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NEGO REVALIDA CASE DIGESTS another account and its restriction on its encashment. Thus, is highly irregular and
1. Wesleyan University Philippines v. Nowella Reyes
2. Cesar Areza and Lolita Areza v. Express Savings Bank, Inc. and
Michael Potenciano
3. Samsung Construction Company Philippines, Inc. vs. Far East Bank and Trust
Company
4. Security Bank and Trust Company vs. Rizal Commercial Banking Corporation
5. Sps. Violago vs. BA Finance
6. Eusebio Gonzales v. Philippine Commercial & International Bank
7. HSBC v. CIR
8. Alvin Patrimonio v. Gutierrez
9. Ilusorio vs. CA
10. Metrobank vs. Cabilzo
11. Metropolitan Bank and Trust Company vs. Chiok
12. Caltex Phils. vs. CA
1. WESLEYAN UNIVERSITY PHILIPPINES v. NOWELLA REYES
FACTS: Wesleyan University dismissed its University Treasurer Nowella Reyes
since it allegedly lost trust and confidence owing to an interplay of the events such
as: (1) she encashed a check payable to the University Treasurer in the amount of
three hundred thousand pesos (PhP 300,000); (2) she encashed crossed checks
payable to the University Treasurer, when the intention of management in this
regard was to merely transfer funds from one of petitioner’s accounts to another in
the same bank; (3) she allowed the Treasury Department to encash the checks
issued to WUP personnel rather than requiring the latter to have said checks
encashed by the bank, in violation of the imprest system of accounting; (4) she
caused the disbursement of checks without supporting check vouchers; (5) there
were unliquidated cash advances; and (6) spurious duplicate checks bearing her
signature were encashed causing damage to petitioner. Thereafter, the respondent
filed a complaint for Illegal Dismissal. The Labor Arbiter ruled in favor of the
respondent however, this was reversed by the NLRC.
ISSUE: Whether or not the encashment of checks is highly irregular and would
warrant respondent’s dismissal from service on account of loss of trust and
confidence.
HELD: Yes. Jurisprudence has pronounced that the crossing of a check means
that the check may not be encashed but only deposited in the bank. In the case at
bar, the respondent did not deny the encashment of the three hundred thousand
peso (PhP 300,000) crossed check payable to the University Treasurer which
covered the total amount of the "love gift" for administrative and academic officials
of WUP. Neither did she deny the fact that the Treasury Department encashed
checks issued to WUP personnel rather than requiring them to have the checks
encashed by the bank. As Treasurer, respondent knew or is at least expected to be
aware of and abide by this basic banking practice and commercial custom. Clearly,
the issuance of a crossed check reflects management’s intention to safeguard the
funds covered thereby, its special instruction to have the same deposited to
clearly violative of the imprest system of cash management.
Here, respondent disregarded management’s intentions and ignored the measures
in place to secure the handling of WUP’s funds. That the encashment of crossed
checks and payment of checks directly to WUP personnel had been the practice of
the previous and present administration of petitioner is of no moment. By
encashing the crossed checks, respondent put the funds covered thereby under
the risk of being lost, stolen, co-mingled with other funds or spent for other
purposes. Furthermore, the accommodation and encashment by the Treasury
Department of checks issued to WUP personnel were highly irregular. First, WUP,
not being a bank, had no business encashing the checks of its personnel. More
importantly, in encashing the said checks, the Treasury Department made
disbursements contrary to the wishes of the management because, in issuing said
checks, management has made clear its intention that monies therefor would be
sourced from petitioner’s deposit with Chinabank, under a specific account, and not
from the cash available in the Treasury Department. Therefore, it would be
oppressive to require petitioner to retain in their management an officer who has
admitted to knowingly and intentionally committing acts which jeopardized its
finances and who was untrustworthy in the handling and custody of University
funds. events such as: (1) she encashed a check payable to the University
Treasurer in the amount of three hundred thousand pesos (PhP 300,000); (2) she
encashed crossed checks payable to the University Treasurer, when the intention
of management in this regard was to merely transfer funds from one of petitioner’s
accounts to another in the same bank; (3) she allowed the Treasury Department to
encash the checks issued to WUP personnel rather than requiring the latter to have
said checks encashed by the bank, in violation of the imprest system of accounting;
(4) she caused the disbursement of checks without supporting check vouchers; (5)
there were unliquidated cash advances; and (6) spurious duplicate checks bearing
her signature were encashed causing damage to petitioner. Thereafter, the
respondent filed a complaint for Illegal Dismissal. The Labor Arbiter ruled in favor of
the respondent however, this was reversed by the NLRC.
ISSUE: Whether or not the encashment of checks is highly irregular and would
warrant respondent’s dismissal from service on account of loss of trust and
confidence.
HELD: Yes. Jurisprudence has pronounced that the crossing of a check means
that the check may not be encashed but only deposited in the bank. In the case at
bar, the respondent did not deny the encashment of the three hundred thousand
peso (PhP 300,000) crossed check payable to the University Treasurer which
covered the total amount of the "love gift" for administrative and academic officials
of WUP. Neither did she deny the fact that the Treasury Department encashed
checks issued to WUP personnel rather than requiring them to have the checks
encashed by the bank. As Treasurer, respondent knew or is at least expected to be
aware of and abide by this basic banking practice and commercial custom. Clearly,
the issuance of a crossed check reflects management’s intention to safeguard the
funds covered thereby, its special instruction to have the same deposited to
another account and its restriction on its encashment. Thus, is highly irregular and
clearly violative of the imprest system of cash management.

Here, respondent disregarded management’s intentions and ignored the measures
in place to secure the handling of WUP’s funds. That the encashment of crossed
checks and payment of checks directly to WUP personnel had been the practice of
the previous and present administration of petitioner is of no moment. By
encashing the crossed checks, respondent put the funds covered thereby under
the risk of being lost, stolen, co-mingled with other funds or spent for other
purposes. Furthermore, the accommodation and encashment by the Treasury
Department of checks issued to WUP personnel were highly irregular. First, WUP,
not being a bank, had no business encashing the checks of its personnel. More
importantly, in encashing the said checks, the Treasury Department made
disbursements contrary to the wishes of the management because, in issuing said
checks, management has made clear its intention that monies therefor would be
sourced from petitioner’s deposit with Chinabank, under a specific account, and not
from the cash available in the Treasury Department. Therefore, it would be
oppressive to require petitioner to retain in their management an officer who has
admitted to knowingly and intentionally committing acts which jeopardized its
finances and who was untrustworthy in the handling and custody of University
funds.
2. CESAR AND LOLITA AREZA V. EXPRESS SAVINGS BANK, INC. AND
MICHAEAL POTENCIANO
FACTS: Petitioners Cesar and Lolita Areza maintained 2 bank deposists with
respondent Express Saving Bank’s Biñan branch. They were engaged in the
business of “buy and sell” of brand new and secondhand motor vehicles. They
received an order from a certain Gerry Mambuay for the purchase of a secondhand
Mitsubishi Pajero and a brand-new Honda CR-V.
The buyer paid petitioners with 9 Philippine Veterans Affairs Office (PVAO) checks
payable to different payees and drawn against the Philippine Veterans Bank
(Drawee), each valued at P200,000 for a total of P1,800,000.
Petitioners claimed that respondent Michael Potenciano, the branch manager of
respondent bank was present during the transaction and immediately offered the
services of the Bank for the processing and eventual crediting of the said checks to
petitioners’ account. Potenciano countered that he was prevailed upon to accept
the checks by way of accommodation of petitioners who were valued clients of the
Bank.
Petitioners deposited the checks in their savings account with the bank, and the
latter deposited the checks with its depositary bank, Equitable-PCI Bank, which
then presented the checks to the drawee Veterans Bank which honored the
checks.
[Express Savings (respondent) > Equitable-PCI (depositary) > Veterans (drawee)]
Potenciano informed petitioners that the checks they deposited were honored. He
allegedly warned petitioners that the clearing of the checks pertained only to the
availability of funds and did not mean that the checks were not infirmed. The entire
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amount of P1,800,000 was credited to petitioners’ saving account, and based on
this information, they release the 2 cars to the buyer.
Approximately 2 months later, the subject checks were returned by PVAO to the
drawee on the ground that the amount on the face of the checks was altered from
the original amount of P4,000 to P2,000. The drawee returned the checks to
Equitable-PCI by way of special clearing receipts. A month thereafter, respondent
bank was informed by Equitable that the drawee dishonored the checks on the
ground of material alterations. Equitable initially filed a protest with the Philippine
Clearing House, but it ruled in favor of Veterans Bank. Equitable then debited the
deposit account of the Bank in the amount of P1,800,000.
Respondent bank insisted that they informed petitioner of said development by
furnishing them copies of the documents given by its depositary bank, but
petitioners claimed that they were never informed.
