injury being the defendants lack of due care,
the plaintiff may recover damages, but the courts shall mitigate the
damages to be awarded.
Explaining this provision in Lambert v. Heirs of Ray Castillon,[25] the Court
held:
The underlying precept on contributory negligence is that a plaintiff
who is partly responsible for his own injury should not be entitled
to recover damages in full but must bear the consequences of his
own negligence. The defendant must thus be held liable only for the
damages actually caused by his negligence. xxx xxx xxx
As we previously stated, respondents practice of signing checks in blank
whenever its authorized bank signatories would travel abroad was a dangerous policy,
especially considering the lack of evidence on record that respondent had appropriate
safeguards or internal controls to prevent the pre-signed blank checks from falling into
the hands of unscrupulous individuals and being used to commit a fraud against the
company. We cannot believe that there was no other secure and reasonable way to
guarantee the non-disruption of respondents business. As testified to by petitioners
expert witness, other corporations would ordinarily have another set of authorized
bank signatories who would be able to sign checks in the absence of the preferred
signatories.[26] Indeed, if not for the fortunate happenstance that the thief failed to
properly fill up the subject checks, respondent would expectedly take the blame for
the entire loss since the defense of forgery of a drawers signature(s) would be
unavailable to it. Considering that respondent knowingly took the risk that the pre-
signed blank checks might fall into the hands of wrongdoers, it is but just that
respondent shares in the responsibility for the loss.
We also cannot ignore the fact that the person who stole the pre-signed checks
subject of this case from respondents accountant turned out to be another employee,
purportedly a clerk in respondents accounting department. As the employer of the
thief, respondent supposedly had control and supervision over its own employee. This
gives the Court more reason to allocate part of the loss to respondent.
Following established jurisprudential precedents,[27] we believe the allocation
of sixty percent (60%) of the actual damages involved in this case (represented by the
amount of the checks with legal interest) to petitioner is proper under the
premises. Respondent should, in light of its contributory negligence, bear forty percent
(40%) of its own loss.
Finally, we find that the awards of attorneys fees and litigation expenses in
favor of respondent are not justified under the circumstances and, thus, must be
deleted. The power of the court to award attorneys fees and litigation expenses under
Article 2208 of the NCC[28] demands factual, legal, and equitable justification.
An adverse decision does not ipso facto justify an award of attorneys fees to
the winning party.[29] Even when a claimant is compelled to litigate with third persons
or to incur expenses to protect his rights, still attorneys fees may not be awarded where
no sufficient showing of bad faith could be reflected in a partys persistence in a case
other than an erroneous conviction of the righteousness of his cause. [30]
WHEREFORE, the Decision of the Court of Appeals dated July 16, 2001
and its Resolution dated September 28, 2001 are AFFIRMED with the following
MODIFICATIONS: (a) petitioner Bank of America NT & SA shall pay to respondent
Philippine Racing Club sixty percent (60%) of the sum of Two Hundred Twenty
Thousand Pesos (P220,000.00) with legal interest as awarded by the trial court and (b)
the awards of attorneys fees and litigation expenses in favor of respondent are deleted.
Proportionate costs.
SO ORDERED.
THE INTERNATIONAL CORPORATE BANK, INC., petitioner,
vs.
COURT OF APPEALS and PHILIPPINE NATIONAL BANK, respondents.
DECISION
CARPIO, J.:
The Case
Before the Court is a petition for review1 assailing the 9 August 1994
Amended Decision2 and the 16 July 1997 Resolution3 of the Court of Appeals
in CA-G.R. CV No. 25209.
The Antecedent Facts
The case originated from an action for collection of sum of money filed on 16
March 1982 by the International Corporate Bank, Inc.4 ("petitioner") against
the Philippine National Bank ("respondent"). The case was raffled to the then
Court of First Instance (CFI) of Manila, Branch 6. The complaint was
amended on 19 March 1982. The case was eventually re-raffled to the
Regional Trial Court of Manila, Branch 52 ("trial court").
The Ministry of Education and Culture issued 15 checks 5 drawn against
respondent which petitioner accepted for deposit on various dates. The
checks are as follows: xxx
The checks were deposited on the following dates for the following accounts:
xxx
After 24 hours from submission of the checks to respondent for clearing,
petitioner paid the value of the checks and allowed the withdrawals of the
deposits. However, on 14 October 1981, respondent returned all the checks
to petitioner without clearing them on the ground that they were materially
altered. Thus, petitioner instituted an action for collection of sums of money
against respondent to recover the value of the checks.
The Ruling of the Trial Court
The trial court ruled that respondent is expected to use reasonable business
practices in accepting and paying the checks presented to it. Thus,
respondent cannot be faulted for the delay in clearing the checks considering
the ingenuity in which the alterations were effected. The trial court observed
that there was no attempt from petitioner to verify the status of the checks
before petitioner paid the value of the checks or allowed withdrawal of the
deposits. According to the trial court, petitioner, as collecting bank, could
have inquired by telephone from respondent, as drawee bank, about the
status of the checks before paying their value. Since the immediate cause of
petitioner’s loss was the lack of caution of its personnel, the trial court held
that petitioner is not entitled to recover the value of the checks from
respondent.
The dispositive portion of the trial court’s Decision reads:
WHEREFORE, judgment is hereby rendered dismissing both the
complaint and the counterclaim. Costs shall, however be assessed
against the plaintiff.
SO ORDERED.7
Petitioner appealed the trial court’s Decision before the Court of Appeals.
The Ruling of the Court of Appeals
In its 10 October 1991 Decision,8 the Court of Appeals reversed the trial
court’s Decision. Applying Section 4(c) of Central Bank Circular No. 580,
series of 1977,9 the Court of Appeals held that checks that have been
materially altered shall be returned within 24 hours after discovery of the
alteration. However, the Court of Appeals ruled that even if the drawee bank
returns a check with material alterations after discovery of the alteration, the
return would not relieve the drawee bank from any liability for its failure to
return the checks within the 24-hour clearing period. The Court of Appeals
explained:
Does this mean that, as long as the drawee bank returns a check
with material alteration within 24 hour[s] after discovery of such
alteration, such return would have the effect of relieving the bank of
any liability whatsoever despite its failure to return the check within
the 24- hour clearing house rule?
We do not think so.
Obviously, such bank cannot be held liable for its failure to return the
check in question not later than the next regular clearing. However,
this Court is of the opinion and so holds that it could still be held
liable if it fails to exercise due diligence in verifying the alterations
made. In other words, such bank would still be expected, nay
required, to make the proper verification before the 24-hour regular
clearing period lapses, or in cases where such lapses may be
 deemed inevitable, that the required verification should be made PREMISES CONSIDERED, the decision appealed from is hereby
within a reasonable time. REVERSED and the defendant-appellee Philippine National Bank is
declared liable for the value of the fifteen checks specified and
The implication of the rule that a check shall be returned within the enumerated in the decision of the trial court (page 3) in the amount
24-hour clearing period is that if the collecting bank paid the check of P1,447,920.00
before the end of the aforesaid 24-hour clearing period, it would be
responsible therefor such that if the said check is dishonored and SO ORDERED.11
returned within the 24-hour clearing period, the drawee bank cannot
be held liable. Would such an implication apply in the case of Respondent filed a motion for reconsideration of the 10 October 1991
materially altered checks returned within 24 hours after discovery? Decision. In its 9 August 1994 Amended Decision, the Court of Appeals
This Court finds nothing in the letter of the above-cited C.B. Circular reversed itself and affirmed the Decision of the trial court dismissing the
that would justify a negative answer. Nonetheless, the drawee bank complaint.
could still be held liable in certain instances. Even if the return of the
check/s in question is done within 24 hours after discovery, if it can In reversing itself, the Court of Appeals held that its 10 October 1991
be shown that the drawee bank had been patently negligent in the
Decision failed to appreciate that the rule on the return of altered checks
performance of its verification function, this Court finds no reason
within 24 hours from the discovery of the alteration had been duly passed by
why the said bank should be relieved of liability.
the Central Bank and accepted by the members of the banking system. Until
the rule is repealed or amended, the rule has to be applied.
Although banking practice has it that the presumption of clearance is
conclusive when it comes to the application of the 24-hour clearing
Petitioner moved for the reconsideration of the Amended Decision. In its 16
period, the same principle may not be applied to the 24-hour period
July 1997 Resolution, the Court of Appeals denied the motion for lack of
vis-a-vis material alterations in the sense that the drawee bank which
merit.
returns materially altered checks within 24 hours after discovery
would be conclusively relieved of any liability thereon. This is
because there could well be various intervening events or factors Hence, the recourse to this Court.
that could affect the rights and obligations of the parties in cases
such as the instant one including patent negligence on the part of the The Issues
drawee bank resulting in an unreasonable delay in detecting the
alterations. While it is true that the pertinent proviso in C.B. Circular Petitioner raises the following issues in its Memorandum:
No. 580 allows the drawee bank to return the altered check within
the period "provided by law for filing a legal action", this does not 1. Whether the checks were materially altered;
mean that this would entitle or allow the drawee bank to be grossly
negligent and, inspite thereof, avail itself of the maximum period
2. Whether respondent was negligent in failing to recognize within a
allowed by the above-cited Circular. The discovery must be made
reasonable period the altered checks and in not returning the checks
within a reasonable time taking into consideration the facts and
within the period; and
circumstances of the case. In other words, the aforementioned C.B.
Circular does not provide the drawee bank the license to be grossly
negligent on the one hand nor does it preclude the collecting bank 3. Whether the motion for reconsideration filed by respondent was
from raising available defenses even if the check is properly returned out of time thus making the 10 October 1991 Decision final and
within the 24-hour period after discovery of the material alteration.10 executory.12

