EN BANC G.R. No. L-10221 February 28, 1958 Intestate of Luther Young and Pacita Young, spouses.

PACIFICA JIMENEZ, petitioner-appellee, vs. DR. JOSE BUCOY, administrator-appellant.

Frank W. Brady and Pablo C. de Guia, Jr. for appellee.E. A. Beltran for appellant.

payable only after the war or after liberation, or became payable after those dates, nor education could be effected, and peso-forpeso payment shall be ordered in Philippine currency.2 The Ballantyne Conversion Table does not apply where the monetary obligation, under the contract, was not payable during the Japanese occupation but until after one year counted for the date of ratification of the Treaty of Peace concluding the Greater East Asia War. (Arellano vs. De Domingo, 101 Phil., 902.) When a monetary obligation is contracted during the Japanese occupation, to be discharged after the war, the payment should be made in Philippine Currency. (Kare et al. vs. Imperial et al., 102 Phil., 173.) Now then, as in the case before us, the debtor undertook to pay "six months after the war," peso for peso payment is indicated. The Ang Lam3 case cited by appellant is not controlling, because the loan therein given could have been repaid during the Japanese occupation. Dated December 26, 1944, it was payable within one year. Payment could therefore have been made during January 1945. The notes here in question were payable only after the war. The appellant administrator calls attention to the fact that the notes contained no express promise to pay a specified amount. We declare the point to be without merit. In accordance with doctrines on the matter, the note herein-above quoted amounted in effect to "a promise to pay ten thousand pesos six months after the war, without interest." And so of the other notes. "An acknowledgment may become a promise by the addition of words by which a promise of payment is naturally implied, such as, "payable," "payable" on a given day, "payable on demand,""paid . . . when called for," . . . (10 Corpus Juris Secundum p. 523.)" To constitute a good promissory note, no precise words of contract are necessary, provided they amount, in legal effect, to a promise to pay. In other words, if over and above the mere acknowledgment of the debt there may be collected from the words used a promise to pay it, the instrument may be regarded as a promissory note. 1 Daniel, Neg. Inst. sec. 36 et seq.; Byles, Bills,10, 11, and cases cited . . . "Due A. B. $325, payable on demand," or, "I acknowledge myself to be indebted to A in $109, to be paid on demand, for value received," or, "I O. U. $85 to be paid on May5th," are held to be promissory notes, significance being given to words of payment as indicating a promise to pay." 1 Daniel Neg. Inst. see. 39, and cases cited. (Cowan vs. Hallack, (Colo.) 13 Pacific Reporter 700, 703.) Another argument of appellant is that as the deceased Luther Young did not sign these notes, his estate is not liable for the same. This defense, however, was not interposed in the lower

BENGZON, J.: In this intestate of Luther Young and Pacita Young who died in 1954 and 1952 respectively, Pacifica Jimenez presented for payment four promissory notes signed by Pacita for different amounts totalling twenty-one thousand pesos (P21,000). Acknowledging receipt by Pacita during the Japanese occupation, in the currency then prevailing, the administrator manifested willingness to pay provided adjustment of the sums be made in line with the Ballantyne schedule. The claimant objected to the adjustment insisting on full payment in accordance with the notes. Applying doctrines of this Court on the matter, the Hon. Primitive L. Gonzales, Judge, held that the notes should be paid in the currency prevailing after the war, and that consequently plaintiff was entitled to recover P21,000 plus attorneys fees for the sum of P2,000. Hence this appeal. Executed in the month of August 1944, the first promissory note read as follows: Received from Miss Pacifica Jimenez the total amount of P10,000) ten thousand pesos payable six months after the war, without interest. The other three notes were couched in the same terms, except as to amounts and dates. There can be no serious question that the notes were promises to pay "six months after the war," the amounts mentioned. But the important question, which obviously compelled the administrator to appeal, is whether the amounts should be paid, peso for peso, or whether a reduction should be made in accordance with the well-known Ballantyne schedule. This matter of payment of loans contracted during the Japanese occupation has received our attention in many litigations after the liberation. The gist of our adjudications, in so far as material here, is that if the loan should be paid during the Japanese occupation, the Ballantyne schedule should apply with corresponding reduction of the amount.1 However, if the loan was expressly agreed to be

court. There the only issue related to the amount to be amount, considering that the money had been received in Japanese money. It is now unfair to put up this new defense, because had it been raised in the court below, appellees could have proved, what they now alleged that Pacita contracted the obligation to support and maintain herself, her son and her husband (then concentrated at Santo Tomas University) during the hard days of the occupation. It is now settled practice that on appeal a change of theory is not permitted. In order that a question may be raised on appeal, it is essential that it be within the issues made by the parties in their pleadings. Consequently, when a party deliberately adopts a certain theory, and the case is tried and decided upon that theory in the court below, he will not be permitted to change his theory on appeal because, to permit him to do so, would be unfair to the adverse party. (Rules of Court by Moran-1957 Ed. Vol. I p. 715 citing Agoncillo vs. Javier, 38 Phil., 424; American Express Company vs. Natividad, 46 Phil., 207;San Agustin vs. Barrios, 68 Phil., 475, 480; Toribio vs. Dacasa, 55 Phil., 461.) Appellant's last assignment of error concerns attorneys fees. He says there was no reason for making this and exception to the general rule that attorney's fees are not recoverable in the absence of stipulation. Under the new Civil Code, attorney's fees and expenses of litigation new be awarded in this case if defendant acted in gross and evident bad faith in refusing to satisfy plaintiff's plainly valid, just and demandable claim" or "where the court deems it just and equitable that attorney's fees be recovered"(Article 2208 Civil Code). These are if applicable some of the exceptions to the general rule that in the absence of stipulation no attorney's fees shall be awarded. The trial court did not explain why it ordered payment of counsel fees. Needless to say, it is desirable that the decision should state the reason why such award is made bearing in mind that it must necessarily rest on an exceptional situation. Unless of course the text of the decision plainly shows the case to fall into one of the exceptions, for instance "in actions for legal support," when exemplary damages are awarded," etc. In the case at bar, defendant could not obviously be held to have acted in gross and evident bad faith." He did not deny the debt, and merely pleaded for adjustment, invoking decisions he thought to be controlling. If the trial judge considered it "just and equitable" to require payment of attorney's fees because the defense adjustment under Ballantyne schedule proved to be untenable in view of this Court's applicable rulings, it would be error to uphold his view. Otherwise, every time a defendant loses, attorney's fees would

follow as a matter of course. Under the article above cited, even a clearly untenable defense would be no ground for awarding attorney's fees unless it amounted to "gross and evident bad faith." Plaintiff's attorneys attempt to sustain the award on the ground of defendant's refusal to accept her offer, before the suit, to take P5,000 in full settlement of her claim. We do not think this is tenable, defendant's attitude being merely a consequence of his line of defense, which though erroneous does not amount to "gross and evident bad faith." For one thing, there is a point raised by defendant, which so far as we are informed, has not been directly passed upon in this jurisdiction: the notes contained no express promise to pay a definite amount. There being no circumstance making it reasonable and just to require defendant to pay attorney's fees, the last assignment of error must be upheld. Wherefore, in view of the foregoing considerations, the appealed decision is affirmed, except as to the attorney's fees which are hereby disapproved. So ordered. Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L. Endencia and Felix, JJ., concur.

ELIZALDE & CO., INC. VS. BINAN TRANSPORTATION CO. 56 O.G. 5386

FIRST DIVISION G.R. No. 88866 February 18, 1991

METROPOLITAN BANK & TRUST COMPANY, Petitioner, vs. COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA CASTILLO, MAGNO CASTILLO and GLORIA CASTILLO, Respondents. CRUZ, J.: This case, for all its seeming complexity, turns on a simple question of negligence. The facts, pruned of all nonessentials, are easily told. The Metropolitan Bank and Trust Co. is a commercial bank with branches throughout the Philippines and even abroad. Golden Savings and Loan Association was, at the time these events happened, operating in Calapan, Mindoro, with the other private respondents as its principal officers. In January 1979, a certain Eduardo Gomez opened an account with Golden Savings and deposited over a period of two months 38 treasury warrants with a total value of P1,755,228.37. They were all drawn by the Philippine Fish Marketing Authority and purportedly signed by its General Manager and countersigned by its Auditor. Six of these were directly payable to Gomez while the others appeared to have been indorsed by their respective payees, followed by Gomez as second indorser. 1 On various dates between June 25 and July 16, 1979, all these warrants were subsequently indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its Savings Account No. 2498 in the Metrobank branch in Calapan, Mindoro. They were then sent for clearing by the branch office to the principal office of Metrobank, which forwarded them to the Bureau of Treasury for special clearing. 2 More than two weeks after the deposits, Gloria Castillo went to the Calapan branch several times to ask whether the warrants had been cleared. She was told to wait. Accordingly, Gomez was meanwhile not allowed to withdraw from his account. Later, however, "exasperated" over Gloria's repeated inquiries and also as an accommodation for a "valued client," the petitioner says it finally decided to allow Golden Savings to withdraw from the proceeds of the

warrants. 3 The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the second on July 13, 1979, in the amount of P310,000.00, and the third on July 16, 1979, in the amount of P150,000.00. The total withdrawal was P968.000.00. 4 In turn, Golden Savings subsequently allowed Gomez to make withdrawals from his own account, eventually collecting the total amount of P1,167,500.00 from the proceeds of the apparently cleared warrants. The last withdrawal was made on July 16, 1979. On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants had been dishonored by the Bureau of Treasury on July 19, 1979, and demanded the refund by Golden Savings of the amount it had previously withdrawn, to make up the deficit in its account. The demand was rejected. Metrobank then sued Golden Savings in the Regional Trial Court of Mindoro. 5 After trial, judgment was rendered in favor of Golden Savings, which, however, filed a motion for reconsideration even as Metrobank filed its notice of appeal. On November 4, 1986, the lower court modified its decision thus: ACCORDINGLY, judgment is hereby rendered: 1. Dismissing the complaint with costs against the plaintiff; 2. Dissolving and lifting the writ of attachment of the properties of defendant Golden Savings and Loan Association, Inc. and defendant Spouses Magno Castillo and Lucia Castillo; 3. Directing the plaintiff to reverse its action of debiting Savings Account No. 2498 of the sum of P1,754,089.00 and to reinstate and credit to such account such amount existing before the debit was made including the amount of P812,033.37 in favor of defendant Golden Savings and Loan Association, Inc. and thereafter, to allow defendant Golden Savings and Loan Association, Inc. to withdraw the amount outstanding thereon before the debit; 4. Ordering the plaintiff to pay the defendant Golden Savings and Loan Association, Inc. attorney's fees and expenses of litigation in the amount of P200,000.00.