A year thereafter, petitioners issued a check in the amount of P500,000, but was
dishonored by respondent bank for the reason “Deposit Under Hold.” Petitioners
claim that respondent bank unilaterally and unlawfully put their account on hold.
Petitioner’s counsel sent a demand letter asking the bank to honor their check, but
it refused and closed their Special Savings Account and transferred its remaining
amount to their savings account. It then withdrew the amount of P1,800,000
representing the returned checks from petitioner’s savings account.
This caused petitioners to file a complaint for Sum of Money with Damages against
the bank and Potenciano with the RTC.
The RTC ruled in favor of petitioners, requiring them to pay the amount withdrawn
plus moral damages and attorney’s fees. It explained that the depositary bank
shold safeguard the right of depositors over their money. Invoking Art. 1977 of the
Civil Code, the RTC stated that the depositary cannot make use of the thing
deposited without the express permission of the depositor. It also held that the
bank should have observed the 24-hour clearing house rule that checks should be
returned within 24-hours after discovery of the forgery but in no event beyond the
period fixed by law for filing a legal action. It was only after 3 months that the bank
notified petitioners of the problems, making the court rule that this was attended
with bad faith.
Respondents filed an Motion for Reconsideration while petitioners filed a motion for
execution of the Decision on the ground that the MR did not conform with Sec. 5
Rule 16, which makes it a mere scrap of paper that did not toll the running of the
period of appeal. The RTC granted the MR and set aside the former decision,
awarding moral and exemplary damages to the respondent. The trial court applied
the principle of liberality when it disregarded the alleged absence of a notice of
hearing in respondents’ motion. Also, it considered the relationship of the bank and
petitioners with respect to their savings account deposits as a contract of loan with
the bank as the debtor and petitioners as creditors, thus Art. 1977 of the Civil Code
prohibiting the depository from making use of the thing deposited without the
express permission of the depositor not applicable. It applied Art. 1980, which
provides that fixed, savings and current deposits of money in banks and similar

institutions shall be governed by the provisions governing simple loan; giving the
bank the right to set-off the value of the checks to their deposits.
On appeal, the CA affirmed the ruling of the RTC but deleted the award of
damages. It ruled that all the elements of legal compensation were present since
they are debtors and creditors of each other, since the bank is the debtor as a
depositor, but a creditor with respect to the dishonored treasury warrant checks
which were credited on the account of petitioner; that petitioners should have
exercised due diligence in assessing the credit or personal background of the walk-
in buyer; and the it believes that the bank and the petitioners had opportunities to
communicate about the checks considering that several transactions occurred from
the time of alleged return of the checks to the date of the debit.
ISSUE: Whether or not respondent bank had the right to debit the amount of
P1,800,000 from petitioners’ accounts.
HELD: No, the bank did not have the right to debit the amount from petitioners’
accounts. The drawee bank, Philippine Veterans Bank in this case, is only liable to
the extent of the check prior to alteration. Since Philippine Veterans Bank paid the
altered amount of the check, it may pass the liability back as it did, to Equitable-PCI
Bank, the collecting bank. The collecting banks, Equitable-PCI Bank and the Bank,
are ultimately liable for the amount of the materially altered check. It cannot further
pass the liability back to the petitioners absent any showing in the negligence on
the part of the petitioners which substantially contributed to the loss from alteration.
In this case, before the alteration was discovered, the checks were already cleared
by the drawee bank, the Philippine Veterans Bank. Three months had lapsed
before the drawee dishonored the checks and returned them to Equitable-PCI
Bank, the respondents’ depositary bank. And it was not until 10 months later when
petitioners’ accounts were debited. A question thus arises: What are the liabilities
of the drawee, the intermediary banks, and the petitioners for the altered checks?
Liability of the Drawee
Sec. 63 of the NIL provides that the acceptor, by accepting the instrument,
engages that he will pay it according to the tenor of his acceptance. The acceptor is
a drawee who accepts the bill. the payment of the amount of a check implies not
only acceptance but also compliance with the draweeÊs obligation.
In case the negotiable instrument is altered before acceptance, is the drawee liable
for the original or the altered tenor of acceptance? There are two divergent
interpretations proffered by legal analysts.
FIRST VIEW: In the case of National City Bank of Chicago v. Bank of the Republic,
a person stole a draft and substituted his name for that of the original payee. He
offered it as payment to a jeweler in exchange for certain jewelry. The jeweler
deposited the draft to the defendant bank which collected the equivalent amount
from the drawee. Upon learning of the alteration, the drawee sought to recover
from the defendant bank the amount of the draft, as money paid by mistake. The
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court denied recovery on the ground that the drawee by accepting admitted the
existence of the payee and his capacity to endorse.
SECOND VIEW: the acceptor/drawee despite the tenor of his acceptance is liable
only to the extent of the bill prior to alteration. This view appears to be in
consonance with Section 124 of the NIL which states that a material alteration
avoids an instrument except as against an assenting party and subsequent
indorsers, but a holder in due course may enforce payment according to its original
tenor.
Thus, when the drawee bank pays a materially altered check, it violates the terms
of the check, as well as its duty to charge its client’s account only for bona fide
disbursements he had made. If the drawee did not pay according to the original
tenor of the instrument, as directed by the drawer, then it has no right to claim
reimbursement from the drawer, much less, the right to deduct the erroneous
payment it made from the drawer’s account which it was expected to treat with
utmost fidelity The drawee, however, still has recourse to recover its loss. It may
pass the liability back to the collecting bank which is what the drawee bank exactly
did in this case. It debited the account of Equitable-PCI Bank for the altered
amount of the checks.
Liability of Depositary Bank and Collecitng Bank
A depositary bank is the first bank to take an item even though it is also the payor
bank, unless the item is presented for immediate payment over the counter. It is
also the bank to which a check is transferred for deposit in an account at such
bank, even if the check is physically received and indorsed first by another bank. A
collecting bank is defined as any bank handling an item for collection except the
bank on which the check is drawn.
When petitioners deposited the check with the Bank, they were designating the
latter as the collecting bank. This is in consonance with the rule that a negotiable
instrument, such as a check, whether a manager’s check or ordinary check, is not
legal tender. As such, after receiving the deposit, under its own rules, the Bank
shall credit the amount in petitioners’ account or infuse value thereon only after the
drawee bank shall have paid the amount of the check or the check has been
cleared for deposit.
The Bank and Equitable-PCI Bank are both depositary and collecting banks.
A depositary/collecting bank where a check is deposited, and which endorses the
check upon presentment with the drawee bank, is an endorser. Under Section 66
of the Negotiable Instruments Law, an endorser warrants “that the instrument is
genuine and in all respects what it purports to be; that he has good title to it; that all
prior parties had capacity to contract; and that the instrument is at the time of his
endorsement valid and subsisting.” It has been repeatedly held that in check
transactions, the depositary/collecting bank or last endorser generally suffers the
loss because it has the duty to ascertain the genuineness of all prior endorsements
considering that the act of presenting the check for payment to the drawee is an
assertion that the party making the presentment has done its duty to ascertain the
genuineness of the endorsements. If any of the warranties made by the

depositary/collecting bank turns out to be false, then the drawee bank may recover
from it up to the amount of the check.
The law imposes a duty of diligence on the collecting bank to scrutinize checks
deposited with it for the purpose of determining their genuineness and regularity.
The collecting bank being primarily engaged in banking holds itself out to the public
as the expert and the law holds it to a high standard of conduct.
As collecting banks, the Bank and Equitable-PCI Bank are both liable for the
amount of the materially altered checks. Since Equitable-PCI Bank is not a party to
this case and the Bank allowed its account with Equitable-PCI Bank to be debited,
it has the option to seek recourse against the latter in another forum.
24-Hour Clearing Rule
The rule does not apply to altered checks. As the rule now stands, the 24-hour rule
is still in force, that is, any check which should be refused by the drawee bank in
accordance with long standing and accepted banking practices shall be returned
through the PCHC/local clearing office, as the case may be, not later than the next
regular clearing (24-hour). The modification, however, is that items which have
been the subject of material alteration or bearing forged endorsement may be
returned even beyond 24 hours so long that the same is returned within the
prescriptive period fixed by law. The consensus among lawyers is that the
prescriptive period is ten (10) years because a check or the endorsement thereon
is a written contract. Moreover, the item need not be returned through the clearing
house but by direct presentation to the presenting bank.
Liability of Petitioners
The Bank cannot debit the savings account of petitioners. A depositary/collecting
bank may resist or defend against a claim for breach of warranty if the drawer, the
payee, or either the drawee bank or depositary bank was negligent and such
negligence substantially contributed to the loss from alteration. In the instant case,
no negligence can be attributed to petitioners. We lend credence to their claim that
at the time of the sales transaction, the Bank’s branch manager was present and
even offered the Bank’s services for the processing and eventual crediting of the
checks. True to the branch manager’s words, the checks were cleared three days
later when deposited by petitioners and the entire amount of the checks was
credited to their savings account.