The Court of Appeals rejected the trial court’s opinion that petitioner could The Ruling of This Court
have verified the status of the checks by telephone call since such imposition
is not required under Central Bank rules. The dispositive portion of the 10 Filing of the Petition under both Rules 45 and 65
October 1991 Decision reads:
Respondent asserts that the petition should be dismissed outright since
petitioner availed of a wrong mode of appeal. Respondent cites Ybañez v.
Court of Appeals13 where the Court ruled that "a petition cannot be
subsumed simultaneously under Rule 45 and Rule 65 of the Rules of Court,
and neither may petitioners delegate upon the court the task of determining
under which rule the petition should fall."
The remedies of appeal and certiorari are mutually exclusive and not
alternative or successive.14 However, this Court may set aside technicality for
justifiable reasons. The petition before the Court is clearly meritorious.
Further, the petition was filed on time both under Rules 45 and 65.15 Hence,
in accordance with the liberal spirit which pervades the Rules of Court and in
the interest of justice,16 we will treat the petition as having been filed under
Rule 45.
Alteration of Serial Number Not Material
The alterations in the checks were made on their serial numbers.
Sections 124 and 125 of Act No. 2031, otherwise known as the Negotiable
Instruments Law, provide:
SEC. 124. Alteration of instrument; effect of. ― Where a negotiable
instrument is materially altered without the assent of all parties liable
thereon, it is avoided, except as against a party who has himself
made, authorized, or assented to the alteration and subsequent
indorsers.
But when an instrument has been materially altered and is in the
hands of a holder in due course, not a party to the alteration, he may
enforce payment thereof according to its original tenor.
SEC. 125. What constitutes a material alteration. ― Any alteration
which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
or which adds a place of payment where no place of payment is
specified, or any other change or addition which alters the effect of
the instrument in any respect, is a material alteration.
The question on whether an alteration of the serial number of a check is a
material alteration under the Negotiable Instruments Law is already a settled
matter. In Philippine National Bank v. Court of Appeals, this Court ruled that
the alteration on the serial number of a check is not a material alteration.
Thus:
An alteration is said to be material if it alters the effect of the
instrument. It means an unauthorized change in an instrument that
purports to modify in any respect the obligation of a party or an
unauthorized addition of words or numbers or other change to an
incomplete instrument relating to the obligation of a party. In other
words, a material alteration is one which changes the items which
are required to be stated under Section 1 of the Negotiable
Instrument[s] Law.
Section 1 of the Negotiable Instruments Law provides:
Section 1. ― Form of negotiable instruments. An instrument to be
negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a
sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must
be named or otherwise indicated therein with reasonable
certainty.
In his book entitled "Pandect of Commercial Law and
Jurisprudence," Justice Jose C. Vitug opines that "an innocent
alteration (generally, changes on items other than those required to
be stated under Sec. 1, N.I.L.) and spoliation (alterations done by a
stranger) will not avoid the instrument, but the holder may enforce it
only according to its original tenor.
xxxx
The case at the bench is unique in the sense that what was altered is
the serial number of the check in question, an item which, it can
 readily be observed, is not an essential requisite for negotiability
under Section 1 of the Negotiable Instruments Law. The
aforementioned alteration did not change the relations between the
parties. The name of the drawer and the drawee were not altered.
The intended payee was the same. The sum of money due to the
payee remained the same. x x x
xxxx
The check’s serial number is not the sole indication of its origin. As
succinctly found by the Court of Appeals, the name of the
government agency which issued the subject check was prominently
printed therein. The check’s issuer was therefore sufficiently
identified, rendering the referral to the serial number redundant and
inconsequential. x x x
xxxx
Petitioner, thus cannot refuse to accept the check in question on the
ground that the serial number was altered, the same being an
immaterial or innocent one.17
There are instances when rules of procedure are relaxed in the interest of
justice. However, in this case, respondent did not proffer any explanation for
the late filing of the motion for reconsideration. Instead, there was a
deliberate attempt to deceive the Court of Appeals by claiming that the copy
of the 10 October 1991 Decision was received on 22 October 1991 instead of
on 16 October 1991. We find no justification for the posture taken by the
Court of Appeals in admitting the motion for reconsideration. Thus, the late
filing of the motion for reconsideration rendered the 10 October 1991
Decision final and executory.
The 24-Hour Clearing Time
The Court will not rule on the proper application of Central Bank Circular No.
580 in this case. Since there were no material alterations on the checks,
respondent as drawee bank has no right to dishonor them and return them to
petitioner, the collecting bank.21 Thus, respondent is liable to petitioner for
the value of the checks, with legal interest from the time of filing of the
complaint on 16 March 1982 until full payment.22 Further, considering that
respondent’s motion for reconsideration was filed late, the 10 October 1991
Decision, which held respondent liable for the value of the checks amounting
to P1,447,920, had become final and executory.

WHEREFORE, we SET ASIDE the 9 August 1994 Amended Decision and

Likewise, in the present case the alterations of the serial numbers do not
constitute material alterations on the checks. the 16 July 1997 Resolution of the Court of Appeals. We rule that respondent
Philippine National Bank is liable to petitioner International Corporate Bank,
Inc. for the value of the checks amounting to P1,447,920, with legal interest
Incidentally, we agree with the petitioner’s observation that the check in from 16 March 1982 until full payment. Costs against respondent.
the PNB case appears to belong to the same batch of checks as in the
present case. The check in the PNB case was also issued by the Ministry of
SO ORDERED.
Education and Culture. It was also drawn against PNB, respondent in this
case. The serial number of the check in the PNB case is 7-3666-223-3 and it
was issued on 7 August 1981.