5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo and Lucia Castillo attorney's fees and expenses of litigation in the amount of P100,000.00. SO ORDERED. On appeal to the respondent court, 6 the decision was affirmed, prompting Metrobank to file this petition for review on the following grounds: 1. Respondent Court of Appeals erred in disregarding and failing to apply the clear contractual terms and conditions on the deposit slips allowing Metrobank to charge back any amount erroneously credited. (a) Metrobank's right to charge back is not limited to instances where the checks or treasury warrants are forged or unauthorized. (b) Until such time as Metrobank is actually paid, its obligation is that of a mere collecting agent which cannot be held liable for its failure to collect on the warrants. 2. Under the lower court's decision, affirmed by respondent Court of Appeals, Metrobank is made to pay for warrants already dishonored, thereby perpetuating the fraud committed by Eduardo Gomez. 3. Respondent Court of Appeals erred in not finding that as between Metrobank and Golden Savings, the latter should bear the loss. 4. Respondent Court of Appeals erred in holding that the treasury warrants involved in this case are not negotiable instruments. The petition has no merit. From the above undisputed facts, it would appear to the Court that Metrobank was indeed negligent in giving Golden Savings the impression that the treasury warrants had been cleared and that, consequently, it was safe to allow Gomez to withdraw the proceeds thereof from his account with it. Without such assurance, Golden Savings would not have allowed the withdrawals; with such assurance, there was no reason not to allow the withdrawal. Indeed, Golden Savings might even have incurred liability for its refusal to return the money that to all appearances belonged to the depositor, who could therefore withdraw it any time and for any reason he saw fit.

It was, in fact, to secure the clearance of the treasury warrants that Golden Savings deposited them to its account with Metrobank. Golden Savings had no clearing facilities of its own. It relied on Metrobank to determine the validity of the warrants through its own services. The proceeds of the warrants were withheld from Gomez until Metrobank allowed Golden Savings itself to withdraw them from its own deposit. 7 It was only when Metrobank gave the go-signal that Gomez was finally allowed by Golden Savings to withdraw them from his own account. The argument of Metrobank that Golden Savings should have exercised more care in checking the personal circumstances of Gomez before accepting his deposit does not hold water. It was Gomez who was entrusting the warrants, not Golden Savings that was extending him a loan; and moreover, the treasury warrants were subject to clearing, pending which the depositor could not withdraw its proceeds. There was no question of Gomez's identity or of the genuineness of his signature as checked by Golden Savings. In fact, the treasury warrants were dishonored allegedly because of the forgery of the signatures of the drawers, not of Gomez as payee or indorser. Under the circumstances, it is clear that Golden Savings acted with due care and diligence and cannot be faulted for the withdrawals it allowed Gomez to make. By contrast, Metrobank exhibited extraordinary carelessness. The amount involved was not trifling - more than one and a half million pesos (and this was 1979). There was no reason why it should not have waited until the treasury warrants had been cleared; it would not have lost a single centavo by waiting. Yet, despite the lack of such clearance - and notwithstanding that it had not received a single centavo from the proceeds of the treasury warrants, as it now repeatedly stresses - it allowed Golden Savings to withdraw - not once, not twice, but thrice - from the uncleared treasury warrants in the total amount of P968,000.00 Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo about the clearance and it also wanted to "accommodate" a valued client. It "presumed" that the warrants had been cleared simply because of "the lapse of one week." 8 For a bank with its long experience, this explanation is unbelievably naive.

And now, to gloss over its carelessness, Metrobank would invoke the conditions printed on the dorsal side of the deposit slips through which the treasury warrants were deposited by Golden Savings with its Calapan branch. The conditions read as follows: Kindly note that in receiving items on deposit, the bank obligates itself only as the depositor's collecting agent, assuming no responsibility beyond care in selecting correspondents, and until such time as actual payment shall have come into possession of this bank, the right is reserved to charge back to the depositor's account any amount previously credited, whether or not such item is returned. This also applies to checks drawn on local banks and bankers and their branches as well as on this bank, which are unpaid due to insufficiency of funds, forgery, unauthorized overdraft or any other reason. (Emphasis supplied.) According to Metrobank, the said conditions clearly show that it was acting only as a collecting agent for Golden Savings and give it the right to "charge back to the depositor's account any amount previously credited, whether or not such item is returned. This also applies to checks ". . . which are unpaid due to insufficiency of funds, forgery, unauthorized overdraft of any other reason." It is claimed that the said conditions are in the nature of contractual stipulations and became binding on Golden Savings when Gloria Castillo, as its Cashier, signed the deposit slips. Doubt may be expressed about the binding force of the conditions, considering that they have apparently been imposed by the bank unilaterally, without the consent of the depositor. Indeed, it could be argued that the depositor, in signing the deposit slip, does so only to identify himself and not to agree to the conditions set forth in the given permit at the back of the deposit slip. We do not have to rule on this matter at this time. At any rate, the Court feels that even if the deposit slip were considered a contract, the petitioner could still not validly disclaim responsibility thereunder in the light of the circumstances of this case. In stressing that it was acting only as a collecting agent for Golden Savings, Metrobank seems to be suggesting that as a mere agent it cannot be liable to the principal. This is not

exactly true. On the contrary, Article 1909 of the Civil Code clearly provides that Art. 1909. - The agent is responsible not only for fraud, but also for negligence, which shall be judged 'with more or less rigor by the courts, according to whether the agency was or was not for a compensation. The negligence of Metrobank has been sufficiently established. To repeat for emphasis, it was the clearance given by it that assured Golden Savings it was already safe to allow Gomez to withdraw the proceeds of the treasury warrants he had deposited Metrobank misled Golden Savings. There may have been no express clearance, as Metrobank insists (although this is refuted by Golden Savings) but in any case that clearance could be implied from its allowing Golden Savings to withdraw from its account not only once or even twice but three times. The total withdrawal was in excess of its original balance before the treasury warrants were deposited, which only added to its belief that the treasury warrants had indeed been cleared. Metrobank's argument that it may recover the disputed amount if the warrants are not paid for any reason is not acceptable. Any reason does not mean no reason at all. Otherwise, there would have been no need at all for Golden Savings to deposit the treasury warrants with it for clearance. There would have been no need for it to wait until the warrants had been cleared before paying the proceeds thereof to Gomez. Such a condition, if interpreted in the way the petitioner suggests, is not binding for being arbitrary and unconscionable. And it becomes more so in the case at bar when it is considered that the supposed dishonor of the warrants was not communicated to Golden Savings before it made its own payment to Gomez. The belated notification aggravated the petitioner's earlier negligence in giving express or at least implied clearance to the treasury warrants and allowing payments therefrom to Golden Savings. But that is not all. On top of this, the supposed reason for the dishonor, to wit, the forgery of the signatures of the general manager and the auditor of the drawer corporation, has not been established. 9 This was the finding of the lower courts which we see no reason to disturb. And as we said in MWSS v. Court of Appeals: 10

Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It must be established by clear, positive and convincing evidence. This was not done in the present case. A no less important consideration is the circumstance that the treasury warrants in question are not negotiable instruments. Clearly stamped on their face is the word "nonnegotiable." Moreover, and this is of equal significance, it is indicated that they are payable from a particular fund, to wit, Fund 501. The following sections of the Negotiable Instruments Law, especially the underscored parts, are pertinent: Sec. 1. - Form of negotiable instruments. - An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. xxx xxx xxx Sec. 3. When promise is unconditional. - An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with (a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or (b) A statement of the transaction which gives rise to the instrument judgment. But an order or promise to pay out of a particular fund is not unconditional. The indication of Fund 501 as the source of the payment to be made on the treasury warrants makes the order or promise to pay "not unconditional" and the warrants themselves non-negotiable. There should be no question

that the exception on Section 3 of the Negotiable Instruments Law is applicable in the case at bar. This conclusion conforms to Abubakar vs. Auditor General 11 where the Court held: The petitioner argues that he is a holder in good faith and for value of a negotiable instrument and is entitled to the rights and privileges of a holder in due course, free from defenses. But this treasury warrant is not within the scope of the negotiable instrument law. For one thing, the document bearing on its face the words "payable from the appropriation for food administration, is actually an Order for payment out of "a particular fund," and is not unconditional and does not fulfill one of the essential requirements of a negotiable instrument (Sec. 3 last sentence and section [1(b)] of the Negotiable Instruments Law). Metrobank cannot contend that by indorsing the warrants in general, Golden Savings assumed that they were "genuine and in all respects what they purport to be," in accordance with Section 66 of the Negotiable Instruments Law. The simple reason is that this law is not applicable to the nonnegotiable treasury warrants. The indorsement was made by Gloria Castillo not for the purpose of guaranteeing the genuineness of the warrants but merely to deposit them with Metrobank for clearing. It was in fact Metrobank that made the guarantee when it stamped on the back of the warrants: "All prior indorsement and/or lack of endorsements guaranteed, Metropolitan Bank & Trust Co., Calapan Branch." The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine Islands, 12 but we feel this case is inapplicable to the present controversy. That case involved checks whereas this case involves treasury warrants. Golden Savings never represented that the warrants were negotiable but signed them only for the purpose of depositing them for clearance. Also, the fact of forgery was proved in that case but not in the case before us. Finally, the Court found the Jai Alai Corporation negligent in accepting the checks without question from one Antonio Ramirez notwithstanding that the payee was the Inter-Island Gas Services, Inc. and it did not appear that he was authorized to indorse it. No similar negligence can be imputed to Golden Savings.

We find the challenged decision to be basically correct. However, we will have to amend it insofar as it directs the petitioner to credit Golden Savings with the full amount of the treasury checks deposited to its account. The total value of the 32 treasury warrants dishonored was P1,754,089.00, from which Gomez was allowed to withdraw P1,167,500.00 before Golden Savings was notified of the dishonor. The amount he has withdrawn must be charged not to Golden Savings but to Metrobank, which must bear the consequences of its own negligence. But the balance of P586,589.00 should be debited to Golden Savings, as obviously Gomez can no longer be permitted to withdraw this amount from his deposit because of the dishonor of the warrants. Gomez has in fact disappeared. To also credit the balance to Golden Savings would unduly enrich it at the expense of Metrobank, let alone the fact that it has already been informed of the dishonor of the treasury warrants. WHEREFORE, the challenged decision is AFFIRMED, with the modification that Paragraph 3 of the dispositive portion of the judgment of the lower court shall be reworded as follows: 3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and thereafter allowing defendant Golden Savings & Loan Association, Inc. to withdraw the amount outstanding thereon, if any, after the debit. SO ORDERED. Narvasa, Gancayco, Grio-Aquino and Medialdea, JJ., concur.