Legal Compensation
The Bank cannot set-off the amount it paid to Equitable- PCI Bank with petitioners’
savings account. Under Art. 1278 of the New Civil Code, compensation shall take
place when two persons, in their own right, are creditors and debtors of each other.
And the requisites for legal compensation are:
(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
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(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor.
It is well-settled that the relationship of the depositors and the Bank or similar
institution is that of creditor- debtor. Article 1980 of the New Civil Code provides
that fixed, savings and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning simple loans. The bank is the
debtor and the depositor is the creditor. The depositor lends the bank money and
the bank agrees to pay the depositor on demand. The savings deposit agreement
between the bank and the depositor is the contract that determines the rights and
obligations of the parties.
But as previously discussed, petitioners are not liable for the deposit of the altered
checks. The Bank, as the depositary and collecting bank ultimately bears the loss.
Thus, there being no indebtedness to the Bank on the part of petitioners, legal
compensation cannot take place.
Damages
The Bank incurred a delay in informing petitioners of the checks’ dishonor. The
Bank was informed of the dishonor by Equitable-PCI Bank as early as August 2000
but it was only on March 2001 when the Bank informed petitioners that it will debit
from their account the altered amount. This delay is tantamount to negligence on
the part of the collecting bank which would entitle petitioners to an award for
damages under Article 1170 of the New Civil Code
3. SAMSUNG CONSTRUCTION COMPANY PHILIPPINES V FAR EAST BANK
FACTS:
1. Petitioner maintained a current account with defendant Far East Bank and Trust
Company[1] (FEBTC) at the latters Bel-Air, Makati branch.[2] The sole signatory to
Samsung Constructions account was Jong Kyu Lee (Jong), its Project
Manager,[3] while the checks remained in the custody of the companys accountant,
Kyu Yong Lee (Kyu).[4]
2. a certain Roberto Gonzaga presented for payment FEBTC Check No. 432100 to
the banks branch in Bel-Air, Makati. The check, payable to cash and drawn against
Samsung Constructions current account, was in the amount of Nine Hundred
Ninety Nine Thousand Five Hundred Pesos (P999,500.00). The bank teller, Cleofe
Justiani, first checked the balance of Samsung Constructions account. After
ascertaining there were enough funds to cover the check,[5] she compared the
signature appearing on the check with the specimen signature of Jong as
contained in the specimen signature card with the bank. After comparing the two
signatures, Justiani was satisfied as to the authenticity of the signature appearing
on the check. She then asked Gonzaga to submit proof of his identity, and the
latter presented three (3) identification cards.[6]
At the same time, Justiani forwarded the check to the branch Senior Assistant
Cashier Gemma Velez, as it was bank policy that two bank branch officers approve
checks exceeding One Hundred Thousand Pesos, for payment or
encashment. Velez likewise counterchecked the signature on the check as against

that on the signature card. He too concluded that the check was indeed signed by
Jong. Velez then forwarded the check and signature card to Shirley Syfu, another
bank officer, for approval. Syfu then noticed that Jose Sempio III (Sempio), the
assistant accountant of Samsung Construction, was also in the bank. Sempio was
well-known to Syfu and the other bank officers, he being the assistant accountant
of Samsung Construction. Syfu showed the check to Sempio, who vouched for the
genuineness of Jongs signature. Confirming the identity of Gonzaga, Sempio said
that the check was for the purchase of equipment for Samsung Construction.
Satisfied with the genuineness of the signature of Jong, Syfu authorized the banks
encashment of the check to Gonzaga.
3. The following day, Kyu and Jong found out that a check in the amount of
P999,500 had been encashed. A criminal case for qualified theft was filed against
Sempio. Meanwhile, a complaint for violation of Sec. 23 of the NIL has been filed
against the bank.
4. During the trial of the case, Samsung presented an expert witness from the NBI
who testified that the signature had been forged. On the other hand, the bank’s
expert witness came from the PNP who testified that the signature is genuine.
RTC: chose to believe the findings of the NBI expert
- testimony of the PNP document examiner reveals that there are a lot of
differences in the questioned signature as compared to the specimen signature
CA: Reversed the findings of the RTC
ISSUE: 1. Whether or not the bank should reimburse the drawer due to the
encashment of a forged check
2. whether or not Samsung is precluded from setting up the defense of forgery
HELD:
1. YES. Section 23 of the Negotiable Instruments Law states:
When a signature is forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against
any party thereto, can be acquired through or under such signature, unless the
party against whom it is sought to enforce such right is precluded from setting up
the forgery or want of authority. (Emphasis supplied)
The general rule is to the effect that a forged signature is wholly inoperative, and
payment made through or under such signature is ineffectual or does not discharge
the instrument.[21] If payment is made, the drawee cannot charge it to the drawers
account. The traditional justification for the result is that the drawee is in a superior
position to detect a forgery because he has the makers signature and is expected
to know and compare it.[22] The rule has a healthy cautionary effect on banks by
encouraging care in the comparison of the signatures against those on the
signature cards they have on file. Moreover, the very opportunity of the drawee to
insure and to distribute the cost among its customers who use checks makes the
drawee an ideal party to spread the risk to insurance.[23]
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Under Section 23 of the Negotiable Instruments Law, forgery is a real or absolute
defense by the party whose signature is forged.[26] On the premise that Jongs
signature was indeed forged, FEBTC is liable for the loss since it authorized the
discharge of the forged check. Such liability attaches even if the bank exerts due
diligence and care in preventing such faulty discharge. Forgeries often deceive the
eye of the most cautious experts; and when a bank has been so deceived, it is a
harsh rule which compels it to suffer although no one has suffered by its being
deceived.[27] The forgery may be so near like the genuine as to defy detection by
the depositor himself, and yet the bank is liable to the depositor if it pays the
check.[28]
2. NO. We recognize that Section 23 of the Negotiable Instruments Law bars a
party from setting up the defense of forgery if it is guilty of negligence.[52] Yet, we
are unable to conclude that Samsung Construction was guilty of negligence in this
case. The appellate court failed to explain precisely how the Korean accountant
was negligent or how more care and prudence on his part would have prevented
the forgery. We cannot sustain this tar and feathering resorted to without any basis.
The bare fact that the forgery was committed by an employee of the party whose
signature was forged cannot necessarily imply that such partys negligence was the
cause for the forgery. Employers do not possess the preternatural gift of cognition
as to the evil that may lurk within the hearts and minds of their employees. The
Courts pronouncement in PCI Bank v. Court of Appeals[53] applies in this case, to
wit:
[T]he mere fact that the forgery was committed by a drawer-payors confidential
employee or agent, who by virtue of his position had unusual facilities for
perpetrating the fraud and imposing the forged paper upon the bank, does not
entitle the bank to shift the loss to the drawer-payor, in the absence of some
circumstance raising estoppel against the drawer.
Quite palpably, the general rule remains that the drawee who has paid upon the
forged signature bears the loss. The exception to this rule arises only when
negligence can be traced on the part of the drawer whose signature was forged,
and the need arises to weigh the comparative negligence between the drawer and
the drawee to determine who should bear the burden of loss. The Court finds no
basis to conclude that Samsung Construction was negligent in the safekeeping of
its checks. For one, the settled rule is that the mere fact that the depositor leaves
his check book lying around does not constitute such negligence as will free the
bank from liability to him, where a clerk of the depositor or other persons, taking
advantage of the opportunity, abstract some of the check blanks, forges the
depositors signature and collect on the checks from the bank.[62]And for another, in
point of fact Samsung Construction was not negligent at all since it reported the
forgery almost immediately upon discovery.[6
4. SECURITY BANK AND TRUST CORP VS. RIZAL COMMERCIAL BANKING
CORPORATION

FACTS: On January 9, 1981: a manager’s check was issued by Security Bank and
Trust Company (SBTC) amounting to P 8M, payable to "CASH", as proceeds of the
loan granted to Guidon Construction and Development Corporation (GCDC).
The check was deposited by Continental Manufacturing Corporation(CMC) in its Cu
rrent Account with Rizal Commercial Banking Corporation(RCBC). Immediately,
RCBC honored the P8M check and allowed CMC to withdraw.
A “Stop Payment Order” was issued by GCGD to SBTC claiming that the P8M
was released to a 3rd party by mistake. SBTCdishonored and returned the
manager’s check to RCBC
On February 13, 1981, RCBC filed a complaint for damages against SBTC.
Following the rules of the Philippine Clearing House, RCBC and SBTC stopped
returning the checks to each other. By way of a temporary arrangement pending
resolution of the case, the P8-million check was equally divided between, and
credited to, RCBC and SBTC.
RTC ruled in favor of RCBC. CA affirmed but modified it by adding interest.
ISSUE: W/N SBTC should be held liable for its manager's check
HELD: Yes. SBTC should be held liable for its manager’s check.
At the outset, it must be noted that the questioned check issued by SBTC not just
an ordinary check but a manager’s check.