Timeliness of Filing of Respondent’s Motion for Reconsideration

Respondent filed its motion for reconsideration of the 10 October 1991

Decision on 6 November 1991. Respondent’s motion for reconsideration
states that it received a copy of the 10 October 1991 Decision on 22 October
1991.18 Thus, it appears that the motion for reconsideration was filed on time.
However, the Registry Return Receipt shows that counsel for respondent or
his agent received a copy of the 10 October 1991 Decision on 16 October
1991,19 not on 22 October 1991 as respondent claimed. Hence, the Court of
Appeals is correct when it noted that the motion for reconsideration was filed
late. Despite its late filing, the Court of Appeals resolved to admit the motion
for reconsideration "in the interest of substantial justice."20
G.R. No. 154469 December 6, 2006
METROPOLITAN BANK AND TRUST COMPANY, petitioners,
vs.
RENATO D. CABILZO, respondent.
CHICO-NAZARIO, J.:
Before this Court is a Petition for Review on Certiorari, filed by petitioner
Metropolitan Bank and Trust Company (Metrobank) seeking to reverse and
set aside the Decision1 of the Court of Appeals dated 8 March 2002 and its
Resolution dated 26 July 2002 affirming the Decision of the Regional Trial
Court (RTC) of Manila, Branch 13 dated 4 September 1998. The dispositive
portion of the Court of Appeals Decision reads:
WHEREFORE, the assailed decision dated September 4, 1998 is
AFFIRMED with modifications (sic) that the awards for exemplary
damages and attorney’s fees are hereby deleted.
Petitioner Metrobank is a banking institution duly organized and existing as
such under Philippine laws.2
Respondent Renato D. Cabilzo (Cabilzo) was one of Metrobank’s clients who
maintained a current account with Metrobank Pasong Tamo Branch.3
On 12 November 1994, Cabilzo issued a Metrobank Check No. 985988,
payable to "CASH" and postdated on 24 November 1994 in the amount of
One Thousand Pesos (P1,000.00). The check was drawn against Cabilzo’s
Account with Metrobank Pasong Tamo Branch under Current Account No.
618044873-3 and was paid by Cabilzo to a certain Mr. Marquez, as his sales
commission.4
Subsequently, the check was presented to Westmont Bank for payment.
Westmont Bank, in turn, indorsed the check to Metrobank for appropriate
clearing. After the entries thereon were examined, including the availability of
funds and the authenticity of the signature of the drawer, Metrobank cleared
the check for encashment in accordance with the Philippine Clearing House
Corporation (PCHC) Rules.
On 16 November 1994, Cabilzo’s representative was at Metrobank Pasong
Tamo Branch to make some transaction when he was asked by a bank
personnel if Cabilzo had issued a check in the amount of P91,000.00 to
which the former replied in the negative. On the afternoon of the same date,
Cabilzo himself called Metrobank to reiterate that he did not issue a check in
the amount of P91,000.00 and requested that the questioned check be
returned to him for verification, to which Metrobank complied.5
Upon receipt of the check, Cabilzo discovered that Metrobank Check No.
985988 which he issued on 12 November 1994 in the amount of P1,000.00
was altered to P91,000.00 and the date 24 November 1994 was changed to
14 November 1994.6
Hence, Cabilzo demanded that Metrobank re-credit the amount
of P91,000.00 to his account. Metrobank, however, refused reasoning that it
has to refer the matter first to its Legal Division for appropriate action.
Repeated verbal demands followed but Metrobank still failed to re-credit the
amount of P91,000.00 to Cabilzo’s account.7
On 30 June 1995, Cabilzo, thru counsel, finally sent a letter-demand8 to
Metrobank for the payment of P90,000.00, after deducting the original value
of the check in the amount of P1,000.00. Such written demand
notwithstanding, Metrobank still failed or refused to comply with its obligation.
Consequently, Cabilzo instituted a civil action for damages against
Metrobank before the RTC of Manila, Branch 13. In his Complaint docketed
as Civil Case No. 95-75651, Renato D. Cabilzo v. Metropolitan Bank and
Trust Company, Cabilzo prayed that in addition to his claim for
reimbursement, actual and moral damages plus costs of the suit be awarded
in his favor.9
For its part, Metrobank countered that upon the receipt of the said check
through the PCHC on 14 November 1994, it examined the genuineness and
the authenticity of the drawer’s signature appearing thereon and the technical
entries on the check including the amount in figures and in words to
determine if there were alterations, erasures, superimpositions or
intercalations thereon, but none was noted. After verifying the authenticity
and propriety of the aforesaid entries, including the indorsement of the
collecting bank located at the dorsal side of the check which stated that, "all
prior indorsements and lack of indorsement guaranteed," Metrobank cleared
the check.10
Anent thereto, Metrobank claimed that as a collecting bank and the last
indorser, Westmont Bank should be held liable for the value of the check.
Westmont Bank indorsed the check as the an unqualified indorser, by virtue
of which it assumed the liability of a general indorser, and thus, among
others, warranted that the instrument is genuine and in all respect what it
purports to be.
In addition, Metrobank, in turn, claimed that Cabilzo was partly responsible in
leaving spaces on the check, which, made the fraudulent insertion of the
amount and figures thereon, possible. On account of his negligence in the
preparation and issuance of the check, which according to Metrobank, was
the proximate cause of the loss, Cabilzo cannot thereafter claim indemnity by
virtue of the doctrine of equitable estoppel.
Thus, Metrobank demanded from Cabilzo, for payment in the amount
of P100,000.00 which represents the cost of litigation and attorney’s fees, for
allegedly bringing a frivolous and baseless suit. 11
On 19 April 1996, Metrobank filed a Third-Party Complaint12 against
Westmont Bank on account of its unqualified indorsement stamped at the
dorsal side of the check which the former relied upon in clearing what turned
out to be a materially altered check.
Subsequently, a Motion to Dismiss13 the Third-Party Complaint was then filed
by Westmont bank because another case involving the same cause of action
was pending before a different court. The said case arose from an action for
reimbursement filed by Metrobank before the Arbitration Committee of the
PCHC against Westmont Bank, and now the subject of a Petition for Review
before the RTC of Manila, Branch 19.
In an Order14 dated 4 February 1997, the trial court granted the Motion to
Dismiss the Third-Party Complaint on the ground of litis pendentia.
On 4 September 1998, the RTC rendered a Decision15 in favor of Cabilzo
and thereby ordered Metrobank to pay the sum of P90,000.00, the amount of
the check. In stressing the fiduciary nature of the relationship between the
bank and its clients and the negligence of the drawee bank in failing to detect
an apparent alteration on the check, the trial court ordered for the payment of
exemplary damages, attorney’s fees and cost of litigation. The dispositive
portion of the Decision reads:
WHEREFORE, judgment is rendered ordering defendant
Metropolitan Bank and Trust Company to pay plaintiff Renato
Cabilzo the sum of P90,000 with legal interest of 6 percent per
annum from November 16, 1994 until payment is made plus P20,000
attorney’s fees, exemplary damages of P50,000, and costs of the
suit.16
Aggrieved, Metrobank appealed the adverse decision to the Court of Appeals
reiterating its previous argument that as the last indorser, Westmont Bank
shall bear the loss occasioned by the fraudulent alteration of the check.
Elaborating, Metrobank maintained that by reason of its unqualified
indorsement, Westmont Bank warranted that the check in question is
genuine, valid and subsisting and that upon presentment the check shall be
accepted according to its tenor.
Even more, Metrobank argued that in clearing the check, it was not remiss in
the performance of its duty as the drawee bank, but rather, it exercised the
highest degree of diligence in accordance with the generally accepted
banking practice. It further insisted that the entries in the check were regular
and authentic and alteration could not be determined even upon close
examination.
In a Decision17 dated 8 March 2002, the Court of Appeals affirmed with
modification the Decision of the court a quo, similarly finding Metrobank liable
for the amount of the check, without prejudice, however, to the outcome of
the case between Metrobank and Westmont Bank which was pending before
another tribunal. The decretal portion of the Decision reads:
WHEREFORE, the assailed decision dated September 4, 1998 is
AFFIRMED with the modifications (sic) that the awards for exemplary
damages and attorney’s fees are hereby deleted.18
Similarly ill-fated was Metrobank’s Motion for Reconsideration which was
also denied by the appellate court in its Resolution19 issued on 26 July 2002,
for lack of merit.
Metrobank now poses before this Court this sole issue:
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
HOLDING METROBANK, AS DRAWEE BANK, LIABLE FOR THE
ALTERATIONS ON THE SUBJECT CHECK BEARING THE
AUTHENTIC SIGNATURE OF THE DRAWER THEREOF.
We resolve to deny the petition.
An alteration is said to be material if it changes the effect of the instrument. It
means that an unauthorized change in an instrument that purports to modify
in any respect the obligation of a party or an unauthorized addition of words
or numbers or other change to an incomplete instrument relating to the
obligation of a party.20 In other words, a material alteration is one which
changes the items which are required to be stated under Section 1 of the
Negotiable Instruments Law.
Section 1 of the Negotiable Instruments Law provides:
 Section 1. Form of negotiable instruments. - An instrument to be
negotiable must conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum
certain in money;
(c) Must be payable on demand or at a fixed 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.
Also pertinent is the following provision in the Negotiable Instrument Law
which states:
Section 125. What constitutes material alteration. – Any alteration
which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relation of the parties;
(e) The medium or currency in which payment is to be made;
Or which adds a place of payment where no place of payment is
specified, or any other change or addition which alters the effect of
the instrument in any respect is a material alteration.
In the case at bar, the check was altered so that the amount was increased
from P1,000.00 to P91,000.00 and the date was changed from 24 November
1994 to 14 November 1994. Apparently, since the entries altered were
among those enumerated under Section 1 and 125, namely, the sum of
money payable and the date of the check, the instant controversy therefore
squarely falls within the purview of material alteration.
Now, having laid the premise that the present petition is a case of material
alteration, it is now necessary for us to determine the effect of a materially
altered instrument, as well as the rights and obligations of the parties
thereunder. The following provision of the Negotiable Instrument Law will
shed us some light in threshing out this issue:
Section 124. Alteration of instrument; effect of. – Where a negotiable
instrument is materially altered without the assent of all parties liable
thereon, it is avoided, except as against a party who has
himself made,authorized, and assented to the
alteration and subsequent indorsers.
But when the instrument has been materially altered and is in the
hands of a holder in due course not a party to the alteration, he may
enforce the payment thereof according to its original tenor.
(Emphasis ours.)
Indubitably, Cabilzo was not the one who made nor authorized the alteration.
Neither did he assent to the alteration by his express or implied acts. There is
no showing that he failed to exercise such reasonable degree of diligence
required of a prudent man which could have otherwise prevented the loss. As
correctly ruled by the appellate court, Cabilzo was never remiss in the
preparation and issuance of the check, and there were no indicia of evidence
that would prove otherwise. Indeed, Cabilzo placed asterisks before and after
the amount in words and figures in order to forewarn the subsequent holders
that nothing follows before and after the amount indicated other than the one
specified between the asterisks.
The degree of diligence required of a reasonable man in the exercise of his
tasks and the performance of his duties has been faithfully complied with by
Cabilzo. In fact, he was wary enough that he filled with asterisks the spaces
between and after the amounts, not only those stated in words, but also
those in numerical figures, in order to prevent any fraudulent insertion, but
unfortunately, the check was still successfully altered, indorsed by the
collecting bank, and cleared by the drawee bank, and encashed by the
perpetrator of the fraud, to the damage and prejudice of Cabilzo.
Verily, Metrobank cannot lightly impute that Cabilzo was negligent and is
therefore prevented from asserting his rights under the doctrine of equitable
estoppel when the facts on record are bare of evidence to support such
conclusion. The doctrine of equitable estoppel states that when one of the
two innocent persons, each guiltless of any intentional or moral wrong, must
suffer a loss, it must be borne by the one whose erroneous conduct, either by
omission or commission, was the cause of injury.21 Metrobank’s reliance on
this dictum, is misplaced. For one, Metrobank’s representation that it is an
innocent party is flimsy and evidently, misleading. At the same time,
Metrobank cannot asseverate that Cabilzo was negligent and this negligence
was the proximate cause22 of the loss in the absence of even a scintilla proof
to buttress such claim. Negligence is not presumed but must be proven by
the one who alleges it.23
Undoubtedly, Cabilzo was an innocent party in this instant controversy. He
was just an ordinary businessman who, in order to facilitate his business
transactions, entrusted his money with a bank, not knowing that the latter
would yield a substantial amount of his deposit to fraud, for which Cabilzo
can never be faulted.
We never fail to stress the remarkable significance of a banking institution to
commercial transactions, in particular, and to the country’s economy in
general. The banking system is an indispensable institution in the modern
world and plays a vital role in the economic life of every civilized nation.
Whether as mere passive entities for the safekeeping and saving of money
or as active instruments of business and commerce, banks have become an
ubiquitous presence among the people, who have come to regard them with
respect and even gratitude and, most of all, confidence.24
Thus, even the humble wage-earner does not hesitate to entrust his life's
savings to the bank of his choice, knowing that they will be safe in its custody
and will even earn some interest for him. The ordinary person, with equal
faith, usually maintains a modest checking account for security and
convenience in the settling of his monthly bills and the payment of ordinary
expenses. As for a businessman like the respondent, the bank is a trusted
and active associate that can help in the running of his affairs, not only in the
form of loans when needed but more often in the conduct of their day-to-day
transactions like the issuance or encashment of checks.25
In every case, the depositor expects the bank to treat his account with the
utmost fidelity, whether such account consists only of a few hundred pesos
or of millions. The bank must record every single transaction accurately,
down to the last centavo, and as promptly as possible. This has to be done if
the account is to reflect at any given time the amount of money the depositor
can dispose of as he sees fit, confident that the bank will deliver it as and to
whomever he directs.26
The point is that as a business affected with public interest and because of
the nature of its functions, the bank is under obligation to treat the accounts
of its depositors with meticulous care, always having in mind the fiduciary
nature of their relationship. The appropriate degree of diligence required of a
bank must be a high degree of diligence, if not the utmost diligence. 27
In the present case, it is obvious that Metrobank was remiss in that duty and
violated that relationship. As observed by the Court of Appeals, there are
material alterations on the check that are visible to the naked eye. Thus:
x x x The number "1" in the date is clearly imposed on a white figure
in the shape of the number "2". The appellant’s employees who
examined the said check should have likewise been put on guard as
to why at the end of the amount in words, i.e., after the word "ONLY",
there are 4 asterisks, while at the beginning of the line or before said
phrase, there is none, even as 4 asterisks have been placed before
and after the word "CASH" in the space for payee. In addition, the 4
asterisks before the words "ONE THOUSAND PESOS ONLY" have
noticeably been erased with typing correction paper, leaving white
marks, over which the word "NINETY" was superimposed. The same
can be said of the numeral "9" in the amount "91,000", which is
superimposed over a whitish mark, obviously an erasure, in lieu of
the asterisk which was deleted to insert the said figure. The
appellant’s employees should have again noticed why only 2
asterisks were placed before the amount in figures, while 3 asterisks
were placed after such amount. The word "NINETY" is also typed
differently and with a lighter ink, when compared with the words
"ONE THOUSAND PESOS ONLY." The letters of the word
"NINETY" are likewise a little bigger when compared with the letters
of the words "ONE THOUSAND PESOS ONLY".28
Surprisingly, however, Metrobank failed to detect the above alterations which
could not escape the attention of even an ordinary person. This negligence
was exacerbated by the fact that, as found by the trial court, the check in
question was examined by the cash custodian whose functions do not
include the examinations of checks indorsed for payment against drawer’s
accounts.29 Obviously, the employee allowed by Metrobank to examine the
check was not verse and competent to handle such duty. These factual
findings of the trial court is conclusive upon this court especially when such
findings was affirmed the appellate court.30
Apropos thereto, we need to reiterate that by the very nature of their work the
degree of responsibility, care and trustworthiness expected of their
employees and officials is far better than those of ordinary clerks and
employees. Banks are expected to exercise the highest degree of diligence
in the selection and supervision of their employees.31
In addition, the bank on which the check is drawn, known as the drawee
bank, is under strict liability to pay to the order of the payee in accordance
with the drawer’s instructions as reflected on the face and by the terms of the
check. Payment made under materially altered instrument is not payment
done in accordance with the instruction of the drawer.
When the drawee bank pays a materially altered check, it violates the terms
of the check, as well as its duty to charge its client’s account only for bona
fide disbursements he had made. Since the drawee bank, in the instant case,
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.
Metrobank vigorously asserts that the entries in the check were carefully
examined: The date of the instrument, the amount in words and figures, as
well as the drawer’s signature, which after verification, were found to be
proper and authentic and was thus cleared. We are not persuaded.
Metrobank’s negligence consisted in the omission of that degree of diligence
required of a bank owing to the fiduciary nature of its relationship with its
client. Article 1173 of the Civil Code provides:
The fault or negligence of the obligor consists in the omission of that
diligence which is required by the nature of the obligation and
corresponds with the circumstances of the persons, of the time and
of the place. x x x.
Beyond question, Metrobank failed to comply with the degree required by the
nature of its business as provided by law and jurisprudence. If indeed it was
not remiss in its obligation, then it would be inconceivable for it not to detect
an evident alteration considering its vast knowledge and technical expertise
in the intricacies of the banking business. This Court is not completely
unaware of banks’ practices of employing devices and techniques in order to
detect forgeries, insertions, intercalations, superimpositions and alterations in
checks and other negotiable instruments so as to safeguard their authenticity
and negotiability. Metrobank cannot now feign ignorance nor claim diligence;
neither can it point its finger at the collecting bank, in order to evade liability.
What is even more deplorable is that, having been informed of the alteration,
Metrobank did not immediately re-credit the amount that was erroneously
debited from Cabilzo’s account but permitted a full blown litigation to push
through, to the prejudice of its client. Anyway, Metrobank is not left with no
recourse for it can still run after the one who made the alteration or with the
collecting bank, which it had already done. It bears repeating that the records
are bare of evidence to prove that Cabilzo was negligent. We find no
justifiable reason therefore why Metrobank did not immediately reimburse his
account. Such ineptness comes within the concept of wanton manner
contemplated under the Civil Code which warrants the imposition of
exemplary damages, "by way of example or correction for the public good,"
in the words of the law. It is expected that this ruling will serve as a stern
warning in order to deter the repetition of similar acts of negligence, lest the
confidence of the public in the banking system be further eroded. 32
WHEREFORE, premises considered, the instant Petition is DENIED. The
Decision dated 8 March 2002 and the Resolution dated 26 July 2002 of the
Court of Appeals are AFFIRMED with modification that exemplary damages
in the amount of P50,000.00 be awarded. Costs against the petitioner.
SO ORDERED.