12 66 SCRA 29.F

Endnotes: 1 Rollo, pp. 12-13.chanrobles virtual law library 2 Ibid., p. 52.chanrobles virtual law library 3 Id., p. 14.chanrobles virtual law library 4 Id.chanrobles virtual law library 5 Through Judge Marciano T. Virola.chanrobles virtual law library 6 Penned by Ejercito, J., with Pe and Victor, JJ., concurring.chanrobles virtual law library 7 Rollo, p. 84.chanrobles virtual law library 8 TSN, July 29, 1983, p. 20.chanrobles virtual law library 9 Rollo, p. 61.chanrobles virtual law library 10 143 SCRA 20.chanrobles virtual law library 11 81 Phil. 359.chanrobles virtual law library

EN BANC G.R. No. L-22405 June 30, 1971

PHILIPPINE EDUCATION CO., INC., plaintiff-appellant, vs. MAURICIO A. SORIANO, ET AL., defendant-appellees.
Marcial Esposo for plaintiff-appellant. Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio G. Ibarra and Attorney Concepcion Torrijos-Agapinan for defendantsappellees.

been deducted from the bank's clearing account. For its part, on August 2 of the same year, the Bank of America debited appellant's account with the same amount and gave it advice thereof by means of a debit memo. On October 12, 1961 appellant requested the Postmaster General to reconsider the action taken by his office deducting the sum of P200.00 from the clearing account of the Bank of America, but his request was denied. So was appellant's subsequent request that the matter be referred to the Secretary of Justice for advice. Thereafter, appellant elevated the matter to the Secretary of Public Works and Communications, but the latter sustained the actions taken by the postal officers. In connection with the events set forth above, Montinola was charged with theft in the Court of First Instance of Manila (Criminal Case No. 43866) but after trial he was acquitted on the ground of reasonable doubt. On January 8, 1962 appellant filed an action against appellees in the Municipal Court of Manila praying for judgment as follows: WHEREFORE, plaintiff prays that after hearing defendants be ordered: (a) To countermand the notice given to the Bank of America on September 27, 1961, deducting from the said Bank's clearing account the sum of P200.00 represented by postal money order No. 124688, or in the alternative indemnify the plaintiff in the same amount with interest at 8-?% per annum from September 27, 1961, which is the rate of interest being paid by plaintiff on its overdraft account; (b) To pay to the plaintiff out of their own personal funds, jointly and severally, actual and moral damages in the amount of P1,000.00 or in such amount as will be proved and/or determined by this Honorable Court: exemplary damages in the amount of P1,000.00, attorney's fees of P1,000.00, and the costs of action. Plaintiff also prays for such other and further relief as may be deemed just and equitable. On November 17, 1962, after the parties had submitted the stipulation of facts reproduced at pages 12 to 15 of the Record on Appeal, the above-named court rendered judgment as follows: WHEREFORE, judgment is hereby rendered, ordering the defendants to countermand the notice given to the Bank of

DECISION DIZON, J.: An appeal from a decision of the Court of First Instance of Manila dismissing the complaint filed by the Philippine Education Co., Inc. against Mauricio A. Soriano, Enrico Palomar and Rafael Contreras. On April 18, 1958 Enrique Montinola sought to purchase from the Manila Post Office ten (10) money orders of P200.00 each payable to E.P. Montinola with address at Lucena, Quezon. After the postal teller had made out money orders numbered 124685, 124687-124695, Montinola offered to pay for them with a private checks were not generally accepted in payment of money orders, the teller advised him to see the Chief of the Money Order Division, but instead of doing so, Montinola managed to leave building with his own check and the ten(10) money orders without the knowledge of the teller. On the same date, April 18, 1958, upon discovery of the disappearance of the unpaid money orders, an urgent message was sent to all postmasters, and the following day notice was likewise served upon all banks, instructing them not to pay anyone of the money orders aforesaid if presented for payment. The Bank of America received a copy of said notice three days later. On April 23, 1958 one of the above-mentioned money orders numbered 124688 was received by appellant as part of its sales receipts. The following day it deposited the same with the Bank of America, and one day thereafter the latter cleared it with the Bureau of Posts and received from the latter its face value of P200.00. On September 27, 1961, appellee Mauricio A. Soriano, Chief of the Money Order Division of the Manila Post Office, acting for and in behalf of his co-appellee, Postmaster Enrico Palomar, notified the Bank of America that money order No. 124688 attached to his letter had been found to have been irregularly issued and that, in view thereof, the amount it represented had

America on September 27, 1961, deducting from said Bank's clearing account the sum of P200.00 representing the amount of postal money order No. 124688, or in the alternative, to indemnify the plaintiff in the said sum of P200.00 with interest thereon at the rate of 8-?% per annum from September 27, 1961 until fully paid; without any pronouncement as to cost and attorney's fees. The case was appealed to the Court of First Instance of Manila where, after the parties had resubmitted the same stipulation of facts, the appealed decision dismissing the complaint, with costs, was rendered. The first, second and fifth assignments of error discussed in appellant's brief are related to the other and will therefore be discussed jointly. They raise this main issue: that the postal money order in question is a negotiable instrument; that its nature as such is not in anyway affected by the letter dated October 26, 1948 signed by the Director of Posts and addressed to all banks with a clearing account with the Post Office, and that money orders, once issued, create a contractual relationship of debtor and creditor, respectively, between the government, on the one hand, and the remitters payees or endorses, on the other. It is not disputed that our postal statutes were patterned after statutes in force in the United States. For this reason, ours are generally construed in accordance with the construction given in the United States to their own postal statutes, in the absence of any special reason justifying a departure from this policy or practice. The weight of authority in the United States is that postal money orders are not negotiable instruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912), the reason behind this rule being that, in establishing and operating a postal money order system, the government is not engaging in commercial transactions but merely exercises a governmental power for the public benefit. It is to be noted in this connection that some of the restrictions imposed upon money orders by postal laws and regulations are inconsistent with the character of negotiable instruments. For instance, such laws and regulations usually provide for not more than one endorsement; payment of money orders may be withheld under a variety of circumstances (49 C.J. 1153). Of particular application to the postal money order in question are the conditions laid down in the letter of the Director of Posts of October 26, 1948 (Exhibit 3) to the Bank of America for the redemption of postal money orders received by it from its depositors. Among others, the condition is imposed that "in cases of adverse claim, the money order or money orders

involved will be returned to you (the bank) and the, corresponding amount will have to be refunded to the Postmaster, Manila, who reserves the right to deduct the value thereof from any amount due you if such step is deemed necessary." The conditions thus imposed in order to enable the bank to continue enjoying the facilities theretofore enjoyed by its depositors, were accepted by the Bank of America. The latter is therefore bound by them. That it is so is clearly referred from the fact that, upon receiving advice that the amount represented by the money order in question had been deducted from its clearing account with the Manila Post Office, it did not file any protest against such action. Moreover, not being a party to the understanding existing between the postal officers, on the one hand, and the Bank of America, on the other, appellant has no right to assail the terms and conditions thereof on the ground that the letter setting forth the terms and conditions aforesaid is void because it was not issued by a Department Head in accordance with Sec. 79 (B) of the Revised Administrative Code. In reality, however, said legal provision does not apply to the letter in question because it does not provide for a department regulation but merely sets down certain conditions upon the privilege granted to the Bank of America to accept and pay postal money orders presented for payment at the Manila Post Office. Such being the case, it is clear that the Director of Posts had ample authority to issue it pursuant to Sec. 1190 of the Revised Administrative Code. In view of the foregoing, We do not find it necessary to resolve the issues raised in the third and fourth assignments of error. WHEREFORE, the appealed decision being in accordance with law, the same is hereby affirmed with costs. Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Fernando, Teehankee, Barredo and Villamor, JJ., concur. Castro and Makasiar, JJ., took no part. .

10

SECOND DIVISION G.R. No. 74451 May 25, 1988

1975, defendant Casville, through its president, defendant Casals, ordered from plaintiff two units of garrett skidders ... The purchase order for the garrett skidders bearing No. 0051 and dated December 22, 1975 (Exhibit "A") contained the following terms and conditions: Two (2) units GARRETT Skidders Model 30A complete as basically described in the bulletin PRICE: F.O.B. dock Manila P485,000.00/unit For two (2) units P970,000.00 SHIPMENT: We will inform you the date and name of the vessel as soon as arranged. TERMS: By irrevocable domestic letter of credit to be issued in favor of THE EDWARD J. NELL CO. or ORDER payable in thirty six (36) months and will be opened within ninety (90) days after date of shipment. at first installment will be due one hundred eighty (180) days after date of shipment. Interest-14% per annum (Exhibit A) xxx xxx xxx ... in a letter dated April 21, 1976, defendants Casals and Casville requested from plaintiff the delivery of one (1) unit of the bidders, complete with tools and cables, to Cagayan de Oro, on or before Saturday, April 24,1976, on board a Lorenzo shipping vessel, with the information that an irrevocable Domestic Letter of Credit would be opened in plaintiff's favor on or before June 30, 1976 under the terms and conditions agreed upon (Exhibit "B") On May 3, 1976, in compliance with defendant Casvile's recognition request, plaintiff shipped to Cagayan de Oro City a Garrett skidder. Plaintiff paid the shipping cost in the amount of P10,640.00 because of the verbal assurance of defendant Casville that it would be covered by the letter of credit soon to be opened. xxx xxx xxx On July 15, 1976, defendant Casals handed to plaintiff a check in the amount of P300,000.00 postdated August 4, 1976, which was followed by another check of same date. Plaintiff considered these checks either as partial payment for the skidder that was already delivered to Cagayan de

EQUITABLE BANKING CORPORATION, Petitioner, vs. THE HONORABLE INTERMEDIATE APPELLATE COURT and THE EDWARD J. NELL CO., Respondents. MELENCIO-HERRERA, J.: In this Petition for Review on certiorari petitioner, Equitable Banking Corporation, prays that the adverse judgment against it rendered by respondent Appellate Court, 1 dated 4 October 1985, and its majority Resolution, dated 28 April 1986, denying petitioner's Motion for Reconsideration, 2be annulled and set aside. The facts pertinent to this Petition, as summarized by the Trial Court and adopted by reference by Respondent Appellate Court, emanated from the case entitled "Edward J. Nell Co. vs. Liberato V. Casals, Casville Enterprises, Inc., and Equitable Banking Corporation" of the Court of First Instance of Rizal (Civil Case No. 25112), and read: From the evidence submitted by the parties, the Court finds that sometime in 1975 defendant Liberato Casals went to plaintiff Edward J. Nell Company and told its senior sales engineer, Amado Claustro that he was interested in buying one of the plaintiff's garrett skidders. Plaintiff was a dealer of machineries, equipment and supplies. Defendant Casals represented himself as the majority stockholder, president and general manager of Casville Enterprises, Inc., a firm engaged in the large scale production, procurement and processing of logs and lumber products, which had a plywood plant in Sta. Ana, Metro Manila. After defendant Casals talked with plaintiff's sales engineer, he was referred to plaintiffs executive vice-president, Apolonio Javier, for negotiation in connection with the manner of payment. When Javier asked for cash payment for the skidders, defendant Casals informed him that his corporation, defendant Casville Enterprises, Inc., had a credit line with defendant Equitable Banking Corporation. Apparently, impressed with this assertion, Javier agreed to have the skidders paid by way of a domestic letter of credit which defendant Casals promised to open in plaintiffs favor, in lieu of cash payment. Accordingly, on December 22,