A manager’s check is one drawn by a banks manager upon the bank itself. It
stands on the same footing as a certified check, which is deemed to have been
accepted by the bank that certified it. As the banks own check, a managers check
becomes the primary obligation of the bank and is accepted in advance by the act
of its issuance.
RCBC, in immediately crediting the amount of P8 million to CMCs account, relied on
the integrity and honor of the check as it is regarded in commercial
transactions. Where the questioned check, which was payable to Cash, appeared
regular on its face, and the bank found nothing unusual in the transaction, as the
drawer usually issued checks in big amounts made payable to cash, RCBC cannot
be faulted in paying the value of the questioned check.
On July 9, 1980 Memorandum that banks were given the discretion to allow
immediate drawings on uncollected deposits of managers checks, among others.
Consequently, RCBC, in allowing the immediate withdrawal against the subject
managers check, only exercised a prerogative expressly granted to it by the
Monetary Board.
it is important that banks should guard against injury attributable to negligence or
bad faith on its part.As repeatedly emphasized, since the banking business is
impressed with public interest, the trust and confidence of the public in it is of
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paramount importance. Consequently, the highest degree of diligence is expected,
and high standards of integrity and performance are required of it.
5. SPS. PEDRO AND FLORENCIA VIOLAGO VS. BA FINANCE CORP. AND
AVELINO VIOLAGO
TOPIC: What constitutes a NI; What constitutes a Holder in due course
FACTS:
 Avelino, president of Violago Motor Sales Corp. (VMSC) offered to sell a
Toyota Cressida Model 1983 car to his cousin, Pedro Violago and wife
Florencia. The downpayment is only 60,500 with balance to be financed by
BA Finance.
 The spouses and Avelino signed a promissory note (PN) binding themselves
to pay jointly and severally to the order of VMSC the remaining balance in 36
monthly installments. VMSC issued sales invoice in favor of spouses and the
spouses executed chattel mortgage (CM) over the car in favor of VMSC, and
P60,500 was remitted to VMSC.
 VMSC endorsed the PN to BA Finance without recourse. After receiving the
full payment from VMSC, it executed a Deed of Assignment over the PN and
CM in favor of BA Finance.
 Unaware of the prior sale of the same car to Esmeraldo Violago, another
cousin of Avelino, the spouses filed the sales invoice with the LTO which later
on issued the Cert. of Registration in the name of Pedro. While the case was
on-going, Esmeraldo conveyed the car to Jose Olvido who executed a CM
over the vehicle in favor of one Generoso Lopez as security for loan.
 Despite demands, there was no delivery of the vehicle. Accordingly, the
spouses did not pay the monthly amortization to BA Finance.
 BA Finance filed a complaint for Replevin with damages against the spouses
praying for the delivery of the vehicle to BA Finance, or payment of the
financed amount. RTC issued an order of replevin, ruling in favor of BA
Finance. After RTC denied the MR and Motion to Quash Writ of Execution
due to lack of service of summons, the spouses filed a petition for certiorari.
 Spouses filed their answer, averring that:
o They ever received the vehicle;
o It was previously sold to Esmeraldo;
o BA Finance was not a holder in due course; and
o Recourse of BA Finance should be against VMSC
 Spouses also filed a 3rd party complaint against Avelino praying that he be
held liable in case they be held liable to BA Finance. Avelino’s MTD was
denied.
 RTC: Spouses should deliver the car to BA Finance or in the alternative, to
pay BA Finance jointly and severally, but the spouses are entitled to be
indemnified by Avelino.
 Upon appeal to CA, spouses argued that:
o PN is a negotiable instrument thus NIL should be applied (not Civil
Code)
o Since VMSC was not the owner of the car at the time of the sale,
such sale was null and void for failure in the cause or consideration
of the PN.

o BA Finance is not a holder in due course since it knew that the car
was never delivered to the spouses.
 CA’s decision:
o PN was a negotiable instrument and that BA Finance was a holder in
due course (NIL, Sec.8, 24, 52).
o Spouses should have impleaded VMSC (seller of the car and
creditor in PN).
o Since VMSC is an indispensable party, any judgment will not bind it
or be enforced against it.
o Avelino is liable for damages to the spouses without prejudice to the
action of the spouses against VMSC and Avelino in a separate
action.
o Third party complaint against the spouses is dismissed.
ISSUES:
1. W/N the PN is a negotiable instrument.
2. W/N BA Finance is a holder in due course.
HELD:
1. YES. PN is clearly negotiable, all the requisites of a negotiable instrument are
present. CA’s decision is set aside insofar as it dismissed without prejudice
the 3rd party complaint of spouses against Violago.
 Requisites of a Negotiable Instrument: (See Sec.1, NIL)
 The PN clearly satisfies the requirements of a NI..
o It is in writing and signed by the Violago spouses
o Has an unconditional promise to pay a certain amount
o On specific dates in the future which could be determined from
the terms of the note
o Made payable to the order of VMSC
o Names the drawees with certainty. The indorsement by VMSC
to BA Finance appears likewise to be valid and regular.
2. YES. The law presumes that a holder of a negotiable instrument is a holder
thereof in due course. In this case, the CA is correct in finding that BA
Finance meets all the foregoing requisites:
In the present recourse, on its face, (a) the "Promissory Note", Exhibit "A", is
complete and regular; (b) the "Promissory Note" was endorsed by the VMSC in
favor of the Appellee; (c) the Appellee, when it accepted the Note, acted in good
faith and for value; (d) the Appellee was never informed, before and at the time the
"Promissory Note" was endorsed to the Appellee, that the vehicle sold to the
Defendants-Appellants was not delivered to the latter and that VMSC had already
previously sold the vehicle to Esmeraldo Violago. Although Jose Olvido mortgaged
the vehicle to Generoso Lopez, who assigned his rights to the BA Finance
Corporation (Cebu Branch), the same occurred only on May 8, 1987, much later
than August 4, 1983, when VMSC assigned its rights over the "Chattel Mortgage"
by the Defendants-Appellants to the Appellee. Hence, Appellee was a holder in
due course.
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In the hands of one other than a holder in due course, a negotiable instrument is
subject to the same defenses as if it were non-negotiable. A holder in due course,
however, holds the instrument free from any defect of title of prior parties and from
defenses available to prior parties among themselves, and may enforce payment of
the instrument for the full amount thereof. Since BA Finance is a holder in due
course, petitioners cannot raise the defense of non-delivery of the object and nullity
of the sale against the corporation.
6. EUSEBIO GONZALES VS. PHILIPPINE COMMERCIAL & INTERNATIONAL
BANK
FACTS:
1. Gonzales was a client of PCIB for a good 15 years. He was granted a credit line
by the bank through a Credit-On-Hand-Loan Agreement (COHLA).
2. He drew from the credit line through a check and said credit line was secured by
a collateral in the form of his accounts with PCIB which was a foreign currency
deposit worth USD 8000.
3. He obtained loans from PCIB. The first loan was in the amount of 500,000, the
other two loans amounted to 1,000,000 and 300,000 respectively. All of these
loans were obtained by Gonzales and Spouses Panlilo.
4. The above loans were covered by 3 promissory notes and were secured by a
real estage mortgage on a land co owned by Gonzales and spouses Panlilio.
5. The promissory notes state the solidary liability of Gonzales and spouses
Panlilio, which means Gonzales was an accommodation party. However, it was the
spouses Panlilio who received the proceeds of 1.8M. The monthly interest dues
were paid by the spouses Panlilio through auto debit from their PCIB account.
however, they defaulted in the payment because their PCIB account had
insufficient deposits.
6. Gonzales issued a check to Rene Unson worth 250K drawn against his credit
line but said check was subsequently dishonored due to termination of gonzales’
credit line because of the unpaid period interest dues from the loans. PCIB also
froze the foreign currency deposit account of Gonzales.
7. In the meantime, Gonzales issued a check but was dishonored which resulted to
a falling out and a heated argument causing him great embarrassment and
humiliation.
8. Petitioner filed a case with the RTC on account of the alleged unjust dishonor of
the check. RTC ruled in favor of PCIB. CA affirmed in toto.
ISSUES:
1.W/N Gonzales is liable for the three promissory notes covering PHP1.8M loan he
made with spouses Panlilio?
2.Whether or not PCIB acted in bad faith by dishonoring the check of petitioner.
HELD:
1. Yes. Gonzales was an accommodation party of the loan. An accommodation
party is one who meets all the three requisites according to Sec 29 of NIL:
1. he must be a party to the instrument, signing as a maker, drawer, acceptor, or
indorser
2. he must not receive value therefor

3. he must sign for the purpose of lending his name or credit to some other person.