Metrobank argues that Westmont Bank, as the collecting bank and the last
indorser, shall bear the loss. Without ruling on the matter between the
drawee bank and the collecting bank, which is already under the jurisdiction
of another tribunal, we find that Metrobank cannot rely on such indorsement,
in clearing the questioned check. The corollary liability of such indorsement,
if any, is separate and independent from the liability of Metrobank to Cabilzo.

The reliance made by Metrobank on Westmont Bank’s indorsement is clearly

inconsistent, if not totally offensive to the dictum that being impressed with
public interest, banks should exercise the highest degree of diligence, if not
utmost diligence in dealing with the accounts of its own clients. It owes the
highest degree fidelity to its clients and should not therefore lightly rely on the
judgment of other banks on occasions where its clients money were involve,
no matter how small or substantial the amount at stake.

Metrobank’s contention that it relied on the strength of collecting bank’s

indorsement may be merely a lame excuse to evade liability, or may be
indeed an actual banking practice. In either case, such act constitutes a
deplorable banking practice and could not be allowed by this Court bearing in
mind that the confidence of public in general is of paramount importance in
banking business.
G.R. No. 180144 September 24, 2014
LEONARDO BOGNOT, Petitioner,
vs.
RRI LENDING CORPORATION, represented by its General Manager,
DARIO J. BERNARDEZ, Respondent.
Background Facts
RRI Lending Corporation (respondent) is an entity engaged in the business
of lending money to its borrowers within Metro Manila. It is duly represented
by its General Manager, Mr. Dario J. Bernardez (Bernardez).
Sometime in September 1996, the petitioner and his younger brother,
Rolando A. Bognot (collectively referred to as the "Bognot siblings"), applied
for and obtained a loan of Five Hundred Thousand Pesos (P500,000.00)
from the respondent, payable on November 30, 1996.4 The loan was
evidenced by a promissory note and was secured by a post dated
check5 dated November 30, 1996.
Evidence on record shows that the petitioner renewed the loan several times
on a monthly basis. He paid a renewal fee of P54,600.00 for each renewal,
issued a new post-dated checkas security, and executed and/or renewed the
promissory note previouslyissued. The respondent on the other hand,
cancelled and returned to the petitioner the post-dated checks issued prior to
their renewal.
Sometime in March 1997, the petitioner applied for another loan renewal. He
again executed as principal and signed Promissory Note No. 97-
0356 payable on April 1, 1997; his co-maker was again Rolando. As security
for the loan, the petitioner also issued BPI Check No. 0595236,7 post dated
to April 1, 1997.8
Subsequently, the loan was again renewed on a monthly basis (until June
30, 1997), as shown by the Official Receipt No. 7979 dated May 5, 1997, and
the Disclosure Statement dated May 30, 1997 duly signed by Bernardez. The
petitioner purportedly paid the renewal fees and issued a post-dated check
dated June 30, 1997 as security. As had been done in the past, the
respondent superimposed the date "June 30, 1997" on the upper right
portion of Promissory Note No. 97-035 to make it appear that it would mature
on the said date.
Several days before the loan’s maturity, Rolando’s wife, Julieta Bognot (Mrs.
Bognot), went to the respondent’s office and applied for another renewal of
the loan. She issued in favor of the respondent Promissory Note No. 97-051,
and International Bank Exchange (IBE) Check No. 00012522, dated July 30,
1997, in the amount of P54,600.00 as renewal fee.
On the excuse that she needs to bring home the loan documents for the
Bognot siblings’ signatures and replacement, Mrs. Bognot asked the
respondent’s clerk to release to her the promissory note, the disclosure
statement, and the check dated July 30, 1997. Mrs. Bognot, however, never
returned these documents nor issued a new post-dated check.
Consequently, the respondent sent the petitioner follow-up letters demanding
payment of the loan, plus interest and penalty charges. These demands went
unheeded.
On November 27, 1997, the respondent, through Bernardez, filed a
complaint for sum of money before the Regional Trial Court (RTC) against
the Bognot siblings. The respondent mainly alleged that the loan renewal
payable on June 30, 1997 which the Bognot siblings applied for remained
unpaid; that before June30, 1997, Mrs. Bognot applied for another loan
extension and issued IBE Check No. 00012522 as payment for the renewal
fee; that Mrs. Bognot convinced the respondent’s clerk to release to her the
promissory note and the other loan documents; that since Mrs. Bognot never
issued any replacement check, no loanextension took place and the loan,
originally payable on June 30, 1997, became due on this date; and despite
repeated demands, the Bognot siblings failed to pay their joint and solidary
obligation.
Summons were served on the Bognotsiblings. However, only the petitioner
filed his answer.
In his Answer,10 the petitioner claimed that the complaint states no cause of
action because the respondent’s claim had been paid, waived, abandoned or
otherwise extinguished. He denied being a party to any loan application
and/or renewal in May 1997. He also denied having issued the BPI check
post-dated to June 30, 1997, as well as the promissory note dated June 30,
1997, claiming that this note had been tampered. He claimed that the one (1)
month loan contracted by Rolando and his wife in November 1996 which was
lastly renewed in March 1997 had already been fully paid and extinguished in
April 1997.11
RTC ruled in the respondent’s favor and ordered the Bognot siblings to pay
the amount of the loan, plus interest and penalty charges. It considered the
wordings of the promissory note and found that the loan they contracted was
joint and solidary. It also noted that the petitioner signed the promissory note
as a principal (and not merely as a guarantor), while Rolando was the co-
maker. It brushed the petitioner’s defense of full payment aside, ruling that
the respondent had successfully proven, by preponderance of evidence, the
nonpayment of the loan. The trial court said:
Records likewise reveal that while he claims that the obligation had been fully
paid in his Answer, he did not, in order to protect his right filed (sic) a cross-
claim against his co-defendant Rolando Bognot despite the fact that the latter
did not file any responsive pleading.
In fine, defendants are liable solidarily to plaintiff and must pay the loan
of P500,000.00 plus 5% interest monthly as well as 10% monthly penalty
charges from the filing of the complaint on December 3, 1997 until fully paid.
As plaintiff was constrained to engage the services of counsel in order to
protect his right,defendants are directed to pay the former jointly and
severally the amount of P50,000.00 as and by way of attorney’s fee.
CA affirmed the RTC’s findings
The Issues
2. Whether the petitioner is relieved from liability by reason of the
material alteration in the promissory note; and
Our Ruling
We find the petition partly meritorious.
As a rule, the Court’s jurisdiction in a Rule 45 petition is limited to the review
of pure questions of law.14Appreciation of evidence and inquiry on the
correctness of the appellate court's factual findings are not the functions of
this Court; we are not a trier of facts.15
A question of law exists when the doubt or dispute relates to the application
of the law on given facts. On the other hand, a question of fact exists when
the doubt or dispute relates to the truth or falsity of the parties’ factual
allegations.16
As the respondent correctly pointedout, the petitioner’s allegations are factual
issuesthat are not proper for the petition he filed. In the absence of
compelling reasons, the Court cannot re-examine, review or re-evaluate the
evidence and the lower courts’ factual conclusions. This is especially true
when the CA affirmed the lower court’s findings, as in this case. Since the
CA’s findings of facts affirmed those of the trial court, they are binding on this
Court, rendering any further factual review unnecessary.
If only to lay the issues raised - both factual and legal – to rest, we shall
proceed to discuss their merits and demerits.
No Evidence Was Presented to Establish the Fact of Payment
Jurisprudence tells us that one who pleads payment has the burden of
proving it;17 the burden rests on the defendant to prove payment, rather than
on the plaintiff to prove non-payment.18 Indeed, once the existence of an
indebtedness is duly established by evidence, the burden of showing with
legal certainty that the obligation has been discharged by payment rests on
the debtor.19
In the present case, the petitioner failed to satisfactorily prove that his
obligation had already been extinguished by payment. As the CA correctly
noted, the petitioner failed to present any evidence that the respondent had
in fact encashed his check and applied the proceeds to the payment of the
loan. Neither did he present official receipts evidencing payment, nor any
proof that the check had been dishonored.
We note that the petitioner merely relied on the respondent’s cancellation
and return to him of the check dated April 1, 1997. The evidence shows that
this check was issued to secure the indebtedness. The acts imputed on the
respondent, standing alone, do not constitute sufficient evidence of payment.
Article 1249, paragraph 2 of the Civil Code provides:
xxxx
The delivery of promissory notes payable to order, or bills of exchange or
other mercantile documents shall produce the effect of payment only when
they have been cashed, or when through the fault of the creditor they have
been impaired. (Emphasis supplied)
Also, we held in Bank of the Philippine Islands v. Spouses Royeca:20
Settled is the rule that payment must be made in legal tender. A check is not
legal tender and, therefore, cannot constitute a valid tender of payment.
Since a negotiable instrument is only a substitute for money and not money,
the delivery of such an instrument does not, by itself, operate as payment.
Mere delivery of checks does not discharge the obligation under a judgment.
The obligation is not extinguished and remains suspended until the payment
by commercial document is actually realized.(Emphasis supplied)
Although Article 1271 of the Civil Code provides for a legal presumption of In light of these exchanges, wefind that the petitioner failed to discharge his
renunciation of action (in cases where a private document evidencing a credit burden ofproving payment.
was voluntarily returned by the creditor to the debtor), this presumption is
merely prima facieand is not conclusive; the presumption loses efficacy when The Alteration of the Promissory Note
faced with evidence to the contrary.
Did Not Relieve the Petitioner From Liability
Moreover, the cited provision merely raises a presumption, not of payment,
but of the renunciation of the credit where more convincing evidence would We now come to the issue of material alteration. The petitioner raised as
be required than what normally would be called for to prove payment. 21Thus,
defense the alleged material alteration of Promissory Note No. 97-035 as
reliance by the petitioner on the legal presumption to prove payment is
basis to claim release from his loan. He alleged that the respondent’s
misplaced.
superimposition of the due date "June 30, 1997" on the promissory note
without his consent effectively relieved him of liability.
To reiterate, no cash payment was proven by the petitioner. The cancellation
and return of the check dated April 1, 1997, simply established his renewal of
We find this defense untenable.
the loan – not the fact of payment. Furthermore, it has been established
during trial, through repeated acts, that the respondent cancelled and
surrendered the post-dated check previously issued whenever the loan is Although the respondent did not dispute the fact of alteration, he
renewed. We trace whatwould amount to a practice under the facts of this nevertheless denied that the alteration was done without the petitioner’s
case, to the following testimonial exchanges: consent. The parties’ Pre-Trial Order dated November 3, 199824 states that:

Civil Case No. 97-0572 xxx There being no possibility of a possible compromise agreement,
TSN December 14, 1998, Page 13. stipulations, admissions, and denials were made, to wit:
Atty. Almeda:
Q: In the case of the renewal of the loan you admitted that a renewal fee is FOR DEFENDANT LEONARDO BOGNOT
charged to the debtor which he or she must pay before a renewal is allowed.
I show you Exhibit "3" official receipt of plaintiff dated July 3, 1997, would this 13. That the promissory note subject of this case marked as Annex "A" of the
be your official receipt which you issued to your client which they make complaint was originally dated April 1, 1997 with a superimposed rubber
renewal of the loan? stamp mark "June 30, 1997" to which the plaintiff admitted the
A: Yes, sir. superimposition.
xxx xxx xxx
Q: And naturally when a loan has been renewed, the old one which is 14. The superimposition was done without the knowledge, consent or prior
replaced by the renewal has already been cancelled, is that correct? consultation with Leonardo Bognot which was denied by
A: Yes, sir. plaintiff."25 (Emphasis supplied)
Q: It is also true to say that all promissory notes and all postdated checks
covered by the old loan which have been the subject of the renewal are
Significantly, the respondent also admitted in the Pre-Trial Order that part of
deemed cancelled and replaced is that correct?
its company practice is to rubber stamp, or make a superimposition through a
A: Yes, sir. xxx22
rubber stamp, the old promissory note which has been renewed to make it
Civil Case No. 97-0572
appear that there is a new loan obligation. The petitioner did not rebut this
TSN November 27, 1998, Page 27.
statement. To our mind, the failure to rebut is tantamount to an admission of
Q: What happened to the check that Mr. Bognot issued?
the respondent’s allegations:
Court: There are two Bognots. Who in particular?
Q: Leonardo Bognot, Your Honor.
A: Every month, they were renewed, he issued a new check, sir. "22. That it is the practice of plaintiff to just rubber stamp or make
Q: Do you have a copy of the checks? superimposition through a rubber stamp on old promissory note which has
A: We returned the check upon renewing the loan.23 been renewed to make it appear that there is a new loan obligation to which
the plaintiff admitted." (Emphasis Supplied).26
Even assuming that the note had indeed been tampered without the
petitioner’s consent, the latter cannot totally avoid payment of his obligation
to the respondent based on the contract of loan.
Based on the records, the Bognot Siblings had applied for and were granted
a loan of P500,000.00 by the respondent. The loan was evidenced by a
promissory note and secured by a post-dated check27 dated November 30,
1996. In fact, the petitioner himself admitted his loan application was
evidenced by the Promissory Note dated April 1, 1997. 28 This loan was
renewed several times by the petitioner, after paying the renewal fees, as
shown by the Official Receipt Nos. 79729 and 58730 dated May 5 and July 3,
1997, respectively. These official receipts were issued in the name of the
petitioner. Although the petitioner had insisted that the loan had been
extinguished, no other evidence was presented to prove payment other than
the cancelled and returnedpost-dated check.
Under this evidentiary situation, the petitioner cannot validly deny his
obligation and liability to the respondent solely on the ground that the
Promissory Note in question was tampered. Notably, the existence of the
obligation, as well as its subsequent renewals, have been duly established
by: first, the petitioner’s application for the loan; second, his admission that
the loan had been obtained from the respondent; third, the post-dated checks
issued by the petitioner to secure the loan; fourth, the testimony of Mr.
Bernardez on the grant, renewal and non-payment of the loan; fifth, proof of
non-payment of the loan; sixth, the loan renewals; and seventh, the approval
and receipt of the loan renewals.
In Guinsatao v. Court of Appeals,31 this Court pointed out that while a
promissory note is evidence of an indebtedness, it is not the only evidence,
for the existence of the obligation can be proven by other documentary
evidence such as a written memorandum signed by the parties. In Pacheco
v. Court of Appeals,32 this Court likewise expressly recognized that a check
constitutes anevidence of indebtedness and is a veritable proof of an
obligation. It canbe used in lieu of and for the same purpose as a promissory
note and can therefore be presented to establish the existence of
indebtedness.33
In the present petition, we find that the totality of the evidence on record
sufficiently established the existence of the petitioner’s indebtedness (and
liability) based on the contract ofloan. Even with the tampered promissory
note, we hold that the petitioner can still be held liable for the unpaid loan.
The Petitioner’s BelatedClaim of Novation by Substitution May no Longer be
Entertained
It has not escaped the Court’s attention that the petitioner raised the
argument that the obligation had been extinguished by novation. The
petitioner never raised this issue before the lower courts.
It is a settled principle of law thatno issue may be raised on appeal unless it
has been brought before the lower tribunal for its consideration.34 Matters
neither alleged in the pleadingsnor raised during the proceedings below
cannot be ventilated for the first time on appeal before the Supreme Court.35
In any event, we find no merit in the defense of novation as we discuss at
length below. Novation cannot be presumed and must be clearly and
unequivocably proven.
Novation is a mode of extinguishing an obligation by changing its objects or
principal obligations, by substituting a new debtor in place of the old one, or
by subrogating a third person to the rights of the creditor. 36
Article 1293 of the Civil Code defines novation as follows:
"Art. 1293. Novation which consists insubstituting a new debtor in the place
of the originalone, may be made even without the knowledge or against the
will of the latter, but not without the consent of the creditor. Payment by the
new debtor gives him rights mentioned in Articles 1236 and 1237."
To give novation legal effect, the original debtor must be expressly released
from the obligation, and the new debtor must assume the original debtor’s
place in the contractual relationship. Depending on who took the initiative,
novation by substitution of debtor has two forms – substitution by
expromision and substitution by delegacion. The difference between these
two was explained in Garcia v. Llamas:37
"In expromision, the initiative for the change does not come from -- and may
even be made without the knowledge of -- the debtor, since it consists of a
third person’s assumption of the obligation. As such, it logically requires the
consent of the third person and the creditor. In delegacion, the debtor offers,
and the creditor accepts, a third person who consents to the substitution and
assumes the obligation; thus, the consent of these three persons are
necessary."
In both cases, the original debtor must be released from the obligation;
otherwise, there can be no valid novation.38 Furthermore, novation by
substitution of debtor must alwaysbe made with the consent of the creditor. 39
The petitioner contends thatnovation took place through a substitution of
debtors when Mrs. Bognot renewed the loan and assumed the debt. He
alleged that Mrs. Bognot assumed the obligation by paying the renewal fees
and charges, and by executing a new promissory note. He further claimed
that she issued her own check 40 to cover the renewal fees, which fact,
according to the petitioner, was done with the respondent’s consent.
Contrary to the petitioner’s contention, Mrs. Bognot did not substitute the
petitioner as debtor. She merely attempted to renew the original loan by
executing a new promissory note41 and check. The purported one month
renewal of the loan, however, did not push through, as Mrs. Bognot did not
return the documents or issue a new post dated check. Since the loan was
not renewed for another month, the originaldue date, June 30,1997,
continued to stand.
More importantly, the respondent never agreed to release the petitioner from
his obligation. That the respondent initially allowed Mrs. Bognot to bring
home the promissory note, disclosure statement and the petitioner’s previous
check dated June 30, 1997, does not ipso factoresult in novation. Neither will
this acquiescence constitute an implied acceptance of the substitution of the
debtor.
In order to give novation legal effect, the creditor should consent to the
substitution of a new debtor. Novation must be clearly and unequivocally
shown, and cannot be presumed.
Since the petitioner failed to show thatthe respondent assented to the
substitution, no valid novation took place with the effect of releasing the
petitioner from his obligation to the respondent.
Moreover, in the absence of showing that Mrs. Bognot and the respondent
had agreed to release the petitioner, the respondent can still enforce the
payment of the obligation against the original debtor. Mere acquiescence to
the renewal of the loan, when there is clearly no agreement to release the
petitioner from his responsibility, does not constitute novation.
The Nature of the Petitioner’s Liability
On the nature of the petitioner’s liability, we rule however, that the CA erred
in holding the petitioner solidarily liable with Rolando.
A solidary obligation is one in which each of the debtors is liable for the entire
obligation, and each of the creditors is entitled to demand the satisfaction of
the whole obligation from any or all of the debtors.42 There is solidary liability
when the obligation expressly so states, when the law so provides, or when
the nature of the obligation so requires.43 Thus, when the obligor undertakes
to be "jointly and severally" liable, the obligation is solidary,
In this case, both the RTC and the CA found the petitioner solidarily liable
with Rolando based on Promissory Note No. 97-035 dated June 30, 1997.
Under the promissory note, the Bognot Siblings defined the parameters of
their obligation as follows:
"FOR VALUE RECEIVED, I/WE, jointly and severally, promise to pay to
READY RESOURCES INVESTORS RRI LENDING CORPO. or Order, its
office at Paranaque, M.M. the principal sum of Five Hundred Thousand
PESOS (P500,000.00), PhilippineCurrency, with interest thereon at the rate
of Five percent (5%) per month/annum, payable in One Installment (01)
equal daily/weekly/semi-monthly/monthly of PESOS Five Hundred Thousand
Pesos (P500,000.00), first installment to become due on June 30, 1997.
xxx"44 (Emphasis Ours).
Although the phrase "jointly and severally" in the promissory note clearly and
unmistakably provided for the solidary liability of the parties, we note and
stress that the promissory note is merely a photocopyof the original, which
was never produced.
Under the best evidence rule, whenthe subject of inquiry is the contents of a
document, no evidence isadmissible other than the original document itself
except in the instances mentioned in Section 3, Rule 130 of the Revised
Rules of Court.45
The records show that the respondenthad the custody of the original
promissory note dated April 1, 1997, with a superimposed rubber stamp mark
"June 30, 1997", and that it had been given every opportunity to present it.
The respondent even admitted during pre-trial that it could not present the
original promissory note because it is in the custody of its cashier who is
stranded in Bicol.46 Since the respondent never produced the original of the
promissory note, much less offered to produce it, the photocopy of the
promissory note cannot be admitted as evidence. Other than the promissory
note in question, the respondent has not presented any other evidence to
support a finding of solidary liability. As we earlier noted, both lower courts
completely relied on the note when they found the Bognot siblingssolidarily
liable.
The well-entrenched rule is that solidary obligation cannot be inferred lightly.
It must be positively and clearly expressed and cannot be presumed.47
In view of the inadmissibility of the promissory note, and in the absence of
evidence showing that the petitioner had bound himself solidarily with
Rolando for the payment of the loan, we cannot but conclude that the
obligation to pay is only joint.48
The 5% Monthly Interest Stipulated in the Promissory Note is
Unconscionable and Should be Equitably Reduced