11

Oro or as reimbursement for the marginal deposit that plaintiff was supposed to pay. In a letter dated August 3, 1976 (Exhibit "C"), defendants Casville informed the plaintiff that their application for a letter of credit for the payment of the Garrett skidders had been approved by the Equitable Banking Corporation. However, the defendants said that they would need the sum of P300,000.00 to stand as collateral or marginal deposit in favor of Equitable Banking Corporation and an additional amount of P100,000.00, also in favor of Equitable Banking Corporation, to clear the title of the Estrada property belonging to defendant Casals which had been approved as security for the trust receipts to be issued by the bank, covering the above-mentioned equipment. Although the marginal deposit was supposed to be produced by defendant Casville Enterprises, plaintiff agreed to advance the necessary amount in order to facilitate the transaction. Accordingly, on August 5,1976, plaintiff issued a check in the amount of P400,000.00 (Exhibit "2") drawn against the First National City Bank and made payable to the order of Equitable Banking Corporation and with the following notation or memorandum: a/c of Casville Enterprises Inc. for Marginal deposit and payment of balance on Estrada Property to be used as security for trust receipt for opening L/C of Garrett Skidders in favor of the Edward J. Nell Co." Said check together with the cash disbursement voucher (Exhibit "2-A") containing the explanation: Payment for marginal deposit and other expenses re opening of L/C for account of Casville Ent.. A covering letter (Exhibit "3") was also sent and when the three documents were presented to Severino Santos, executive vice president of defendant bank, Santos did not accept them because the terms and conditions required by the bank for the opening of the letter of credit had not yet been agreed on. On August 9, 1976, defendant Casville wrote the bank applying for two letters of credit to cover its purchase from plaintiff of two Garrett skidders, under the following terms and conditions: a) On sight Letter of Credit for P485,000.00; b) One 36 months Letter of Credit for P606,000.00; c) P300,000.00

CASH marginal deposit1 d) Real Estate Collateral to secure the Trust Receipts; e) We shall chattel mortgage the equipments purchased even after payment of the first L/C as additional security for the balance of the second L/C and f) Other conditions you deem necessary to protect the interest of the bank." In a letter dated August 11, 1976 (Exhibit "D-l"), defendant bank replied stating that it was ready to open the letters of credit upon defendant's compliance of the following terms and conditions: c) 30% cash margin deposit; d) Acceptable Real Estate Collateral to secure the Trust Receipts; e) Chattel Mortgage on the equipment; and Ashville f) Other terms and conditions that our bank may impose. Defendant Casville sent a copy of the foregoing letter to the plaintiff enclosing three postdated checks. In said letter, plaintiff was informed of the requirements imposed by the defendant bank pointing out that the "cash marginal required under paragraph (c) is 30% of Pl,091,000.00 or P327,300.00 plus another P100,000.00 to clean up the Estrada property or a total of P427,300.00" and that the check covering said amount should be made payable "to the Order of EQUITABLE BANKING CORPORATION for the account of Casville Enterprises Inc." Defendant Casville also stated that the three (3) enclosed postdated checks were intended as replacement of the checks that were previously issued to plaintiff to secure the sum of P427,300.00 that plaintiff would advance to defendant bank for the account of defendant Casville. All the new checks were postdated November 19, 1976 and drawn in the sum of Pl45,500.00 (Exhibit "F"), P181,800.00 (Exhibit "G") and P100,000.00 (Exhibit "H"). On the same occasion, defendant Casals delivered to plaintiff TCT No. 11891 of the Register of Deeds of Quezon City and TCT No. 50851 of the Register of Deeds of Rizal covering two pieces of real estate properties. Subsequently, Cesar Umali, plaintiffs credit and collection manager, accompanied by a representative of defendant Casville, went to see Severino Santos to find out the status of the credit line being sought by defendant Casville. Santos assured Umali that the letters of credit would be opened as soon as the requirements imposed by defendant bank in its

12

letter dated August 11, 1976 had been complied with by defendant Casville. On August 16, 1976, plaintiff issued a check for P427,300.00, payable to the "order of EQUITABLE BANKING CORPORATION A/C CASVILLE ENTERPRISES, INC." and drawn against the first National City Bank (Exhibit "E-l"). The check did not contain the notation found in the previous check issued by the plaintiff (Exhibit "2") but the substance of said notation was reproduced in a covering letter dated August 16,1976 that went with the check (Exhibit "E"). Both the check and the covering letter were sent to defendant bank through defendant Casals. Plaintiff entrusted the delivery of the check and the latter to defendant Casals because it believed that no one, including defendant Casals, could encash the same as it was made payable to the defendant bank alone. Besides, defendant Casals was known to the bank as the one following up the application for the letters of credit. Upon receiving the check for P427,300.00 entrusted to him by plaintiff defendant Casals immediately deposited it with the defendant bank and the bank teller accepted the same for deposit in defendant Casville's checking account. After depositing said check, defendant Casville, acting through defendant Casals, then withdrew all the amount deposited. Meanwhile, upon their presentation for encashment, plaintiff discovered that the three checks (Exhibits "F, "G" and "H") in the total amount of P427,300.00, that were issued by defendant Casville as collateral were all dishonored for having been drawn against a closed account. As defendant Casville failed to pay its obligation to defendant bank, the latter foreclosed the mortgage executed by defendant Casville on the Estrada property which was sold in a public auction sale to a third party. Plaintiff allowed some time before following up the application for the letters of credit knowing that it took time to process the same. However, when the three checks issued to it by defendant Casville were dishonored, plaintiff became apprehensive and sent Umali on November 29, 1976, to inquire about the status of the application for the letters of credit. When plaintiff was informed that no letters of credit were opened by the defendant bank in its favor and then discovered that defendant Casville had in the meanwhile withdrawn the entire amount of P427,300.00,

without paying its obligation to the bank plaintiff filed the instant action. While the the instant case was being tried, defendants Casals and Casville assigned the garrett skidder to plaintiff which credited in favor of defendants the amount of P450,000.00, as partial satisfaction of plaintiff's claim against them. Defendants Casals and Casville hardly disputed their liability to plaintiff. Not only did they show lack of interest in disputing plaintiff's claim by not appearing in most of the hearings, but they also assigned to plaintiff the garrett skidder which is an action of clear recognition of their liability. What is left for the Court to determine, therefore, is only the liability of defendant bank to plaintiff. xxx xxx xxx Resolving that issue, the Trial Court rendered judgment, affirmed by Respondent Court in toto, the pertinent portion of which reads: xxx xxx xxx Defendants Casals and Casville Enterprises and Equitable Banking Corporation are ordered to pay plaintiff, jointly and severally, the sum of P427,300.00, representing the amount of plaintiff's check which defendant bank erroneously credited to the account of defendant Casville and which defendants Casal and Casville misappropriated, with 12% interest thereon from April 5, 1977, until the said sum is fully paid. Defendant Equitable Banking Corporation is ordered to pay plaintiff attorney's fees in the sum of P25,000.00. Proportionate cost against all the defendants. SO ORDERED. The crucial issue to resolve is whether or not petitioner Equitable Banking Corporation (briefly, the Bank) is liable to private respondent Edward J. Nell Co. (NELL, for short) for the value of the second check issued by NELL, Exhibit "E-l," which was made payable to the order of EQUITABLE Ashville BANIUNG CORPORATION A/C OF CASVILLE ENTERPRISES INC. and which the Bank teller credited to the account of Casville.

13

The Trial Court found that the amount of the second check had been erroneously credited to the Casville account; held the Bank liable for the mistake of its employees; and ordered the Bank to pay NELL the value of the check in the sum of P427,300.00, with legal interest. Explained the Trial Court: The Court finds that the check in question was payable only to the defendant bank and to no one else. Although the words "A/C OF CASVILLE ENTERPRISES INC. "appear on the face of the check after or under the name of defendant bank, the payee was still the latter. The addition of said words did not in any way make Casville Enterprises, Inc. the Payee of the instrument for the words merely indicated for whose account or in connection with what account the check was issued by the plaintiff. Indeed, the bank teller who received it was fully aware that the check was not negotiable since he stamped thereon the words "NON-NEGOTIABLE For Payee's Account Only" and "NON-NEGOTIABLE TELLER NO. 4, August 17,1976 EQUITABLE BANKING CORPORATION. But said teller should have exercised more prudence in the handling of Id check because it was not made out in the usual manner. The addition of the words A/C OF CASVILLE ENTERPRISES INC." should have placed the teller on guard and he should have clarified the matter with his superiors. Instead of doing so, however, the teller decided to rely on his own judgment and at the risk of making a wrong decision, credited the entire amount in the name of defendant Casville although the latter was not the payee named in the check. Such mistake was crucial and was, without doubt, the proximate cause of plaintiffs defraudation. xxx xxx xxx Respondent Appellate Court upheld the above conclusions stating in addition: 1) The appellee made the subject check payable to appellant's order, for the account of Casville Enterprises, Inc. In the light of the other facts, the directive was for the appellant bank to apply the value of the check as payment for the letter of credit which Casville Enterprises, Inc. had previously applied for in favor of the appellee (Exhibit D-1, p. 5). The issuance of the subject check was precisely to meet the bank's prior requirement of payment before

issuing the letter of credit previously applied for by Casville Enterprises in favor of the appellee; xxx xxx xxx We disagree. 1) The subject check was equivocal ambiguous. By making the check read: and patently

Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF CASVILLE ENTERPRISES, INC. the payee ceased to be indicated with reasonable certainty in contravention of Section 8 of the Negotiable Instruments Law. 3 As worded, it could be accepted as deposit to the account of the party named after the symbols "A/C," or payable to the Bank as trustee, or as an agent, for Casville Enterprises, Inc., with the latter being the ultimate beneficiary. That ambiguity is to be taken contra proferentem that is, construed against NELL who caused the ambiguity and could have also avoided it by the exercise of a little more care. Thus, Article 1377 of the Civil Code, provides: Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. 2) Contrary to the finding of respondent Appellate Court, the subject check was, initially, not non-negotiable. Neither was it a crossed check. The rubber-stamping transversall on the face of the subject check of the words "Non-negotiable for Payee's Account Only" between two (2) parallel lines, and "Non-negotiable, Teller- No. 4, August 17, 1976," separately boxed, was made only by the Bank teller in accordance with customary bank practice, and not by NELL as the drawer of the check, and simply meant that thereafter the same check could no longer be negotiated. 3) NELL's own acts and omissions in connection with the drawing, issuance and delivery of the 16 August 1976 check, Exhibit "E-l," and its implicit trust in Casals, were the proximate cause of its own defraudation: (a) The original check of 5 August 1976, Exhibit "2," was payable to the order solely of "Equitable Banking Corporation." NELL changed the payee in the subject check, Exhibit "E", however, to "Equitable Banking Corporation, A/C of Casville Enterprises Inc.," upon Casals request. NELL also eliminated

14

both the cash disbursement voucher accompanying the check which read: Payment for marginal deposit and other expense re opening of L/C for account of Casville Enterprises. and the memorandum: a/c of Casville Enterprises Inc. for Marginal deposit and payment of balance on Estrada Property to be used as security for trust receipt for opening L/C of Garrett Skidders in favor of the Edward Ashville J Nell Co. Evidencing the real nature of the transaction was merely a separate covering letter, dated 16 August 1976, which Casals, sinisterly enough, suppressed from the Bank officials and teller. (b) NELL entrusted the subject check and its covering letter, Exhibit "E," to Casals who, obviously, had his own antagonistic interests to promote. Thus it was that Casals did not purposely present the subject check to the Executive Vice-President of the Bank, who was aware of the negotiations regarding the Letter of Credit, and who had rejected the previous check, Exhibit "2," including its three documents because the terms and conditions required by the Bank for the opening of the Letter of Credit had not yet been agreed on. (c) NELL was extremely accommodating to Casals. Thus, to facilitate the sales transaction, NELL even advanced the marginal deposit for the garrett skidder. It is, indeed, abnormal for the seller of goods, the price of which is to be covered by a letter of credit, to advance the marginal deposit for the same. (d) NELL had received three (3) postdated checks all dated 16 November, 1976 from Casvine to secure the subject check and had accepted the deposit with it of two (2) titles of real properties as collateral for said postdated checks. Thus, NELL was erroneously confident that its interests were sufficiently protected. Never had it suspected that those postdated checks would be dishonored, nor that the subject check would be utilized by Casals for a purpose other than for opening the letter of credit. In the last analysis, it was NELL's own acts, which put it into the power of Casals and Casville Enterprises to perpetuate the fraud against it and, consequently, it must bear the loss (Blondeau, et al., vs. Nano, et al., 61 Phil. 625 [1935]; Sta.