An accommodation party lends his name to enable the accommodated party to
obtain credit or raise money. He receives no part but assumed liability.
the relation between an accommodation party is one of principal and surety, the AP
being the surety. As such, he is deemed an original promisor and debtor from the
beginning. He is considered in law as the same party as the debtor in relation to
whatever is adjudged touching the obligation of the latter since their liabilities are
interwoven.Lastly, the solidary nature of the loan was expressly stated in the
promissory notes which state: “…the undersigned JOINTLY AND SEVERALLY
promise.
2. YES. In the instant case, Gonzales suffered from the negligence and bad faith of
PCIB. From the testimonies of Gonzales’ witnesses, particularly those of
Dominador Santos and Freddy Gomez, the embarrassment and humiliation
Gonzales has to endure not only before his former close friend Unson but more
from the members and families of his friends and associates in the PCA, which he
continues to experience considering the confrontation he had with Unson and the
consequent loss of standing and credibility among them from the fact of the
apparent bouncing check he issued. Credit is very important to businessmen and
its loss or impairment needs to be recognized and compensated.
Even in the absence of malice or bad faith, a depositor still has the right to recover
reasonable moral damages, if the depositor suffered mental anguish, serious
anxiety, embarrassment, and humiliation. Although incapable of pecuniary
estimation, moral damages are certainly recoverable if they are the proximate
result of the defendant’s wrongful act or omission. The factual antecedents
bolstered by undisputed testimonies likewise show the mental anguish and anxiety
Gonzales had to endure with the threat of Unson to file a suit. Gonzales had to pay
Unson PhP 250,000, while his FCD account in PCIB was frozen, prompting
Gonzales to demand from PCIB and to file the instant suit.
7. THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-
PHILIPPINE BRANCHES vs.COMMISSIONER OF INTERNAL REVENUE
NATURE: Petitions for review on certiorari assailing the Decision and Resolution of
the CA. The respective Decisions in the said cases similarly reversed and set aside
the decisions of the CTA and dismissed the petition of Petitioner HSBC.
FACTS:
1. HSBC performs custodial services on behalf of its investor-clients with
respect to their passive investments in the Philippines, particularly
investments in shares of stocks in domestic corporations. As a custodian
bank, HSBC serves as the collection/payment agent.
2. HSBC’s investor-clients maintain Philippine peso and/or foreign currency
accounts, which are managed by HSBC through instructions given
through electronic messages. The said instructions are standard forms
known in the banking industry as SWIFT, or "Society for Worldwide
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Interbank Financial Telecommunication." In purchasing shares of stock
and other investment in securities, the investor-clients would send
electronic messages from abroad instructing HSBC to debit their local or
foreign currency accounts and to pay the purchase price therefor upon
receipt of the securities.
3. Pursuant to the electronic messages of its investor-clients, HSBC
purchased and paid Documentary Stamp Tax (DST) from September to
December 1997 and also from January to December 1998 amounting to
P19,572,992.10 and P32,904,437.30, respectively.
4. BIR, thru its then Commissioner, issued BIR Ruling to the effect that
instructions or advises from abroad on the management of funds located
in the Philippines which do not involve transfer of funds from abroad are
not subject to DST. A documentary stamp tax shall be imposed on any
bill of exchange or order for payment purporting to be drawn in a foreign
country but payable in the Philippines.
a. While the payor is residing outside the Philippines, he maintains
a local and foreign currency account in the Philippines from
where he will draw the money intended to pay a named
recipient. The instruction or order to pay shall be made through
an electronic message. Consequently, there is no negotiable
instrument to be made, signed or issued by the payee.
b. Such electronic instructions by the non-resident payor cannot be
considered as a transaction per se considering that the same do
not involve any transfer of funds from abroad or from the place
where the instruction originates. Insofar as the local bank is
concerned, such instruction could be considered only as a
memorandum and shall be entered as such in its books of
accounts. The actual debiting of the payor’s account, local or
foreign currency account in the Philippines, is the actual
transaction that should be properly entered as such. Under the
Documentary Stamp Tax Law, the mere withdrawal of money
from a bank deposit, local or foreign currency account, is not
subject to DST, unless the account so maintained is a current or
checking account, in which case, the issuance of the check or
bank drafts is subject to the documentary stamp tax.
c. Likewise, the receipt of funds from another bank in the
Philippines for deposit to the payee’s account and thereafter
upon instruction of the non-resident depositor-payor, through an
electronic message, the depository bank to debit his account
and pay a named recipient shall not be subject to documentary
stamp tax. It should be noted that the receipt of funds from
another local bank in the Philippines by a local depository bank
for the account of its client residing abroad is part of its regular
banking transaction which is not subject to documentary stamp
tax.

5. With the above BIR Ruling as its basis, HSBC filed on an administrative
claim for the refund of allegedly representing erroneously paid DST to the
BIR
6. As its claims for refund were not acted upon by the BIR, HSBC
subsequently brought the matter to the CTA, which favored HSBC and
ordered payment of refund or issuance of tax credit.
7. However, the CA reversed decisions of the CTA and ruled that the
electronic messages of HSBC’s investor-clients are subject to DST.
a. DST is levied on the exercise by persons of certain privileges
conferred by law for the creation, revision, or termination of
specific legal relationships through the execution of specific
instruments, independently of the legal status of the
transactions giving rise thereto.
ISSUE: Whether or not the electronic messages are considered transactions
pertaining to negotiable instruments that warrant the payment of DST.
HELD: NO.
The Court agrees with the CTA that the DST under Section 181 of the Tax Code is
levied on the acceptance or payment of "a bill of exchange purporting to be drawn
in a foreign country but payable in the Philippines" and that "a bill of exchange is an
unconditional order in writing addressed by one person to another, signed by the
person giving it, requiring the person to whom it is addressed to pay on demand or
at a fixed or determinable future time a sum certain in money to order or to bearer."
The Court further agrees with the CTA that the electronic messages of HSBC’s
investor-clients containing instructions to debit their respective local or foreign
currency accounts in the Philippines and pay a certain named recipient also
residing in the Philippines is not the transaction contemplated under Section 181 of
the Tax Code as such instructions are "parallel to an automatic bank transfer of
local funds from a savings account to a checking account maintained by a
depositor in one bank." The Court favorably adopts the finding of the CTA that the
electronic messages "cannot be considered negotiable instruments as they lack the
feature of negotiability, which, is the ability to be transferred" and that the said
electronic messages are "mere memoranda" of the transaction consisting of the
"actual debiting of the [investor-client-payor’s] local or foreign currency account in
the Philippines" and "entered as such in the books of account of the local bank,"
HSBC.
The instructions given through electronic messages that are subjected to DST in
these cases are not negotiable instruments as they do not comply with the
requisites of negotiability under Section 1 of the Negotiable Instruments Law. The
electronic messages are not signed by the investor-clients as supposed drawers of
a bill of exchange; they do not contain an unconditional order to pay a sum certain
in money as the payment is supposed to come from a specific fund or account of
the investor-clients; and, they are not payable to order or bearer but to a
specifically designated third party. Thus, the electronic messages are not bills of
exchange. As there was no bill of exchange or order for the payment drawn abroad
and made payable here in the Philippines, there could have been no acceptance or
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payment that will trigger the imposition of the DST under Section 181 of the Tax
Code.
In these cases, the electronic messages received by HSBC from its investor-clients
abroad instructing the former to debit the latter's local and foreign currency
accounts and to pay the purchase price of shares of stock or investment in
securities do not properly qualify as either presentment for acceptance or
presentment for payment. There being neither presentment for acceptance nor
presentment for payment, then there was no acceptance or payment that could
have been subjected to DST to speak of.
WHEREFORE, the petitions are hereby GRANTED and the Decisions dated May
2, 2002 in CTA Case No. 6009 and dated December 18, 2002 in CT A Case No.
5951 of the Court of Tax Appeals are REINSTATED. SO ORDERED.
8. ALVIN PATRIMONIO VS. NAPOLEON GUTIERREZ and OCTAVIO
MARASIGAN III
Facts: This is a petition for review on certiorari assailing the decision and the
resolution of the CA which affirmed the decision of RTC dismissing the complaint
for declaration of nullity of loan filed by petitioner Alvin Patrimonio and ordering him
to pay respondent Octavio Marasigan III.
Petitioner Patrimonio and Respondent Gutierrez entered into a business venture
under the name Slam Dunk Corporation, a production outfit that produced mini-
concerts and shows related to basketball. In the course of their business, the
Petitioner pre-signed several check for the expenses of Slam Dunk. Although
signed, however, there was no payee’s name, date or amount indicated in the said
checks. The blank checks were entrusted to Gutierrez with the instruction that he
cannot fill them out without previous notification to and approval by the petitioner.
Sometime in 1993, without petitioner’s knowledge and consent, Gutierrez went to
secure a loan of P200,000 from Co-Respondent Marasigan, petitioner’s former
teammate, on the excuse that Petitioner Patrimonio needed the money for the
construction of his house. Marasigan acceded to Gutierrez’ request and gave him
the amount. Gutierrez simultaneously delivered to Marasigan one of the blank
checks the petitioner pre-signed with Pilipinas Bank with the blank portions filled
out with the words "Cash" "Two Hundred Thousand Pesos Only", and the amount
of "P200,000.00."