Finally, on the issue of interest, while we agree with the CA that the petitioner
is liable to the respondentfor the unpaid loan, we find the imposition of the
5% monthly interest to be excessive, iniquitous, unconscionable and
exorbitant, and hence, contrary to morals and jurisprudence. Although parties
to a loan agreement have wide latitude to stipulate on the applicable interest
rate under Central Bank Circular No. 905 s. 1982 (which suspended the
Usury Law ceiling on interest effective January 1, 1983), we stress that
unconscionable interest rates may still be declared illegal.49

In several cases, we haveruled that stipulations authorizing iniquitous or

unconscionable interests are contrary to morals and are illegal. In Medel v.
Court of Appeals,50 we annulled a stipulated 5.5% per month or 66% per
annum interest on a P500,000.00 loan, and a 6% per month or 72% per
annum interest on a P60,000.00 loan, respectively, for being excessive,
iniquitous, unconscionableand exorbitant.1âwphi1

We reiterated this ruling in Chua v. Timan,51 where we held that the

stipulated interest rates of 3% per month and higher are excessive,
iniquitous, unconscionable and exorbitant, and must therefore be reduced to
12% per annum.

Applying these cited rulings, we now accordingly hold that the stipulated
interest rate of 5% per month, (or 60% per annum) in the promissory note is
excessive, unconscionable, contrary to morals and is thus illegal. It is void ab
initiofor violating Article 130652 of the Civil Code.1âwphi1 We accordingly find
it equitable to reduce the interest rate from 5% per month to 1% per month or
12% per annum in line with the prevailing jurisprudence.

WHEREFORE, premises considered, the Decision dated March 28, 2007 of

the Court of Appeals in CA-G.R. CV No. 66915 is hereby AFFIRMED with
MODIFICATION, as follows:

1. The petitioner Leonardo A. Bognotand his brother, Rolando A.

Bognot are JOINTLY LIABLE to pay the sum of P500,000.00 plus
12% interest per annum from December 3, 1997 until fully paid.

2. The rest of the Court of Appeals' dispositions are hereby

AFFIRMED.

Costs against petitioner Leonardo A. Bognot.

SO ORDERED.
G.R. No. L-19461 March 28, 1923
CHARLES A. FOSSUM, plaintiff-appellant,
vs.
FERNANDEZ HERMANOS, a general partnership, and JOSE F.
FERNANDEZ Y CASTRO and RAMON FERNANDEZ Y CASTRO,
members of the said partnership of FERNANDEZ
HERMANOS, defendants-appellees.
Chas. E. Tenney for appellant.
Ernesto Zaragoza and Jose Varela Calderon for appellees.
STREET, J.:
Prior to the date of the making of the contract which gave rise to this litigation
the plaintiff, Charles A. Fossum, was the resident agent in Manila of the
American Iron Products Company, Inc., a concern engaged in business in
New York City; and on February 10, 1920, the said Fossum, acting as agent
of that company, procured an order from Fernandez Hermanos, a general
commercial partnership engaged in business in the Philippine Islands, to
deliver to said firm a tail shaft, to be installed on the ship Romulus, then
operated by Fernandez Hermanos, as managers of La Compañía Marítima.
It was stipulated that said tail shaft would be in accordance with the
specifications contained in a blueprint which had been placed in the hands of
Fossum on or about December 18, 1919; and it was further understood that
the shaft should be shipped from New York upon some steamer sailing in
March or April of the year 1920.
Considerable delay seems to have been encountered in the matter of the
manufacture and shipment of the shaft; but in the autumn of 1920 it was
dispatched to Manila, having arrived in January, 1921. Meanwhile the
American Iron Products Company, Inc., had drawn a time draft, at sixty days,
upon Fernandez Hermanos, for the purchase price of the shaft, the same
being in the amount of $2,250, and payable to the Philippine National Bank.
In due course the draft was presented to Fernandez Hermanos for
acceptance, and was accepted by said firm on December 15, 1920,
according to its tenor.
Upon inspection after arrival in Manila the shaft was found not to be in
conformity with the specifications and was incapable of use for the purpose
for which it had been intended. Upon discovering this, Fernandez Hermanos
refused to pay the draft, and it remained for a time dishonored in the hands
of the Philippine National Bank in Manila. Later the bank indorsed the draft in
blank, without consideration, and delivered it to the plaintiff, Charles A.
Fossum, who thereupon instituted the present action on the instrument
against the acceptor, Fernandez Hermanos, and the two individuals named
as defendants in the complaint, in the character of members of said
partnership.
On the foregoing statement it is evident that the consideration for the draft in
question and for the acceptance placed thereon by Fernandez Hermanos,
has completely failed; and no action whatever can be maintained on the
instrument by the American Iron Products Company, Inc., or by any other
person against whom the defense of failure of consideration is available. In
recognition of this fact, and considering that the plaintiff Fossum, in whose
name the action is brought, was the individual who had acted for the
American Iron Products Company, Inc., in the making of the contract, the trial
court held that the action could not be maintained and absolved the
defendants from the complaint. From this judgment the plaintiff appealed.
We are of the opinion that the trial judge has committed no error. To begin
with, the plaintiff himself is far from being a holder of this draft in due course.
In the fact place, he was himself a party to the contract which supplied the
consideration for the draft, albeit he there acted in a representative capacity.
In the second place, he procured the instrument to be indorsed by the bank
and delivered to himself without the payment of value, after it was overdue,
and with full notice that, as between the original parties, the consideration
had completely failed. Under these circumstance recovery on this draft by the
plaintiff by virtue of any merit in his own position is out of the question. His
attorney, however, calls attention to the familiar rule that a person who is not
himself a holder in due course may yet recover against the person primarily
liable where it appears that such holder derives his title through a holder in
due course.
The difficulty of the plaintiff's position from this point of view is that there is
not a line of proof in the record tending to show as a fact that the bank itself
was ever a holder of this draft in due course. In this connection it was
incumbent on the plaintiff to show, as an independent claims, i.e., the bank,
was a holder in due course; and upon this point the plaintiff can have no
assistance from the presumption, expressed in section 59 of the Negotiable
Instrument Law, to the effect that every holder is deemed prima facie to be a
holder in due course. The presumption expressed in that section arise only in
favor of a person who is a holder in the sense defined in section 191 of the
same Law, that is, a payee or indorsee who is in possession of the draft, or
the bearer thereof. Under this definition, in order to be a holder, one must be
in possession of the note or the bearer thereof. (Night & Day
Bank vs. Rosenbaum, 191 Mo. App., 559, 574.) If this action had been
instituted by the bank itself, the presumption that the bank was a holder in
due course would have arisen from the tenor of the draft and the fact that it
was in the bank's possession; but when the instrument passed out of the
possession of the bank and into the possession of the present plaintiff, no
presumption arises as to the character in which the bank held the paper. The
bank's relation to the instrument became past history when it delivered the
document to the plaintiff; and it was incumbent upon the plaintiff in this action
to show that the bank had in fact acquired the instrument for value and under
such conditions as would constitute it a holder in due course. In the entire
absence of proof on this point, the action must fail.
There is another circumstance which exerted a decisive influence on the
mind of the trial judge in deciding the case for the defendants. This is found
in the fact that the plaintiff personally made the contract which constituted the
consideration for this draft. He was therefore a party in fact, if not in law, to
the transaction giving origin to the instrument; and it is difficult to see how the
plaintiff could strip himself of the character to agent with respect to the origin
of the contract and maintain this action in his own name where his principal
could not. Certainly an agent who actually makes a contract, and who has
notice of all equities emanating therefrom, can stand on no better footing
than his principal with respect to commercial paper growing out of the
transaction. To place him on any higher plane would be incompatible with the
fundamental conception underlying the relation of principal and agent. We
note that in the present case there is no proof that the plaintiff Fossum has
ceased to be the agent of the American Iron Products Company, Inc.; and in
the absence of proof the presumption must be that he still occupies the
relation of agent to that company.
it is a well-known rule of law that if the original payee of a note unenforceable
for lack of consideration repurchase the instrument after transferring it to a
holder in due course, the paper again becomes subject in the payee's hands
to the same defenses to which it would have been subject if the paper had
never passed through the hands of a holder in due course. (Kost vs. Bender,
25 Mich., 515; Shade vs. Hayes, L. R. A. [1915D], 271; 8 C. J., 470.) The
same is true where the instrument is retransferred to an agent of the payee
(Battersbee vs. Calkins, 128 Mich., 569).
hands they would not have been subject to the defense which had been
interposed (54 L. R. A., 678).
We find nothing in the Negotiable Instrument Law that would interfere with
the application of the doctrine applied in the cases above cited, for the rule
that identifies the agent with the principal, so far as the legal consequences
of certain acts are concerned, is a rule of general jurisprudence that must
operate in conjunction with that Law. We consider the situation to be the
same in practical effect as if the action had been brought in the name of the
American Iron Products Company, Inc., itself; and the use of the name of
Fossum strikes us as a mere attempt at an evasion of the rule of law that
would have been fatal to the success of an action instituted by that company.
It appears from statements of Mr. Fossum on the witness stand that the draft
in question was indorsed and delivered to him by the bank in order that suit
might be brought thereon in his name for the use and benefit of the bank,
which is said to be the real party in interest. In addition to this it appears that
during the pendency of the cause in this court on appeal a formal transfer, or
assignment, to the bank was made by Fossum of all his interest in the draft
and in the cause of action.
Assuming that the suggestion thus made is true, and that the bank is the real
party in interest, the result of the lawsuit in this court is not thereby affected,
since it has not been affirmatively shown that the bank is an innocent
purchaser for value. It is therefore unnecessary to discuss the bearing of this
circumstance on the second feature to the case discussed in this opinion.
For the reasons stated the judgment appealed from must be affirmed, and it
is so ordered, with costs against the appellant.