Maria vs. Hongkong and Shanghai Banking Corporation, 89 Phil. 780 [1951]; Republic of the Philippines vs. Equitable Banking Corporation, L-15895, January 30,1964, 10 SCRA 8). ... As between two innocent persons, one of whom must suffer the consequence of a breach of trust, the one who made it possible by his act of confidence must bear the loss. WHEREFORE, the Petition is granted and the Decision of respondent Appellate Court, dated 4 October 1985, and its majority Resolution, dated 28 April 1986, denying petitioner's Motion for Reconsideration, are hereby SET ASIDE. The Decision of the then Court of First Instance of Rizal, Branch XI. is modified in that petitioner Equitable Banking Corporation is absolved from any and all liabilities to the private respondent, Edward J. Nell Company, and the Amended Complaint against petitioner bank is hereby ordered dismissed. No costs. SO ORDERED. Yap, C.J., Paras and Sarmiento, J.J., concur. Padilla, J., took no part.
Endnotes: 1 Penned by, Justice Crisolito Pascual and concurred in by Justices Jose C. Campos, Jr., Serafin Ashville E Camilon, and Desiderio P. Jurado.chanrobles virtual law library 2 With Justice Desiderio P. Jurado, dissenting 3 Section 8. ...chanrobles virtual law library Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty.

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SECOND DIVISION G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., Petitioner, vs. COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, Respondents. REGALADO, J.: This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1affirming with modifications, the earlier decision of the Regional Trial Court of Manila, Branch XLII, 2which dismissed the complaint filed therein by herein petitioner against respondent bank. The undisputed background of this case, as found by the court a quo and adopted by respondent court, appears of record: 1. On various dates, defendant, a commercial banking institution, through its Sucat Branch 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, as follows: (Joint Partial Stipulation of Facts and Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1 to 280); CTD 22 26 2 4 5 5 5 8 9 9 9 --Total Dates Feb. Feb. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. Mar. ---82 82 82 82 82 82 82 82 82 82 82 Serial Nos. 90101 74602 74701 90127 74797 89965 70147 90001 90023 89991 90251 to to to to to to to to to to to 90120 74691 74740 90146 94800 89986 90150 90020 90050 90000 90272 Quantity Amount 20 90 40 20 4 22 4 20 28 10 22 280 === P80,000 360,000 160,000 80,000 16,000 88,000 16,000 80,000 112,000 40,000 88,000 P1,120,000

5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in the amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On the same date, said depositor executed a notarized Deed of Assignment of Time Deposit (Exhibit 562) which stated, among others, that he (de la Cruz) surrenders to defendant bank "full control of the indicated time deposits from and after date" of the assignment and further authorizes said bank to 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 (TSN, February 9, 1987, pp. 60-62). 6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc., went to the defendant bank's Sucat branch and presented for verification the CTDs declared lost by Angel dela Cruz alleging that the same were delivered to herein plaintiff "as security for purchases made with Caltex Philippines, Inc." by said depositor (TSN, February 9, 1987, pp. 54-68). 7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from herein plaintiff formally informing it of its possession of the CTDs in question and of its decision to pre-terminate the same. 8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former "a copy of the document evidencing the guarantee agreement with Mr. Angel dela Cruz" as well as "the details of Mr. Angel dela Cruz" obligation against which plaintiff proposed to apply the time deposits (Defendant's Exhibit 564). 9. No copy of the requested documents was furnished herein defendant. 10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the value of the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566). 11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due and on August 5, 1983, the latter set-off and applied the time deposits in question to the payment of the matured loan (TSN, February 9, 1987, pp. 130-131). 12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be ordered to pay it the aggregate value of the certificates of time deposit of P1,120,000.00 plus accrued interest and compounded interest therein at 16% per annum, moral and exemplary damages as well as attorney's fees. After trial, the court a quo rendered its decision dismissing the instant complaint. 3 On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint, hence this petition wherein petitioner faults respondent court in ruling (1) that the subject certificates of deposit are non-negotiable despite being clearly negotiable instruments; (2) that petitioner did not become a holder in due course of the said certificates of deposit; and (3) in disregarding the pertinent provisions of the Code of Commerce relating to lost instruments payable to bearer. 4 The instant petition is bereft of merit. A sample text of the certificates of time deposit is reproduced below to provide a better understanding of the issues involved in this recourse.

========

2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in connection with his purchased of fuel products from the latter (Original Record, p. 208). 3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch Manger, that he lost all the certificates of time deposit in dispute. Mr. Tiangco advised said depositor to execute and submit a notarized Affidavit of Loss, as required by defendant bank's procedure, if he desired replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50). 4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit of loss, 280 replacement CTDs were issued in favor of said depositor (Defendant's Exhibits 282-561).

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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) ---------- ----------AUTHORIZED SIGNATURES 5 Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as follows: . . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued, it is important to note that after the word "BEARER" stamped on the space provided supposedly for the name of the depositor, the words "has deposited" a certain amount follows. The document further provides that the amount deposited shall be "repayable to said depositor" on the period indicated. Therefore, the text of the instrument(s) themselves manifest with clarity that they are payable, not to whoever purports to be the "bearer" but only to the specified person indicated therein, the depositor. In effect, the appellee bank acknowledges its depositor Angel dela Cruz as the person who made the deposit and further engages itself to pay said depositor the amount indicated thereon at the stipulated date. 6 We disagree with these findings and conclusions, and hereby hold that the CTDs in question are negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites for an instrument to become negotiable, viz: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court that the depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz. xxx xxx xxx Atty. Calida:

q In other words Mr. Witness, you are saying that per books of the bank, the depositor referred (sic) in these certificates states that it was Angel dela Cruz? witness: a Yes, your Honor, and we have the record to show that Angel dela Cruz was the one who cause (sic) the amount. Atty. Calida: q And no other person or entity or company, Mr. Witness? witness: a None, your Honor. xxx xxx xxx Atty. Calida: q Mr. Witness, who is the depositor identified in all of these certificates of time deposit insofar as the bank is concerned? witness: a Angel dela Cruz is the depositor. 8 xxx xxx xxx On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face of the instrument itself. 9In the construction of a bill or note, the intention of the parties is to control, if it can be legally ascertained. 10While the writing may be read in the light of surrounding circumstances in order to more perfectly understand the intent and meaning of the parties, yet as they have constituted the writing to be the only outward and visible expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words express, but what is the meaning of the words they have used. What the parties meant must be determined by what they said. 11 Contrary to what respondent court held, 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
7

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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. 12 The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz, as ultimately ascertained, 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 De la Cruz' 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. In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel products" (Emphasis ours.) 13This admission is conclusive upon petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. 14 A party may not go back on his own acts and representations to the prejudice of the other party who relied upon them. 15 In the law of evidence, whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or omission, be permitted to falsify it. 16 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 aforequoted. Besides, when respondent bank, as defendant in the court below, moved for a bill of particularity therein 17praying, among others, that petitioner, as plaintiff, 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, plaintiff corporation opposed the motion. 18Had it produced the receipt prayed for, it could have proved, if such truly was the fact, 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. 19 Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs. Philippine National Bank, et al. 20is apropos: . . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom: The character of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of

the transfer was. If it was intended to secure the payment of money, it must be construed as a pledge; but if there was some other intention, it is not a pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its object and character might still be qualified and explained by contemporaneous writing declaring it to have been a deposit of the property as collateral security. It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge if the debt continues in inexistence and is not discharged by the transfer, and that accordingly the use of the terms ordinarily importing conveyance of absolute ownership will not be given that effect in such a transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and unambiguous language or other circumstances excluding an intent to pledge. 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, 21 and a holder may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. 22In 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, for obvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we even disregard the fact that the amount involved was not disclosed) 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, necessarily, 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. 23As 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, 24which inceptively provide: 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 quoted at the start of this opinion show that petitioner failed to produce any document evidencing any contract of pledge or guarantee agreement between it and Angel de la Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective against and binding upon respondent bank. The requirement under Article 2096 aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge contract, but a rule of substantive law prescribing a condition

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without which the execution of a pledge contract cannot affect third persons adversely. 26 On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank was embodied in a public instrument. 27With regard to this other mode of transfer, the Civil Code specifically declares: Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property. Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent of its lien nor the execution of any public instrument which could affect or bind private respondent. Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better right over the CTDs in question. Finally, 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, on the ground that petitioner failed to raised that issue in the lower court. 28 On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private respondent was not included in the stipulation of the parties and in the statement of issues submitted by them to the trial court. 29The issues agreed upon by them for resolution in this case are: 1. Whether or not the CTDs as worded are negotiable instruments. 2. Whether or not defendant could legally apply the amount covered by the CTDs against the depositor's loan by virtue of the assignment (Annex "C"). 3. Whether or not there was legal compensation or set off involving the amount covered by the CTDs and the depositor's outstanding account with defendant, if any. 4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity date provided therein. 5. Whether or not plaintiff is entitled to the proceeds of the CTDs. 6. Whether or not the parties can recover damages, attorney's fees and litigation expenses from each other. As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the foregoing enumeration does not include the issue of negligence on the part of respondent bank. An issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is barred by estoppel. 30 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. 31chanrobles virtual law library Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are properly raised. Thus, to obviate the element of surprise, parties are expected to disclose at a pre-trial conference all issues of law and fact which they intend to raise at the trial, except such as may involve privileged or impeaching matters. The determination of issues