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. He sought recovery from Gutierrez, but to no avail. He thereafter sent
several demand letters to the, but his demands likewise went unheeded.
Consequently, he filed a criminal case for violation of B.P. 22 against the Petitioner.
On the other hand, Petitioner filed with the RTC a Complaint for Declaration of
Nullity of Loan and Recovery of Damages against the Respondents, invoking that
he was not privy to the parties’ loan agreement.

The trial court ruled in favor of Marasigan and found that the Petitioner, in issuing
the pre-signed blank checks, had the intention of issuing the check even without
his approval. RTC declared Marasigan as a holder in due course. The appellate
court affirmed the decision of the RTC but has different factual findings. CA agreed
with the petitioner that Marasigan is not a holder in due course as he did not
receive the check in good faith.
Issues:
(1) Whether or not the contract of loan between Marasigan and Gutierrez may
be nullified for being void?
(2) Whether or not the petitioner should be held liable for the payment of loan
that he was not privy of?
(3) Whether or not Respondent Gutierrez has completely filled out the subject
check strictly under the authority given by the petitioner; and
(4) Whether or not Respondent Marasigan is a holder in due course?
Held:
(1) Yes, the Contract of Loan entered into by Gutierrez in behalf of the Petitioner
should be nullified for being void. 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. A review of the records reveals that Gutierrez did
not have any authority to borrow money in behalf of the petitioner. Records did 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, whether verbally or in writing, to borrow money in his behalf, nor was he
aware of any such transaction. 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.
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.
(2) No, the Petitioner cannot be held liable for the payment of loan on the ground
that the contract lacked the essential element of consent.
Article 1318 of the Civil Code14 enumerates the essential requisites for a valid
contract, which includes: a. consent of the contracting parties; b. object certain
which is the subject matter of the contract; and c. cause of the obligation which is
established.
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. The act that petitioner issued pre-signed checks
does not constitute sufficient authority to borrow money in his behalf and neither
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should it be construed as petitioner’s grant of consent to the parties’ loan
agreement.
(3) No, the check was not completed strictly under the authority given by the
Petitioner. Under Sec. 14 of the Negotiable Instruments Law, 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. The law used the term "prima facie" to underscore the fact that
the authority which the law accords to a holder is a presumption juris tantumonly;
hence, subject to subject to contrary proof. Thus, evidence that there was no
authority or that the authority granted has been exceeded may be presented by the
maker in order to avoid liability under the instrument.
In this case, the Petitioner gave Gutierrez pre-signed checks to be used in their
business provided that the latter could only use them upon the Petitioner’s
approval. The Petitioner’s 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. No
evidence is on record that Gutierrez ever secured prior approval from the Petitioner
to fill up the blank or to use the check.
(4) No, Marasigan is not a holder in due course. 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. 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.
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.
The term ‘bad faith’ does not necessarily involve furtive motives, but means bad
faith in a commercial sense. Although gross negligence does not of itself constitute
bad faith, it is evidence from which bad faith may be inferred.
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. 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. The only disadvantage of a holder who is not in due course is that the
negotiable instrument is subject to defenses as if it were non-negotiable. Among
such defenses is the filling up blank not within the authority.
9. ILUSORIO V. CA AND MANILA BANKING CORPORATION
Sec. 23 of the Negotiable Instruments law provides that a forged check is
inoperative, meaning there was no right to enforce payment against any party. But
it also provides an exception: “unless the party against whom it is sought enforce
such right is precluded from setting up the forgery or want of authority”. This case
falls under the exception since Ilusorio is precluded from setting up forgery
due to his own negligence considering that he allowed his secretary access
to his credit cards, checkbook, and allowed his secretary to verify his
statements of account.
FACTS: Petitioner is a prominent businessman who, at the time material to this
case, was the Managing Director of Multinational Investment Bancorporation,
Chairman and/or President of several other corporations, and a depositor in good
standing of respondent bank, the Manila Banking Corporation. As he was then
running about 20 corporations and was going out of the country several times,
petitioner entrusted to his secretary, Katherine E. Eugenio, his credit cards and his
checkbook with blank checks.
It was not until a business partner appraised Ilusorio that he saw Eugenio use his
credit cards that the latter’s acts were discovered. 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 then filed a case for ESTAFA THRU FALSIFICATION
which was bolstered by another criminal case for ESTAFA THRU FALSIFICATION
OF COMMERCIAL DOCUMENTS by Manila Banking Corporation based on
petitioner’s statement that his signatures in the checks were forged.
Petitioner then requested the respondent bank to credit back and restore to its
account the value of the checks which were wrongfully encashed, but respondent
bank refused. Hence, petitioner filed the instant case.
PETITIONER’S CONTENTION: 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 payee’s signature and which collects
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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.
RESPONDENT’S CONTENTION: Manila Bank additionally points out that Section
23 of the Negotiable Instruments Law is inapplicable, considering that the fact of
forgery was never proven; And that the bank negates petitioners claim of estoppel.
Also, Manila Bank sought the expertise of the National Bureau of Investigation
(NBI) in determining the genuineness of the signatures appearing on the
checks. 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.
RTC: Dismissed for lack of sufficient basis for plaintiff’s cause of action against the
defendant bank.
CA: Affirmed ruling of RTC. Petitioner’s own negligence was the proximate cause
of his loss.
ISSUES:
(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 petitioner’s
secretary, is barred from raising the defense that the fact of forgery was not
established.
HELD:
1. On the first issue, we find that petitioner has no cause of action against Manila
Bank.
Petitioner 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
Moreover, petitioner’s 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. 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.
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.
2. 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.
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.
10. METROPOLITAN BANK AND TRUST COMPANY vs. RENATO D. CABILZO
FACTS: 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.
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.
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.
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. Consequently, Cabilzo instituted a civil action for damages against
Metrobank before the RTC of Manila.
RTC: Ordered Metrobank to pay the sum of P90,000.00, the amount of the check.
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CA: Affirmed the RTC Decision.
ISSUE:
(1) When is there material altereation?
(2) Is Metrobank (Drawee) liable for the alterations on the subject check bearing
the authentic signature of the drawer thereof?
HELD:
(1) 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. 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. 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;
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.
(2) YES, Metrobank is liable for the alterations on the subject check bearing
the authentic signature of the drawer thereof.
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.
11. Metropolitan Bank and Trust Company vs. Wilfred N. Chiok
Doctrine:
1. While manager’s and cashier’s checks are still subject to clearing, they cannot
be countermanded for being drawn against a closed account, for being drawn
 13 of 16

against insufficient funds, or for similar reasons such as a condition not On July 5, 1995, pursuant to the BPLA, Asian Bank “bills purchased”
appearing on the face of the check. Security Bank & Trust Company (SBTC) Manager’s Check (MC) No. 037364 in the
amount of P25,500,000.00 issued in the name of Chiok, and credited the same
2. Reciprocal obligations are those which arise from the same cause, and in which amount to the latter’s Savings Account No. 2-007-03-00201-3. On the same day,
each party is a debtor and creditor of the other, such that the obligation of one is July 5, 1995, Asian Bank issued MC No. 025935 in the amount of P7,550,000.00
dependent upon the obligation of the other. They are to be performed and MC No. 025939 in the amount of P10,905,350.00 to Gonzalo Bernardo, who is
simultaneously such that the performance of one is conditioned upon the the same person as Gonzalo B. Nuguid. The two Asian Bank manager’s checks,
simultaneous fulfillment of the other. When Nuguid failed to deliver the agreed with a total value of P18,455,350.00 were issued pursuant to Chiok’s instruction
amount to Chiok, the latter had a cause of action against Nuguid to ask for the and was debited from his account.Likewise upon Chiok’s application, Metrobank
rescission of their contract. On the other hand, Chiok did not have a cause of issued Cashier’s Check (CC) No. 003380 in the amount of P7,613,000.00 in the
action agaist Metrobank and Global Bank that would allow him to rescind the name of Gonzalo Bernardo. The same was debited from Chiok’s Savings Account
contracts of sale ofthe manager’s or cashier's checks, which would have No. 154-42504955. The checks bought by Chiok for payee Gonzalo Bernardo are
resulted in the crediting of the amounts thereof back to his accounts. Otherwise therefore summarized as follows:
stated, the right of rescission under Article 1191 of the civil code can only be
exercised in accordance with the principle of relativity of contracts under Article
Drawee
1311 of the same code. Amount (P) Source of fund
Bank/Check No.