In Dollarhide vs. Hopkins (72 Ill. App., 509), the plaintiff, as agent of a
corporation engaged in manufacturing agricultural implements, sold to the
defendant a separator for threshing small grain, with a general warranty that
the machine, properly handled, would thresh and clean grain as well as any
other separator of like size. The notes in suit were executed by the defendant
in payment of the separator, and were assigned to the plaintiff before
maturity. They were then indorsed by the plaintiff to a bank which became
holder in due course; but afterwards, and before the commencement of the
action, the notes were retransferred by the bank to the plaintiff. In an action
upon the notes the defendant alleged and proved breach of warranty and
showed that the plaintiff knew of the defect in the separator at the time he
purchased the notes. It was held that the plaintiff could not recover,
notwithstanding the fact that the notes had passed through a bank, in whose
G.R. No. L-15126 November 30, 1961
VICENTE R. DE OCAMPO & CO., plaintiff-appellee,
vs.
ANITA GATCHALIAN, ET AL., defendants-appellants.
The action is for the recovery of the value of a check for P600 payable to the
plaintiff and drawn by defendant Anita C. Gatchalian. The complaint sets
forth the check and alleges that plaintiff received it in payment of the
indebtedness of one Matilde Gonzales; that upon receipt of said check,
plaintiff gave Matilde Gonzales P158.25, the difference between the face
value of the check and Matilde Gonzales' indebtedness. The defendants
admit the execution of the check but they allege in their answer, as
affirmative defense, that it was issued subject to a condition, which was not
fulfilled, and that plaintiff was guilty of gross negligence in not taking steps to
protect itself.
At the time of the trial, the parties submitted a stipulation of facts, which
reads as follows:
Plaintiff and defendants through their respective undersigned
attorney's respectfully submit the following Agreed Stipulation of
Facts;
First. — That on or about 8 September 1953, in the evening,
defendant Anita C. Gatchalian who was then interested in looking for
a car for the use of her husband and the family, was shown and
offered a car by Manuel Gonzales who was accompanied by Emil
Fajardo, the latter being personally known to defendant Anita C.
Gatchalian;
Second. — That Manuel Gonzales represented to defend Anita C.
Gatchalian that he was duly authorized by the owner of the car,
Ocampo Clinic, to look for a buyer of said car and to negotiate for
and accomplish said sale, but which facts were not known to plaintiff;
Third. — That defendant Anita C. Gatchalian, finding the price of the
car quoted by Manuel Gonzales to her satisfaction, requested
Manuel Gonzales to bring the car the day following together with the
certificate of registration of the car, so that her husband would be
able to see same; that on this request of defendant Anita C.
Gatchalian, Manuel Gonzales advised her that the owner of the car
will not be willing to give the certificate of registration unless there is
a showing that the party interested in the purchase of said car is
ready and willing to make such purchase and that for this purpose
Manuel Gonzales requested defendant Anita C. Gatchalian to give
him (Manuel Gonzales) a check which will be shown to the owner as
evidence of buyer's good faith in the intention to purchase the said
car, the said check to be for safekeeping only of Manuel Gonzales
and to be returned to defendant Anita C. Gatchalian the following
day when Manuel Gonzales brings the car and the certificate of
registration, but which facts were not known to plaintiff;
Fourth. — That relying on these representations of Manuel Gonzales
and with his assurance that said check will be only for safekeeping
and which will be returned to said defendant the following day when
the car and its certificate of registration will be brought by Manuel
Gonzales to defendants, but which facts were not known to plaintiff,
defendant Anita C. Gatchalian drew and issued a check, Exh. "B";
that Manuel Gonzales executed and issued a receipt for said check,
Exh. "1";
Fifth. — That on the failure of Manuel Gonzales to appear the day
following and on his failure to bring the car and its certificate of
registration and to return the check, Exh. "B", on the following day as
previously agreed upon, defendant Anita C. Gatchalian issued a
"Stop Payment Order" on the check, Exh. "3", with the drawee bank.
Said "Stop Payment Order" was issued without previous notice on
plaintiff not being know to defendant, Anita C. Gatchalian and who
furthermore had no reason to know check was given to plaintiff;
Sixth. — That defendants, both or either of them, did not know
personally Manuel Gonzales or any member of his family at any time
prior to September 1953, but that defendant Hipolito Gatchalian is
personally acquainted with V. R. de Ocampo;
Seventh. — That defendants, both or either of them, had no
arrangements or agreement with the Ocampo Clinic at any time prior
to, on or after 9 September 1953 for the hospitalization of the wife of
Manuel Gonzales and neither or both of said defendants had
assumed, expressly or impliedly, with the Ocampo Clinic, the
obligation of Manuel Gonzales or his wife for the hospitalization of
the latter;
Eight. — That defendants, both or either of them, had no obligation
or liability, directly or indirectly with the Ocampo Clinic before, or on 9
September 1953;
Ninth. — That Manuel Gonzales having received the check Exh. "B"
from defendant Anita C. Gatchalian under the representations and
 conditions herein above specified, delivered the same to the
Ocampo Clinic, in payment of the fees and expenses arising from the
hospitalization of his wife;
Tenth. — That plaintiff for and in consideration of fees and expenses
of hospitalization and the release of the wife of Manuel Gonzales
from its hospital, accepted said check, applying P441.75 (Exhibit "A")
thereof to payment of said fees and expenses and delivering to
Manuel Gonzales the amount of P158.25 (as per receipt, Exhibit "D")
representing the balance on the amount of the said check, Exh. "B";
Eleventh. — That the acts of acceptance of the check and
application of its proceeds in the manner specified above were made
without previous inquiry by plaintiff from defendants:
Twelfth. — That plaintiff filed or caused to be filed with the Office of
the City Fiscal of Manila, a complaint for estafa against Manuel
Gonzales based on and arising from the acts of said Manuel
Gonzales in paying his obligations with plaintiff and receiving the
cash balance of the check, Exh. "B" and that said complaint was
subsequently dropped;
Thirteenth. — That the exhibits mentioned in this stipulation and the
other exhibits submitted previously, be considered as parts of this
stipulation, without necessity of formally offering them in evidence;
WHEREFORE, it is most respectfully prayed that this agreed
stipulation of facts be admitted and that the parties hereto be given
fifteen days from today within which to submit simultaneously their
memorandum to discuss the issues of law arising from the facts,
reserving to either party the right to submit reply memorandum, if
necessary, within ten days from receipt of their main memoranda.
(pp. 21-25, Defendant's Record on Appeal).
No other evidence was submitted and upon said stipulation the court
rendered the judgment already alluded above.
In their appeal defendants-appellants contend that the check is not a
negotiable instrument, under the facts and circumstances stated in the
stipulation of facts, and that plaintiff is not a holder in due course. In support
of the first contention, it is argued that defendant Gatchalian had no intention
to transfer her property in the instrument as it was for safekeeping merely
and, therefore, there was no delivery required by law (Section 16, Negotiable
Instruments Law); that assuming for the sake of argument that delivery was
not for safekeeping merely, delivery was conditional and the condition was
not fulfilled.
In support of the contention that plaintiff-appellee is not a holder in due
course, the appellant argues that plaintiff-appellee cannot be a holder in due
course because there was no negotiation prior to plaintiff-appellee's
acquiring the possession of the check; that a holder in due course
presupposes a prior party from whose hands negotiation proceeded, and in
the case at bar, plaintiff-appellee is the payee, the maker and the payee
being original parties. It is also claimed that the plaintiff-appellee is not a
holder in due course because it acquired the check with notice of defect in
the title of the holder, Manuel Gonzales, and because under the
circumstances stated in the stipulation of facts there were circumstances that
brought suspicion about Gonzales' possession and negotiation, which
circumstances should have placed the plaintiff-appellee under the duty, to
inquire into the title of the holder. The circumstances are as follows:
The check is not a personal check of Manuel Gonzales. (Paragraph
Ninth, Stipulation of Facts). Plaintiff could have inquired why a
person would use the check of another to pay his own debt.
Furthermore, plaintiff had the "means of knowledge" inasmuch as
defendant Hipolito Gatchalian is personally acquainted with V. R. de
Ocampo (Paragraph Sixth, Stipulation of Facts.).
The maker Anita C. Gatchalian is a complete stranger to Manuel
Gonzales and Dr. V. R. de Ocampo (Paragraph Sixth, Stipulation of
Facts).
The maker is not in any manner obligated to Ocampo Clinic nor to
Manuel Gonzales. (Par. 7, Stipulation of Facts.)
The check could not have been intended to pay the hospital fees
which amounted only to P441.75. The check is in the amount of
P600.00, which is in excess of the amount due plaintiff. (Par. 10,
Stipulation of Facts).
It was necessary for plaintiff to give Manuel Gonzales change in the
sum P158.25 (Par. 10, Stipulation of Facts). Since Manuel Gonzales
is the party obliged to pay, plaintiff should have been more cautious
and wary in accepting a piece of paper and disbursing cold cash.
The check is payable to bearer. Hence, any person who holds it
should have been subjected to inquiries. EVEN IN A BANK,
CHECKS ARE NOT CASHED WITHOUT INQUIRY FROM THE
 BEARER. The same inquiries should have been made by plaintiff.
(Defendants-appellants' brief, pp. 52-53)
Answering the first contention of appellant, counsel for plaintiff-appellee
argues that in accordance with the best authority on the Negotiable
Instruments Law, plaintiff-appellee may be considered as a holder in due
course, citing Brannan's Negotiable Instruments Law, 6th edition, page 252.
On this issue Brannan holds that a payee may be a holder in due course and
says that to this effect is the greater weight of authority, thus:
Whether the payee may be a holder in due course under the N. I. L.,
as he was at common law, is a question upon which the courts are in
serious conflict. There can be no doubt that a proper interpretation of
the act read as a whole leads to the conclusion that a payee may be
a holder in due course under any circumstance in which he meets
the requirements of Sec. 52.
The argument of Professor Brannan in an earlier edition of this work
has never been successfully answered and is here repeated.
Section 191 defines "holder" as the payee or indorsee of a bill or
note, who is in possession of it, or the bearer thereof. Sec. 52
defendants defines a holder in due course as "a holder who has
taken the instrument under the following conditions: 1. That it is
complete and regular on its face. 2. 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. 3. That he took it in good faith and
for value. 4. 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."
Since "holder", as defined in sec. 191, includes a payee who is in
possession the word holder in the first clause of sec. 52 and in the
second subsection may be replaced by the definition in sec. 191 so
as to read "a holder in due course is a payee or indorsee who is in
possession," etc. (Brannan's on Negotiable Instruments Law, 6th ed.,
p. 543).
The first argument of the defendants-appellants, therefore, depends upon
whether or not the plaintiff-appellee is a holder in due course. If it is such a
holder in due course, it is immaterial that it was the payee and an immediate
party to the instrument.
The other contention of the plaintiff is that there has been no negotiation of
the instrument, because the drawer did not deliver the instrument to Manuel
Gonzales with the intention of negotiating the same, or for the purpose of
giving effect thereto, for as the stipulation of facts declares the check was to
remain in the possession Manuel Gonzales, and was not to be negotiated,
but was to serve merely as evidence of good faith of defendants in their
desire to purchase the car being sold to them. Admitting that such was the
intention of the drawer of the check when she delivered it to Manuel
Gonzales, it was no fault of the plaintiff-appellee drawee if Manuel Gonzales
delivered the check or negotiated it. As the check was payable to the plaintiff-
appellee, and was entrusted to Manuel Gonzales by Gatchalian, the delivery
to Manuel Gonzales was a delivery by the drawer to his own agent; in other
words, Manuel Gonzales was the agent of the drawer Anita Gatchalian
insofar as the possession of the check is concerned. So, when the agent of
drawer Manuel Gonzales negotiated the check with the intention of getting its
value from plaintiff-appellee, negotiation took place through no fault of the
plaintiff-appellee, unless it can be shown that the plaintiff-appellee should be
considered as having notice of the defect in the possession of the holder
Manuel Gonzales. Our resolution of this issue leads us to a consideration of
the last question presented by the appellants, i.e., whether the plaintiff-
appellee may be considered as a holder in due course.
Section 52, Negotiable Instruments Law, defines holder in due course, thus:
A holder in due course is a holder who has taken the instrument
under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and
without notice that it had been previously dishonored, if such was the
fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of the person
negotiating it.
The stipulation of facts expressly states that plaintiff-appellee was not aware
of the circumstances under which the check was delivered to Manuel
Gonzales, but we agree with the defendants-appellants that the
circumstances indicated by them in their briefs, such as the fact that
appellants had no obligation or liability to the Ocampo Clinic; that the amount
of the check did not correspond exactly with the obligation of Matilde
Gonzales to Dr. V. R. de Ocampo; and that the check had two parallel lines
in the upper left hand corner, which practice means that the check could only
be deposited but may not be converted into cash — all these circumstances
should have put the plaintiff-appellee to inquiry as to the why and wherefore
of the possession of the check by Manuel Gonzales, and why he used it to
pay Matilde's account. It was payee's duty to ascertain from the holder
Manuel Gonzales what the nature of the latter's title to the check was or the
nature of his possession. Having failed in this respect, we must declare that
plaintiff-appellee was guilty of gross neglect in not finding out the nature of
the title and possession of Manuel Gonzales, amounting to legal absence of
good faith, and it may not be considered as a holder of the check in good
faith. To such effect is the consensus of authority.
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. Paika
v. Perry, 225 Mass. 563, 114 N.E. 830.
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. Ozark Motor Co. v. Horton (Mo. App.),
196 S.W. 395. Accord. Davis v. First Nat. Bank, 26 Ariz. 621, 229
Pac. 391.
Liberty bonds stolen from the plaintiff were brought by the thief, a
boy fifteen years old, less than five feet tall, immature in appearance
and bearing on his face the stamp a degenerate, to the defendants'
clerk for sale. The boy stated that they belonged to his mother. The
defendants paid the boy for the bonds without any further inquiry.
Held, the plaintiff could recover the value of the bonds. 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. Morris v. Muir, 111 Misc. Rep. 739, 181 N.Y. Supp.
913, affd. in memo., 191 App. Div. 947, 181 N.Y. Supp. 945." (pp.
640-642, Brannan's Negotiable Instruments Law, 6th ed.).
The above considerations would seem sufficient to justify our ruling that
plaintiff-appellee should not be allowed to recover the value of the check. Let
us now examine the express provisions of the Negotiable Instruments Law
pertinent to the matter to find if our ruling conforms thereto. Section 52 (c)
provides that a holder in due course is one who takes the instrument "in good
faith and for value;" Section 59, "that every holder is deemed prima facie to
be a holder in due course;" and Section 52 (d), that in order that one may be
a holder in due course it is necessary that "at the time the instrument was
negotiated to him "he had no notice of any . . . defect in the title of the person
negotiating it;" and lastly Section 59, that every holder is deemed prima
facieto be a holder in due course.
In the case at bar the rule that a possessor of the instrument is prima faciea
holder in due course does not apply because there was a defect in the title of
the holder (Manuel Gonzales), because the instrument is not payable to him
or to bearer. On the other hand, the stipulation of facts indicated by the
appellants in their brief, like the fact that the drawer had no account with the
payee; that the holder did not show or tell the payee why he had the check in
his possession and why he was using it for the payment of his own personal
account — show that holder's title was defective or suspicious, to say the
least. As holder's title was defective or suspicious, it cannot be stated that
the payee acquired the check without knowledge of said defect in holder's
title, and for this reason the presumption that it is a holder in due course or
that it acquired the instrument in good faith does not exist. And having
presented no evidence that it acquired the check in good faith, it (payee)
cannot be considered as a holder in due course. In other words, under the
circumstances of the case, instead of the presumption that payee was a
holder in good faith, the fact is that it acquired possession of the instrument
under circumstances that should have put it to inquiry as to the title of the
holder who negotiated the check to it. The burden was, therefore, placed
upon it to show that notwithstanding the suspicious circumstances, it
acquired the check in actual good faith.
The rule applicable to the case at bar is that described in the case of Howard
National Bank v. Wilson, et al., 96 Vt. 438, 120 At. 889, 894, where the
Supreme Court of Vermont made the following disquisition:
Prior to the Negotiable Instruments Act, two distinct lines of cases
had developed in this country. The first had its origin in Gill v. Cubitt,
3 B. & C. 466, 10 E. L. 215, where the rule was distinctly laid down
by the court of King's Bench that the purchaser of negotiable paper
must exercise reasonable prudence and caution, and that, if the
circumstances were such as ought to have excited the suspicion of a
prudent and careful man, and he made no inquiry, he did not stand in
the legal position of a bona fide holder. The rule was adopted by the
courts of this country generally and seem to have become a fixed
 rule in the law of negotiable paper. Later in Goodman v. Harvey, 4 A. For the foregoing considerations, the decision appealed from should be, as it
& E. 870, 31 E. C. L. 381, the English court abandoned its former is hereby, reversed, and the defendants are absolved from the complaint.
position and adopted the rule that nothing short of actual bad faith or With costs against plaintiff-appellee.
fraud in the purchaser would deprive him of the character of a bona
fide purchaser and let in defenses existing between prior parties, that
no circumstances of suspicion merely, or want of proper caution in
the purchaser, would have this effect, and that even gross
negligence would have no effect, except as evidence tending to
establish bad faith or fraud. Some of the American courts adhered to
the earlier rule, while others followed the change inaugurated in
Goodman v. Harvey. The question was before this court in Roth v.
Colvin, 32 Vt. 125, and, on full consideration of the question, a rule
was adopted in harmony with that announced in Gill v. Cubitt, which
has been adhered to in subsequent cases, including those cited
above. Stated briefly, one line of cases including our own had
adopted the test of the reasonably prudent man and the other that of
actual good faith. It would seem that it was the intent of the
Negotiable Instruments Act to harmonize this disagreement by
adopting the latter test. That such is the view generally accepted by
the courts appears from a recent review of the cases concerning
what constitutes notice of defect. Brannan on Neg. Ins. Law, 187-
201. To effectuate the general purpose of the act to make uniform
the Negotiable Instruments Law of those states which should enact
it, we are constrained to hold (contrary to the rule adopted in our
former decisions) that negligence on the part of the plaintiff, or
suspicious circumstances sufficient to put a prudent man on inquiry,
will not of themselves prevent a recovery, but are to be considered
merely as evidence bearing on the question of bad faith. See G. L.
3113, 3172, where such a course is required in construing other
uniform acts.