at a pre-trial conference bars the consideration of other questions on appeal. 32chanrobles virtual law library To accept petitioner's suggestion that respondent bank's supposed negligence may be considered encompassed by the issues on its right to preterminate and receive the proceeds of the CTDs would be tantamount to saying that petitioner could raise on appeal any issue. We agree with private respondent that the broad ultimate issue of petitioner's entitlement to the proceeds of the questioned certificates can be premised on a multitude of other legal reasons and causes of action, of which respondent bank's supposed negligence is only one. Hence, petitioner's submission, if accepted, would render a pre-trial delimitation of issues a useless exercise. 33 chanrobles virtual law library Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner still cannot have the odds in its favor. A close scrutiny of the provisions of the Code of Commerce laying down the rules to be followed in case of lost instruments payable to bearer, which it invokes, will reveal that said provisions, even assuming their applicability to the CTDs in the case at bar, are merely permissive and not mandatory. The very first article cited by petitioner speaks for itself. Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge or court of competent jurisdiction, asking that the principal, interest or dividends due or about to become due, be not paid a third person, as well as in order to prevent the ownership of the instrument that a duplicate be issued him. (Emphasis ours.) xxx xxx xxx The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for the issuance of a duplicate of the lost instrument. Where the provision reads "may," this word shows that it is not mandatory but discretional. 34 The word "may" is usually permissive, not mandatory. 35It is an auxiliary verb indicating liberty, opportunity, permission and possibility. 36 Moreover, as correctly analyzed by private respondent, 37Articles 548 to 558 of the Code of Commerce, on which petitioner seeks to anchor respondent bank's supposed negligence, merely established, on the one hand, a right of recourse in favor of a dispossessed owner or holder of a bearer instrument so that he may obtain a duplicate of the same, and, on the other, an option in favor of the party liable thereon who, for some valid ground, may elect to refuse to issue a replacement of the instrument. Significantly, none of the provisions cited by petitioner categorically restricts or prohibits the issuance a duplicate or replacement instrument sans compliance with the procedure outlined therein, and none establishes a mandatory precedent requirement therefor. WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed decision is hereby AFFIRMED. SO ORDERED. Narvasa, C.J., Padilla and Nocon, JJ., concur.
Endnotes: 1 Per Justice Segundino G. Chua, with the concurrence of Justices Santiago M. Kapunan and Luis L. Victor.chanrobles virtual law library 2 Judge Ramon Mabutas, Jr., presiding; Rollo, 64-88.chanrobles virtual law library 3 Rollo, 24-26.chanrobles virtual law library

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4 Ibid., 12.chanrobles virtual law library 5 Exhibit A, Documentary Evidence for the Plaintiff, 8.chanrobles virtual law library 6 Rollo, 28.chanrobles virtual law library 7 TSN, February 9, 1987, 46-47.chanrobles virtual law library 8 Ibid., id., 152-153.chanrobles virtual law library 9 11 Am. Jur. 2d, Bills and Notes, 79.chanrobles virtual law library 10 Ibid., 86.chanrobles virtual law library 11 Ibid., 87-88.chanrobles virtual law library 12 Art. 1377, Civil Code.chanrobles virtual law library 13 Exhibit 563, Documentary Evidence for the Defendant, 442; Original Record, 211.chanrobles virtual law library 14 Panay Electric Co., Inc. vs. Court of Appeals, et al., 174 SCRA 500 (1989).chanrobles virtual law library 15 Philippine National Bank vs. Intermediate Appellate Court, et al., 189 SCRA 680 (1990).chanrobles virtual law library 16 Section 2(a), Rule 131, Rules of Court.chanrobles virtual law library 17 Original Record, 152.chanrobles virtual law library 18 Ibid., 154.chanrobles virtual law library 19 Section 3(e), Rule 131, Rules of Court.chanrobles virtual law library 20 174 SCRA 295 (1989), jointly decided with Overseas Bank of Manila vs. Court of Appeals, et al., G.R. No. 60907.chanrobles virtual law library 21 Sec. 30, Act No. 2031.chanrobles virtual law library 22 Sec. 191, id.chanrobles virtual law library 23 Sec. 27, id.; see also Art. 2118, Civil Code.chanrobles virtual law library 24 Commentaries and Jurisprudence on the Philippine Commercial Laws, T.C. Martin, 1985 Rev. Ed., Vol. I, 134; Art. 18, Civil Code; Sec. 196, Act No. 2031.chanrobles virtual law library 25 Rollo, 25.chanrobles virtual law library 26 Tec Bi & Co. vs. Chartered Bank of India, Australia and China, 41 Phil. 596 (1916); Ocejo, Perez & Co. vs. The International Banking Corporation, 37 Phil. 631 (1918); Te Pate vs. Ingersoll, 43 Phil. 394 (1922).chanrobles virtual law library 27 Rollo, 25.chanrobles virtual law library 28 Ibid., 15.chanrobles virtual law library 29 Joint Partial Stipulation of Facts and Statement of Issues, dated November 27, 1984; Original Record, 209.chanrobles virtual law library 30 Mejorada vs. Municipal Council of Dipolog, 52 SCRA 451 (1973).chanrobles virtual law library 31 Sec. 18, Rule 46, Rules of Court; Garcia, et al. vs. Court of Appeals, et al., 102 SCRA 597 (1981); Matienzo vs. Servidad, 107 SCRA 276 (1981); Aguinaldo Industries Corporation, etc. vs. Commissioner of Internal Revenue, et al., 112 SCRA 136 (1982); Dulos Realty & Development Corporation vs. Court of Appeals, et al., 157 SCRA 425 (1988).chanrobles virtual law library 32 Bergado vs. Court of Appeals, et al., 173 SCRA 497 (1989).chanrobles virtual law library 33 Rollo, 58.chanrobles virtual law library 34 U.S. vs. Sanchez, 13 Phil. 336 (1909); Capati vs. Ocampo, 113 SCRA 794 (1982).chanrobles virtual law library 35 Luna vs. Abaya, 86 Phil. 472 (1950).chanrobles virtual law library 36 Philippine Law Dictionary, F.B. Moreno, Third Edition, 590.chanrobles virtual law library 37 Rollo, 59.

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MUELLER & MARTIN vs. LIBERTY INS. BANK 219 SW 465

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THIRD DIVISION G.R. No. 170325 September 26, 2008 PHILIPPINE NATIONAL BANK, Petitioner, vs. ERLANDO T. RODRIGUEZ and NORMA RODRIGUEZ, Respondents. DECISION REYES, R.T., J.: WHEN the payee of the check is not intended to be the true recipient of its proceeds, is it payable to order or bearer? What is the fictitious-payee rule and who is liable under it? Is there any exception? These questions seek answers in this petition for review on certiorari of the Amended Decision1 of the Court of Appeals (CA) which affirmed with modification that of the Regional Trial Court (RTC).2 The Facts The facts as borne by the records are as follows: Respondents-Spouses Erlando and Norma Rodriguez were clients of petitioner Philippine National Bank (PNB), Amelia Avenue Branch, Cebu City. They maintained savings and demand/checking accounts, namely, PNBig Demand Deposits (Checking/Current Account No. 810624-6 under the account name Erlando and/or Norma Rodriguez), and PNBig Demand Deposit (Checking/Current Account No. 810480-4 under the account name Erlando T. Rodriguez). The spouses were engaged in the informal lending business. In line with their business, they had a discounting3 arrangement with the Philnabank Employees Savings and Loan Association (PEMSLA), an association of PNB employees. Naturally, PEMSLA was likewise a client of PNB Amelia Avenue Branch. The association maintained current and savings accounts with petitioner bank. PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the postdated checks issued to members whenever the association was short of funds. As was customary, the spouses would replace the postdated checks with their own checks issued in the name of the members.

It was PEMSLAs policy not to approve applications for loans of members with outstanding debts. To subvert this policy, some PEMSLA officers devised a scheme to obtain additional loans despite their outstanding loan accounts. They took out loans in the names of unknowing members, without the knowledge or consent of the latter. The PEMSLA checks issued for these loans were then given to the spouses for rediscounting. The officers carried this out by forging the indorsement of the named payees in the checks. In return, the spouses issued their personal checks (Rodriguez checks) in the name of the members and delivered the checks to an officer of PEMSLA. The PEMSLA checks, on the other hand, were deposited by the spouses to their account. Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings account without any indorsement from the named payees. This was an irregular procedure made possible through the facilitation of Edmundo Palermo, Jr., treasurer of PEMSLA and bank teller in the PNB Branch. It appears that this became the usual practice for the parties. For the period November 1998 to February 1999, the spouses issued sixty nine (69) checks, in the total amount of P2,345,804.00. These were payable to forty seven (47) individual payees who were all members of PEMSLA.4 Petitioner PNB eventually found out about these fraudulent acts. To put a stop to this scheme, PNB closed the current account of PEMSLA. As a result, the PEMSLA checks deposited by the spouses were returned or dishonored for the reason "Account Closed." The corresponding Rodriguez checks, however, were deposited as usual to the PEMSLA savings account. The amounts were duly debited from the Rodriguez account. Thus, because the PEMSLA checks given as payment were returned, spouses Rodriguez incurred losses from the rediscounting transactions. RTC Disposition Alarmed over the unexpected turn of events, the spouses Rodriguez filed a civil complaint for damages against PEMSLA, the Multi-Purpose Cooperative of Philnabankers (MCP), and petitioner PNB. They sought to recover the value of their checks that were deposited to the PEMSLA savings account amounting to P2,345,804.00. The spouses contended that because PNB credited the checks to the PEMSLA account even without indorsements, PNB violated

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its contractual obligation to them as depositors. PNB paid the wrong payees, hence, it should bear the loss. PNB moved to dismiss the complaint on the ground of lack of cause of action. PNB argued that the claim for damages should come from the payees of the checks, and not from spouses Rodriguez. Since there was no demand from the said payees, the obligation should be considered as discharged. In an Order dated January 12, 2000, the RTC denied PNBs motion to dismiss. In its Answer,5 PNB claimed it is not liable for the checks which it paid to the PEMSLA account without any indorsement from the payees. The bank contended that spouses Rodriguez, the makers, actually did not intend for the named payees to receive the proceeds of the checks. Consequently, the payees were considered as "fictitious payees" as defined under the Negotiable Instruments Law (NIL). Being checks made to fictitious payees which are bearer instruments, the checks were negotiable by mere delivery. PNBs Answer included its cross-claim against its co-defendants PEMSLA and the MCP, praying that in the event that judgment is rendered against the bank, the cross-defendants should be ordered to reimburse PNB the amount it shall pay. After trial, the RTC rendered judgment in favor of spouses Rodriguez (plaintiffs). It ruled that PNB (defendant) is liable to return the value of the checks. All counterclaims and cross-claims were dismissed. The dispositive portion of the RTC decision reads: WHEREFORE, in view of the foregoing, the Court hereby renders judgment, as follows: 1. Defendant is hereby ordered to pay the plaintiffs the total amount of P2,345,804.00 or reinstate or restore the amount of P775,337.00 in the PNBig Demand Deposit Checking/Current Account No. 810480-4 of Erlando T. Rodriguez, and the amount of P1,570,467.00 in the PNBig Demand Deposit, Checking/Current Account No. 810624-6 of Erlando T. Rodriguez and/or Norma Rodriguez, plus legal rate of interest thereon to be computed from the filing of this complaint until fully paid; 2. The defendant PNB is hereby ordered to pay the plaintiffs the following reasonable amount of damages suffered by

them taking into consideration the standing of the plaintiffs being sugarcane planters, realtors, residential subdivision owners, and other businesses: (a) Consequential damages, unearned income in the amount of P4,000,000.00, as a result of their having incurred great dificulty (sic) especially in the residential subdivision business, which was not pushed through and the contractor even threatened to file a case against the plaintiffs; (b) Moral damages in the amount of P1,000,000.00; (c) Exemplary damages in the amount of P500,000.00; (d) Attorneys fees in the amount of P150,000.00 considering that this case does not involve very complicated issues; and for the (e) Costs of suit. 3. Other claims and counterclaims are hereby dismissed.6 CA Disposition PNB appealed the decision of the trial court to the CA on the principal ground that the disputed checks should be considered as payable to bearer and not to order. In a Decision7 dated July 22, 2004, the CA reversed and set aside the RTC disposition. The CA concluded that the checks were obviously meant by the spouses to be really paid to PEMSLA. The court a quo declared: We are not swayed by the contention of the plaintiffsappellees (Spouses Rodriguez) that their cause of action arose from the alleged breach of contract by the defendantappellant (PNB) when it paid the value of the checks to PEMSLA despite the checks being payable to order. Rather, we are more convinced by the strong and credible evidence for the defendant-appellant with regard to the plaintiffsappellees and PEMSLAs business arrangement that the value of the rediscounted checks of the plaintiffs-appellees would be deposited in PEMSLAs account for payment of the loans it has approved in exchange for PEMSLAs checks with the full value of the said loans. This is the only obvious explanation as to why all the disputed sixty-nine (69) checks were in the possession of PEMSLAs errand boy for presentment to the defendant-appellant that led to this present controversy. It also appears that the teller who accepted the said checks was PEMSLAs officer, and that such was a regular practice by the parties until the