Facts:
Asian Bank MC 7,550,000.00
(Brief Summary)
No. 025935
On July 5, 1995, respondent Wilfred N. Chiok (Chiok) bought Chiok’s Asian Bank Savings
US$1,022,288.50 dollars from Gonzalo B. Nuguid (Nuguid) where Chiok deposited Account No. 2-007-03-00201-3,
Asian Bank MC 10,905,350.00
the three manager’s checks (Asian Bank MC Nos. 025935 and 025939, and which had been credited with the
No. 025939
Metrobank CC No. 003380), with an aggregate value of ₱26,068,350.00 in
(aggregate value value of SBTC MC No. 037364
Nuguid’s account with petitioner Bank of the Philippine Islands (BPI). Nuguid, (P25,500,000.00) when the latter was
of
however, failed to deliver the dollar equivalent of the three checks as agreed upon,
Asian Bank purchased by Asian Bank from Chiok
prompting Chiok to request that payment on the three checks be stopped. On the pursuant to their BPLA.
MCs:
following day, July 6, 1995, Chiok filed a Complaint for damages with application
18,455,350.00)
for ex parte restraining order and/or preliminary injunction with the Regional Trial
Court (RTC) of Quezon City against the spouses Gonzalo and Marinella Nuguid,
and the depositary banks, Asian Bank and Metrobank. On July 25, 1995, the RTC Metrobank CC 7,613,000.00 Chiok’s Metrobank Savings
issued an Order directing the issuance of a writ of preliminary prohibitory injunction. No. 003380 Account No. 154-425049553
When checks were presented for payment, Asian Bank refused to honor MC Nos.
025935 and 025939 in deference to the TRO. TOTAL 26,068,350.00

Respondent Wilfred N. Chiok (Chiok) had been engaged in dollar trading for
several years. He usually buys dollars from Gonzalo B. Nuguid (Nuguid) at the
Nuguid was supposed to deliver US$1,022,288.50, the dollar equivalent of
exchange rate prevailing on the date of the sale. Chiok pays Nuguid either in cash
the three checks as agreed upon, in the afternoon of the same day. Nuguid,
or manager’s check, to be picked up by the latter or deposited in the latter’s bank
however, failed to do so, prompting Chiok to request that payment on the three
account. Nuguid delivers the dollars either on the same day or on a later date as
checks be stopped. On the following day, July 6, 1995, Chiok filed a Complaint for
may be agreed upon between them, up to a week later. Chiok and Nuguid had
damages with application for ex-parte restraining order and/or preliminary
been dealing in this manner for about six to eight years, with their transactions
injunction with the Regional Trial Court (RTC) of Quezon City against the spouses
running into millions of pesos. For this purpose, Chiok maintained accounts with
Gonzalo and Marinella Nuguid, and the depositary banks, Asian Bank and
petitioners Metropolitan Bank and Trust Company (Metrobank) and Global
Metrobank. It was later amended to include the prayer of Chiok to be declared the
Business Bank, Inc. (Global Bank), the latter being then referred to as the Asian
legal owner of the proceeds of the subject checks and to be allowed to withdraw
Banking Corporation (Asian Bank). Chiok likewise entered into a Bills Purchase
the entire proceeds thereof. On the same day, July 6, 1995, the RTC issued a TRO
Line Agreement (BPLA) with Asian Bank. Under the BPLA, checks drawn in favor
directing the spouses Nuguid to refrain from presenting the said checks for
of, or negotiated to, Chiok may be purchased by Asian Bank. Upon such purchase,
payment and the depositary banks from honoring the same until further orders from
Chiok receives a discounted cash equivalent of the amount of the check earlier
the court.
than the normal clearing period.

However, in a letter also dated July 6, 1995, Ms. Jocelyn T. Paz of
FEBTC, Cubao-Araneta Branch informed Metrobank that the TRO was issued a
day after the check was presented for payment. Thus, according to Paz, the
transaction was already consummated and FEBTC had already validly accepted
the same. In another letter, FEBTC informed Metrobank that "the restraining order
indicates the name of the payee of the check as GONZALO NUGUID, but the
check is in fact payable to GONZALO BERNARDO.
On August 29, 2002, the RTC rendered its Decision in favor Chiok and
ordering Global
Business Bank and Metropolitan Bank & Trust Company to pay him. The RTC went
on to rule that due to the timely service of the TRO and the injunction, the value of
the three checks remained with Global Bank and Metrobank. The RTC concluded
that since Nuguid did not have a valid title to the proceeds of the manager’s and
cashier’s checks, Chiok is entitled to be paid back everything he had paid to the
drawees for the checks.
On May 5, 2006, the Court of Appeals rendered the assailed Decision
affirming the RTC Decision with modifications. The contract to buy foreign currency
in the amount of $1,022,288.50 between plaintiff-appellee Wilfred N. Chiok and
defendant Gonzalo B. Nuguid is hereby rescinded. Corollarily, Manager’s Check
Nos. 025935 and 025939 and Cashier’s Check No. 003380 are ordered cancelled.
According to the Court of Appeals, Article 1191 of the Civil Code provides a legal
basis of the right of purchasers of MCs and CCs to make a stop payment order on
the ground of the failure of the payee to perform his obligation to the purchaser.
The appellate court ruled that such claim was impliedly incorporated in Chiok’s
complaint
Issue: (1) Whether or not payment of manager’s and cashier’s checks are subject
to the condition that the payee thereof should comply with his obligations to the
purchaser of the checks.
(2) Whether or not the purchaser of manager’s and cashier’s checks has
the right to have the checks cancelled by filing an action for rescission of its
contract with the payee.
Held:
(1) No. The legal effects of a manager's check and a cashier's check are
the same. A manager's check, like a cashier's check, is an order of the bank to pay,
drawn upon itself, committing in effect its total resources, integrity, and honor
behind its issuance. By its peculiar character and general use in commerce, a
manager's check or a cashier's check is regarded substantially to be as good as
the money it represents. Thus, the succeeding discussions and jurisprudence on
manager's checks, unless stated otherwise, are applicable to cashier's checks, and
vice versa.
A manager’s check, like a cashier’s check, is an order of the bank to pay,
drawn upon itself, committing in effect its total resources, integrity, and honor
behind its issuance. By its peculiar character and general use in commerce, a
manager’s check or a cashier’s check is regarded substantially to be as good as
the money it represents. While manager’s and cashier’s checks are still subject to
14 of 16
clearing, they cannot be countermanded for being drawn against a closed account,
for being drawn against insufficient funds, or for similar reasons such as a condition
not appearing on the face of the check. Long standing and accepted banking
practices do not countenance the countermanding of manager’s and cashier’s
checks on the basis of a mere allegation of failure of the payee to comply with its
obligations towards the purchaser. While indeed, it cannot be said that manager's
and cashier's checks are pre-cleared, clearing should not be confused with
acceptance. Manager's and cashier's checks are still the subject of clearing to
ensure that the same have not been materially altered or otherwise completely
counterfeited. However, manager's and cashier's checks are pre-accepted by the
mere issuance thereof by the bank, which is both its drawer and drawee. Thus,
while manager's and cashier's checks are still subject to clearing, they cannot be
countermanded for being drawn against a closed account, for being drawn against
insufficient funds, or for similar reasons such as a condition not appearing on the
face of the check. Long standing and accepted banking practices do not
countenance the countermanding of manager's and cashier's checks on the basis
of a mere allegation of failure of the payee to comply with its obligations towards
the purchaser. On the contrary, the accepted banking practice is that such checks
are as good as cash.
Therefore, when Nuguid failed to deliver the agreed amount to Chiok, the
latter had a cause of action against Nuguid to ask for the rescission of their
contract; but, Chiok did not have a cause of action against Metrobank and Global
Bank that would allow him to rescind the contracts of sale of the manager’s or
cashier’s checks, which would have resulted in the crediting of the amounts thereof
back to his accounts.
(2) The Supreme Court disagrees with the CA.
As it was construed by the Court of Appeals, the Amended Complaint of
Chiok was in reality an action for rescission of the contract to buy foreign currency
between Chiok and Nuguid. The Court of Appeals then proceeded to cancel the
manager’s and cashier’s checks as a consequence of the granting of the action for
rescission, explaining that “the subject checks would not have been issued were it
not for the contract between Chiok and Nuguid. Therefore, they cannot be
disassociated from the contract and given a distinct and exclusive signification, as
the purchase thereof is part and parcel of the series of transactions necessary to
consummate the contract.” The right to rescind invoked by the Court of Appeals is
provided by Article 1191 of the Civil Code, which reads:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case
one of
the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible. The court shall decree the rescission claimed, unless there be just
cause authorizing the fixing of a period. This is understood to be without prejudice
to the rights of third persons who have acquired the thing, in accordance with
Articles 1385 and 1388 and the Mortgage Law.