It comes to this then: When the case has taken such shape that the
plaintiff is called upon to prove himself a holder in due course to be
entitled to recover, he is required to establish the conditions entitling
him to standing as such, including good faith in taking the instrument.
It devolves upon him to disclose the facts and circumstances
attending the transfer, from which good or bad faith in the transaction
may be inferred.

In the case at bar as the payee acquired the check under circumstances
which should have put it to inquiry, why the holder had the check and used it
to pay his own personal account, the duty devolved upon it, plaintiff-appellee,
to prove that it actually acquired said check in good faith. The stipulation of
facts contains no statement of such good faith, hence we are forced to the
conclusion that plaintiff payee has not proved that it acquired the check in
good faith and may not be deemed a holder in due course thereof.
G.R. No. 187769 June 4, 2014
ALVIN PATRIMONIO, Petitioner,
vs.
NAPOLEON GUTIERREZ and OCTAVIO MARASIGAN III, Respondents.
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 P200,000.00 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 P200,000.00 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 "P200,000.00". 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 P200,000.00, 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 P200,000.00.
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 P200,000.00
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 P200,000.00 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.1âwphi1 Records 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.
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.

In the present case, no evidence is on record that Gutierrez ever secured SO ORDERED.
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 P200,000 in this check?

A: No, sir.

Q: And lastly, did you authorize anyone including Nap Gutierrez to write the
words P200,000 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.