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defendant-appellant discovered the scam. The logical conclusion, therefore, is that the checks were never meant to be paid to order, but instead, to PEMSLA. We thus find no breach of contract on the part of the defendant-appellant. According to plaintiff-appellee Erlando Rodriguez testimony, PEMSLA allegedly issued post-dated checks to its qualified members who had applied for loans. However, because of PEMSLAs insufficiency of funds, PEMSLA approached the plaintiffs-appellees for the latter to issue rediscounted checks in favor of said applicant members. Based on the investigation of the defendant-appellant, meanwhile, this arrangement allowed the plaintiffs-appellees to make a profit by issuing rediscounted checks, while the officers of PEMSLA and other members would be able to claim their loans, despite the fact that they were disqualified for one reason or another. They were able to achieve this conspiracy by using other members who had loaned lesser amounts of money or had not applied at all. x x x. 8 (Emphasis added) The CA found that the checks were bearer instruments, thus they do not require indorsement for negotiation; and that spouses Rodriguez and PEMSLA conspired with each other to accomplish this money-making scheme. The payees in the checks were "fictitious payees" because they were not the intended payees at all. The spouses Rodriguez moved for reconsideration. They argued, inter alia, that the checks on their faces were unquestionably payable to order; and that PNB committed a breach of contract when it paid the value of the checks to PEMSLA without indorsement from the payees. They also argued that their cause of action is not only against PEMSLA but also against PNB to recover the value of the checks. On October 11, 2005, the CA reversed itself via an Amended Decision, the last paragraph and fallo of which read: In sum, we rule that the defendant-appellant PNB is liable to the plaintiffs-appellees Sps. Rodriguez for the following: 1. Actual damages in the amount of P2,345,804 with interest at 6% per annum from 14 May 1999 until fully paid; 2. Moral damages in the amount of P200,000; 3. Attorneys fees in the amount of P100,000; and 4. Costs of suit.

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by Us AFFIRMING WITH MODIFICATION the assailed decision rendered in Civil Case No. 99-10892, as set forth in the immediately next preceding paragraph hereof, and SETTING ASIDE Our original decision promulgated in this case on 22 July 2004. SO ORDERED.9 The CA ruled that the checks were payable to order. According to the appellate court, PNB failed to present sufficient proof to defeat the claim of the spouses Rodriguez that they really intended the checks to be received by the specified payees. Thus, PNB is liable for the value of the checks which it paid to PEMSLA without indorsements from the named payees. The award for damages was deemed appropriate in view of the failure of PNB to treat the Rodriguez account with the highest degree of care considering the fiduciary nature of their relationship, which constrained respondents to seek legal action. Hence, the present recourse under Rule 45. Issues The issues may be compressed to whether the subject checks are payable to order or to bearer and who bears the loss? PNB argues anew that when the spouses Rodriguez issued the disputed checks, they did not intend for the named payees to receive the proceeds. Thus, they are bearer instruments that could be validly negotiated by mere delivery. Further, testimonial and documentary evidence presented during trial amply proved that spouses Rodriguez and the officers of PEMSLA conspired with each other to defraud the bank. Our Ruling Prefatorily, amendment of decisions is more acceptable than an erroneous judgment attaining finality to the prejudice of innocent parties. A court discovering an erroneous judgment before it becomes final may, motu proprio or upon motion of the parties, correct its judgment with the singular objective of achieving justice for the litigants.10 However, a word of caution to lower courts, the CA in Cebu in this particular case, is in order. The Court does not sanction careless disposition of cases by courts of justice.

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The highest degree of diligence must go into the study of every controversy submitted for decision by litigants. Every issue and factual detail must be closely scrutinized and analyzed, and all the applicable laws judiciously studied, before the promulgation of every judgment by the court. Only in this manner will errors in judgments be avoided. Now to the core of the petition. As a rule, when the payee is fictitious or not intended to be the true recipient of the proceeds, the check is considered as a bearer instrument. A check is "a bill of exchange drawn on a bank payable on demand."11 It is either an order or a bearer instrument. Sections 8 and 9 of the NIL states:
SEC. 8. When payable to order. The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of (a) A payee who is not maker, drawer, or drawee; or (b) The drawer or maker; or (c) The drawee; or (d) Two or more payees jointly; or (e) One or some of several payees; or (f) The holder of an office for the time being. Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty. SEC. 9. When payable to bearer. The instrument is payable to bearer (a) When it is expressed to be so payable; or (b) When it is payable to a person named therein or bearer; or (c) When it is payable to the order of a fictitious or non-existing person, and such fact is known to the person making it so payable; or (d) When the name of the payee does not purport to be the name of any person; or (e) Where the only or last indorsement is an indorsement in blank.12 (Underscoring supplied)

SEC. 30. What constitutes negotiation. An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder completed by delivery.

A check that is payable to a specified payee is an order instrument. However, under Section 9(c) of the NIL, a check payable to a specified payee may nevertheless be considered as a bearer instrument if it is payable to the order of a fictitious or non-existing person, and such fact is known to the person making it so payable. Thus, checks issued to "Prinsipe Abante" or "Si Malakas at si Maganda," who are well-known characters in Philippine mythology, are bearer instruments because the named payees are fictitious and non-existent. We have yet to discuss a broader meaning of the term "fictitious" as used in the NIL. It is for this reason that We look elsewhere for guidance. Court rulings in the United States are a logical starting point since our law on negotiable instruments was directly lifted from the Uniform Negotiable Instruments Law of the United States.13 A review of US jurisprudence yields that an actual, existing, and living payee may also be "fictitious" if the maker of the check did not intend for the payee to in fact receive the proceeds of the check. This usually occurs when the maker places a name of an existing payee on the check for convenience or to cover up an illegal activity. 14 Thus, a check made expressly payable to a non-fictitious and existing person is not necessarily an order instrument. If the payee is not the intended recipient of the proceeds of the check, the payee is considered a "fictitious" payee and the check is a bearer instrument. In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears the loss. When faced with a check payable to a fictitious payee, it is treated as a bearer instrument that can be negotiated by delivery. The underlying theory is that one cannot expect a fictitious payee to negotiate the check by placing his indorsement thereon. And since the maker knew this limitation, he must have intended for the instrument to be negotiated by mere delivery. Thus, in case of controversy, the drawer of the check will bear the loss. This rule is justified for otherwise, it will be most convenient for the maker who desires to escape payment of the check to always deny the validity of the

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

25

indorsement. This despite the fact that the fictitious payee was purposely named without any intention that the payee should receive the proceeds of the check.15 The fictitious-payee rule is best illustrated in Mueller & Martin v. Liberty Insurance Bank.16 In the said case, the corporation Mueller & Martin was defrauded by George L. Martin, one of its authorized signatories. Martin drew seven checks payable to the German Savings Fund Company Building Association (GSFCBA) amounting to $2,972.50 against the account of the corporation without authority from the latter. Martin was also an officer of the GSFCBA but did not have signing authority. At the back of the checks, Martin placed the rubber stamp of the GSFCBA and signed his own name as indorsement. He then successfully drew the funds from Liberty Insurance Bank for his own personal profit. When the corporation filed an action against the bank to recover the amount of the checks, the claim was denied. The US Supreme Court held in Mueller that when the person making the check so payable did not intend for the specified payee to have any part in the transactions, the payee is considered as a fictitious payee. The check is then considered as a bearer instrument to be validly negotiated by mere delivery. Thus, the US Supreme Court held that Liberty Insurance Bank, as drawee, was authorized to make payment to the bearer of the check, regardless of whether prior indorsements were genuine or not.17 The more recent Getty Petroleum Corp. v. American Express Travel Related Services Company, Inc.18 upheld the fictitious-payee rule. The rule protects the depositary bank and assigns the loss to the drawer of the check who was in a better position to prevent the loss in the first place. Due care is not even required from the drawee or depositary bank in accepting and paying the checks. The effect is that a showing of negligence on the part of the depositary bank will not defeat the protection that is derived from this rule. However, there is a commercial bad faith exception to the fictitious-payee rule. A showing of commercial bad faith on the part of the drawee bank, or any transferee of the check for that matter, will work to strip it of this defense. The exception will cause it to bear the loss. Commercial bad faith is present if the transferee of the check acts dishonestly, and is a party to the fraudulent scheme. Said the US Supreme Court in Getty:

Consequently, a transferees lapse of wary vigilance, disregard of suspicious circumstances which might have well induced a prudent banker to investigate and other permutations of negligence are not relevant considerations under Section 3-405 x x x. Rather, there is a "commercial bad faith" exception to UCC 3-405, applicable when the transferee "acts dishonestly where it has actual knowledge of facts and circumstances that amount to bad faith, thus itself becoming a participant in a fraudulent scheme. x x x Such a test finds support in the text of the Code, which omits a standard of care requirement from UCC 3-405 but imposes on all parties an obligation to act with "honesty in fact." x x x19 (Emphasis added) Getty also laid the principle that the fictitious-payee rule extends protection even to non-bank transferees of the checks. In the case under review, the Rodriguez checks were payable to specified payees. It is unrefuted that the 69 checks were payable to specific persons. Likewise, it is uncontroverted that the payees were actual, existing, and living persons who were members of PEMSLA that had a rediscounting arrangement with spouses Rodriguez. What remains to be determined is if the payees, though existing persons, were "fictitious" in its broader context. For the fictitious-payee rule to be available as a defense, PNB must show that the makers did not intend for the named payees to be part of the transaction involving the checks. At most, the banks thesis shows that the payees did not have knowledge of the existence of the checks. This lack of knowledge on the part of the payees, however, was not tantamount to a lack of intention on the part of respondents-spouses that the payees would not receive the checks proceeds. Considering that respondents-spouses were transacting with PEMSLA and not the individual payees, it is understandable that they relied on the information given by the officers of PEMSLA that the payees would be receiving the checks. Verily, the subject checks are presumed order instruments. This is because, as found by both lower courts, PNB failed to present sufficient evidence to defeat the claim of respondents-spouses that the named payees were the intended recipients of the checks proceeds. The bank failed to satisfy a requisite condition of a fictitious-payee situation