The cause of action supplied by the above article, however, is clearly
predicated upon the reciprocity of the obligations of the injured party and the guilty
party. Reciprocal obligations are those which arise from the same cause, and in
which each party is a debtor and a creditor of the other, such that the obligation of
one is dependent upon the obligation of the other. They are to be performed
simultaneously such that the performance of one is conditioned upon the
simultaneous fulfillment of the other. When Nuguid failed to deliver the agreed
amount to Chiok, the latter had a cause of action against Nuguid to ask for the
rescission of their contract. On the other hand, Chiok did not have a cause of action
against Metrobank and Global Bank that would allow him to rescind the contracts of
sale of the manager’s or cashier’s checks, which would have resulted in the
crediting of the amounts thereof back to his accounts.
Otherwise stated, the right of rescission under Article 1191 of the Civil
Code can only be exercised in accordance with the principle of relativity of
contracts under Article 1131 of the same code, which provides:
Art. 1311. Contracts take effect only between the parties, their assigns and heirs,
except
in case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. x x x.
In several cases, this Court has ruled that under the civil law principle of
relativity of contracts under Article 1131, contracts can only bind the parties who
entered into it, and it cannot favor or prejudice a third person, even if he is aware of
such contract and has acted with knowledge thereof.
Metrobank and Global Bank are not parties to the contract to buy foreign
currency between Chiok and Nuguid. Therefore, they are not bound by such
contract and cannot be prejudiced by the failure of Nuguid to comply with the terms
thereof.
12. CALTEX PHILS. VS. CA
FACTS: Defendant Security Bank and Trust Company issued 280 certificates of
time deposit (CTDs) in favor of one Angel dela Cruz who deposited with herein
defendant the aggregate amount of P1,120,000.00.
Dela Cruz delivered the CTDs to herein plaintiff in connection with his purchase of
fuel products from the latter. Sometime thereafter, Angel dela Cruz informed Mr.
Timoteo Tiangco (Branch Manager of SBTC) that he lost all the CTDs. Mr. Tiangco
advised him to execute and submit a notarized Affidavit of Loss, as required by the
bank's procedure, if he desired replacement of said lost CTDs.4. Angel dela Cruz
complied and 280 replacement CTDs were issued in his favor.
Dela Cruz then negotiated and obtained a loan from defendant bank in the amount
of P875,000.00. He executed a notarized Deed of Assignment of Time Deposit
which stated that he surrenders to defendant bank "full control of the indicated time
deposits from and after date" of the assignment and further authorizes said bank to
15 of 16
pre-terminate, set-off and "apply the said time deposits to the payment of whatever
amount or amounts may be due" on the loan upon its maturity.
Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc., went to the defendant
bank and presented for verification the CTDs declared lost by Dela Cruz alleging
that the same were delivered to herein plaintiff "as security for purchases made
with Caltex Philippines, Inc." Defendant received a letter from plaintiff formally
informing it of its possession of the CTDs in question and of its decision to pre-
terminate the same.
Plaintiff was requested to furnish a copy of the document evidencing the guarantee
agreement with Mr. Angel dela Cruz as well as the details of Mr. Angel dela Cruz’s
obligation against which plaintiff proposed to apply the time deposits. However, no
copy was furnished.
Defendant bank rejected the plaintiff's demand and claim for payment of the value
of the CTDs. The loan of Dela Cruz matured and fell due, hence, the bank set-off
and applied the time deposits as payment.
Plaintiff filed a complaint against SBTC praying that the bank be ordered to pay the
aggregate value of the CTDs plus interests, damages and attorney’s fees.
Court a quo rendered dismissed the case and the CA affirmed such decision.
Hence, this petition wherein petitioner faults respondent court in ruling (1) that the
subject certificates of deposit are non-negotiable (Section 1d of NIL is lacking);(2)
that petitioner did not become a holder in due course of the CTDs; and (3) in
disregarding the pertinent provisions of the Code of Commerce relating to lost
instruments payable to bearer.
ISSUE/S:
1. W/N the CTDs are negotiable instruments
2. W/N petitioner is entitled to the proceeds of the CTDs
3. W/N CA erred in disregarding the pertinent provisions of the Code of
Commerce relating to lost instruments payable to bearer
SAMPLE OF THE CTD
SECURITY BANK AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS:
FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00
CTS Pesos, Philippine Currency, repayable to said depositor 731 days. after date,
upon presentation and surrender of this certificate, with interest at the rate
of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)

1. YES. The CTDs are negotiable instruments. The documents provide that the
amounts deposited shall be repayable to the depositor. And who, according to the
document, is the depositor? It is the "bearer." The documents do not say that the
depositor is Angel de la Cruz and that the amounts deposited are repayable
specifically to him. Rather, the amounts are to be repayable to the bearer of the
documents or, for that matter, whosoever may be the bearer at the time of
presentment.
If it was really the intention of respondent bank to pay the amount to Angel de la
Cruz only, it could have with facility so expressed that fact in clear and categorical
terms in the documents, instead of having the word "BEARER" stamped on the
space provided for the name of the depositor in each CTD.
On the wordings of the documents, therefore, the amounts deposited are repayable
to whoever may be the bearer thereof. Thus, petitioner's aforesaid witness merely
declared that Angel de la Cruz is the depositor "insofar as the bank is concerned,"
but obviously other parties not privy to the transaction between them would not be
in a position to know that the depositor is not the bearer stated in the CTDs. Hence,
the situation would require any party dealing with the CTDs to go behind the plain
import of what is written thereon to unravel the agreement of the parties thereto
through facts aliunde. This need for resort to extrinsic evidence is what is sought to
be avoided by the Negotiable Instruments Law and calls for the application of the
elementary rule that the interpretation of obscure words or stipulations in a contract
shall not favor the party who caused the obscurity.
2. NO. Although the CTDs are bearer instruments, a valid negotiation thereof for
the true purpose and agreement between petitioner and De la Cruz requires both
delivery and indorsement. For, although petitioner seeks to deflect this fact, the
CTDs were in reality delivered to it as a security for the purchases of its fuel
products. Any doubt as to whether the CTDs were delivered as payment for the fuel
products or as a security has been dissipated and resolved in favor of the latter by
petitioner's own authorized and responsible representative himself.
Petitioner, through a letter to respondent bank, stated that “These certificates of
deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases
of fuel products.” This admission is conclusive upon petitioner and he is estopped
from denying the same.
If it were true that the CTDs were delivered as payment and not as security,
petitioner's credit manager could have easily said so, instead of using the words "to
guarantee" in the letter. When respondent bank moved for a bill of particularity
praying that petitioner be required to aver with sufficient definiteness or particularity
(a) the due date or dates of payment of the alleged indebtedness of Angel de la
Cruz to plaintiff and (b) whether or not it issued a receipt showing that the CTDs
were delivered to it by De la Cruz as payment of the latter's alleged indebtedness
to it, petitioner opposed the motion. Had it produced the receipt prayed for, it could
have proved that the CTDs were delivered as payment and not as security. Having
opposed the motion, petitioner now labors under the presumption that evidence
willfully suppressed would be adverse if produced.
16 of 16
Petitioner's insistence that the CTDs were negotiated to it begs the question. Under
the Negotiable Instruments Law, an instrument is negotiated when it is transferred
from one person to another in such a manner as to constitute the transferee the
holder thereof, and a holder may be the payee or indorsee of a bill or note, who is
in possession of it, or the bearer thereof. In the present case, however, there was
no negotiation in the sense of a transfer of the legal title to the CTDs in favor of
petitioner in which situation, mere delivery of the bearer CTDs would have sufficed.
Here, the delivery thereof only as security for the purchases of Angel de la Cruz
could at the most constitute petitioner only as a holder for value by reason of his
lien. Accordingly, a negotiation for such purpose cannot be effected by mere
delivery of the instrument since the terms thereof and the subsequent disposition of
such security, in the event of non-payment of the principal obligation, must be
contractually provided for.
The pertinent law on this point is that where the holder has a lien on the instrument
arising from contract, he is deemed a holder for value to the extent of his lien. As
such holder of collateral security, he would be a pledgee but the requirements
therefor and the effects thereof, not being provided for by the Negotiable
Instruments Law, shall be governed by the Civil Code provisions on pledge of
incorporeal rights.
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be
pledged. The instrument proving the right pledged shall be delivered to the creditor,
and if negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of the
thing pledged and the date of the pledge do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual
findings of respondent court show that petitioner failed to produce any document
evidencing any contract of pledge or guarantee agreement between it and Angel
de la Cruz. The mere delivery of the CTDs did not legally vest in petitioner any right
effective against and binding upon respondent bank.
3. NO. Petitioner failed to raise such issue in the lower court. Petitioner faults
respondent court for refusing to delve into the question of whether or not private
respondent observed the requirements of the law in the case of lost negotiable
instruments and the issuance of replacement certificates therefor, however, such
matter was not included in the stipulation of the parties and in the statement of
issues submitted by them to the trial court. An issue raised for the first time on
appeal and not raised timely in the proceedings in the lower court is barred by
estoppel. Questions raised on appeal must be within the issues framed by the
parties and, consequently, issues not raised in the trial court cannot be raised for
the first time on appeal.