26

 that the maker of the check intended for the payee to have no interest in the transaction. Because of a failure to show that the payees were "fictitious" in its broader sense, the fictitious-payee rule does not apply. Thus, the checks are to be deemed payable to order. Consequently, the drawee bank bears the loss.20 PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its teller or tellers accepted the 69 checks for deposit to the PEMSLA account even without any indorsement from the named payees. It bears stressing that order instruments can only be negotiated with a valid indorsement. A bank that regularly processes checks that are neither payable to the customer nor duly indorsed by the payee is apparently grossly negligent in its operations.21 This Court has recognized the unique public interest possessed by the banking industry and the need for the people to have full trust and confidence in their banks.22 For this reason, banks are minded to treat their customers accounts with utmost care, confidence, and honesty.23 In a checking transaction, the drawee bank has the duty to verify the genuineness of the signature of the drawer and to pay the check strictly in accordance with the drawers instructions, i.e., to the named payee in the check. It should charge to the drawers accounts only the payables authorized by the latter. Otherwise, the drawee will be violating the instructions of the drawer and it shall be liable for the amount charged to the drawers account.24 In the case at bar, respondents-spouses were the banks depositors. The checks were drawn against respondentsspouses accounts. PNB, as the drawee bank, had the responsibility to ascertain the regularity of the indorsements, and the genuineness of the signatures on the checks before accepting them for deposit. Lastly, PNB was obligated to pay the checks in strict accordance with the instructions of the drawers. Petitioner miserably failed to discharge this burden. The checks were presented to PNB for deposit by a representative of PEMSLA absent any type of indorsement, forged or otherwise. The facts clearly show that the bank did not pay the checks in strict accordance with the instructions of the drawers, respondents-spouses. Instead, it paid the values of the checks not to the named payees or their order,

but to PEMSLA, a third party to the transaction between the drawers and the payees.alf-ITC Moreover, PNB was negligent in the selection and supervision of its employees. The trustworthiness of bank employees is indispensable to maintain the stability of the banking industry. Thus, banks are enjoined to be extra vigilant in the management and supervision of their employees. In Bank of the Philippine Islands v. Court of Appeals,25 this Court cautioned thus: Banks handle daily transactions involving millions of pesos. By the very nature of their work the degree of responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees. For obvious reasons, the banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees.26 PNBs tellers and officers, in violation of banking rules of procedure, permitted the invalid deposits of checks to the PEMSLA account. Indeed, when it is the gross negligence of the bank employees that caused the loss, the bank should be held liable.27 PNBs argument that there is no loss to compensate since no demand for payment has been made by the payees must also fail. Damage was caused to respondents-spouses when the PEMSLA checks they deposited were returned for the reason "Account Closed." These PEMSLA checks were the corresponding payments to the Rodriguez checks. Since they could not encash the PEMSLA checks, respondentsspouses were unable to collect payments for the amounts they had advanced. A bank that has been remiss in its duty must suffer the consequences of its negligence. Being issued to named payees, PNB was duty-bound by law and by banking rules and procedure to require that the checks be properly indorsed before accepting them for deposit and payment. In fine, PNB should be held liable for the amounts of the checks. One Last Note We note that the RTC failed to thresh out the merits of PNBs cross-claim against its co-defendants PEMSLA and MPC. The records are bereft of any pleading filed by these two defendants in answer to the complaint of respondents-

27

spouses and cross-claim of PNB. The Rules expressly provide that failure to file an answer is a ground for a declaration that defendant is in default.28 Yet, the RTC failed to sanction the failure of both PEMSLA and MPC to file responsive pleadings. Verily, the RTC dismissal of PNBs cross-claim has no basis. Thus, this judgment shall be without prejudice to whatever action the bank might take against its co-defendants in the trial court. To PNBs credit, it became involved in the controversial transaction not of its own volition but due to the actions of some of its employees. Considering that moral damages must be understood to be in concept of grants, not punitive or corrective in nature, We resolve to reduce the award of moral damages to P50,000.00.29 WHEREFORE, the appealed Amended Decision is AFFIRMED with the MODIFICATION that the award for moral damages is reduced to P50,000.00, and that this is without prejudice to whatever civil, criminal, or administrative action PNB might take against PEMSLA, MPC, and the employees involved. SO ORDERED.
Footnotes CA-G.R. CV No. 76645 dated October 11, 2005. Penned by Associate Justice Isaias P. Dicdican, with Associate Justices Pampio A. Abarintos and Ramon M. Bato, Jr., concurring; rollo, pp. 29-42.
1

16. Dennis Montemayor 17. Mickle Argusar 18. Perlita Gallego 19. Sheila Arcobillas 20. Danilo Villarosa 21. Almie Borce 22. Ronie Aragon

0000011598 0000011599 0000011564 0000011563 0001656 0000011583 0000011566

02.05.99 02.05.99 01.21.99 01.19.99 02.05.99 02.01.99 01.20.99 Total:

43,691.00 31,498.00 38,000.00 38,000.00 32,006.00 20,093.00 28,844.00 775,337.00

Current Account No. 810624-6 in the name of Erlando and/or Norma Rodriguez Name of Payees 01. Elma Bacarro 02. Delfin Recarder 03. Elma Bacarro 04. Perlita Gallego 05. Jose Weber 06. Rogelio Alfonso 07. Gianni Amantillo 08. Eddie Bago-od 09. Manuel Longero 10. Anavic Lorenzo 11. Corazon Salva 12. Arlene Diamante 13. Joselin Laurilla 14. Andy Javellana Check No. 0001944 0001927 0001926 0001924 0001932 0001922 0001928 0001929 0001933 0001923 0001945 0001951 0001955 0001960 0001958 0001956 0001969 0001968 0002021 0002023 0002030 0002032 0002020 0001972 0001967 0002022 0002029 0001957 0001965 Date Issued 01.15.99 01.14.99 01.14.99 01.14.99 01.14.99 01.14.99 01.14.99 01.14.99 01.14.99 01.14.99 01.15.99 01.18.99 01.18.99 01.22.99 01.22.99 01.18.99 01/22/99 01/22/99 02/01/99 02/01/99 02/02/99 02/02/99 02/01/99 01/22/99 01/22/99 02/01/99 02/02/99 01/18/99 01/22/99 Amount 37,449.00 30,020.00 34,884.00 35,502.00 38,323.00 43,852.00 32,414.00 38,361.00 38,285.00 29,982.00 37,449.00 39,995.00 37,221.00 30,923.00 40,679.00 24,700.00 38,304.00 37,706.00 36,727.00 38,000.00 26,600.00 19,000.00 32,282.00 36,376.00 36,566.00 37,981.00 25,270.00 34,656.00 31,882.00

Civil Case No. 99-10892, Regional Trial Court in Negros Occidental, Branch 51, Bacolod City, dated May 10, 2002; CA rollo, pp. 63-72.
2 3

A financing scheme where a postdated check is exchanged for a current check with a discounted face value. Current Account No. 810480-4 in the name of Erlando T. Rodriguez Check No. 0001110 0000011589 0000011567 0000011565 0000011587 0000011594 0000011593 0000011595 0000011591 0001657 0001655 0000011588 0000011596 0000011597 0000011600 Date Issued 11.27.98 02.01.99 01.25.99 01.22.99 02.01.99 02.02.99 02.02.99 02.02.99 02.01.99 02.05.99 02.05.99 02.01.99 02.05.99 02.05.99 02.05.99 Amount 40,934.00 29,877.00 50,350.00 39,995.00 38,000.00 28,500.00 37,715.00 45,002.00 35,373.00 39,900.00 28,595.00 34,819.00 32,851.00 28,785.00 32,509.00

Name of Payees 01. Simon Carmelo B. Libo-on 02. Simon Carmelo Libo-on 03. Simon Libo-on 04. Pacifico Castillo 05. Jose Bago-od 06. Dioleto Delcano 07. Antonio Maravilla 08. Josel Juguan 09. Domingo Roa, Jr. 10. Antonio Maravilla 11. Christy Mae Berden 12. Nelson Guadalupe 13. Antonio Londres 14. Arnel Navarosa 15. Estrella Alunan

15. Erdelinda Porras 16. Nelson Guadalupe 17. Barnard Escano 18. Buena Coscolluela 19. Erdelinda Porras 20. Neda Algara 21. Eddie Bago-od 22. Gianni Amantillo 23. Alfredo Llena 24. Emmanuel Fermo 25. Yvonne Ano-os 26. Joel Abibuag 27. Ma. Corazon Salva 28. Jose Bago-od 29. Avelino Brion

28

30. Mickle Algusar 31. Jose Weber 32. Joel Velasco 33. Elma Bacarro 34. Grace Tambis 35. Proceso Mailim 36. Ronnie Aragon 37. Danilo Villarosa 38. Joel Abibuag 39. Danilo Villarosa 40. Reynard Guia 41. Estrella Alunan 42. Eddie Bago-od 43. Jose Bago-od 44. Nicandro Aguilar 45. Guandencia Banaston 46. Dennis Montemayor 47. Eduardo Buglosa Total 1,570,467.00 Grand Total . 2,345,804.00
5

0001962 0001959 0002028 0002031 0001952 0001980 0001983 0001931 0001954 0001984 0001985 0001925 0001982 0001982 0001964 0001963 0001961 0002027

01/22/99 01/22/99 02/02/99 02/02/99 01/18/99 01/21/99 01/22/99 01/14/99 01/18/99 01/22/99 01/22/99 01/14/99 01/22/99 01/22/99 01/22/99 01/22/99 01/22/99 01/02/99

25,004.00 37,001.00 9,500.00 23,750.00 39,995.00 37,193.00 30,324.00 31,008.00 26,600.00 26,790.00 42,959.00 39,596.00 31,018.00 37,240.00 52,250.00 38,000.00 26,600.00 14,250.00

Citytrust Banking Corporation v. Intermediate Appellate Court, G.R. No. 84281, May 27, 1994, 232 SCRA 559; Bank of the Philippine Islands v. Intermediate Appellate Court, G.R. No. 69162, February 21, 1992, 206 SCRA 408.
23 24

Associated Bank v. Court of Appeals, G.R. Nos. 107382 & 107612, January 31, 1996, 252 SCRA 620, 631. G.R. No. 102383, November 26, 1992, 216 SCRA 51. Bank of the Philippine Islands v. Court of Appeals, id. at 71. Id. at 77.

25

26

27

Rules of Civil Procedure, Rule 9, Sec. 3. Default: declaration of. If the defending party fails to answer within the time allowed therefor, the court shall, upon motion of the claiming party with notice to the defending party, and proof of such failure, declare the defending party in default. Thereupon, the court shall proceed to render judgment granting the claimant such relief as his pleading may warrant, unless the court in its discretion requires the claimant to submit evidence. Such reception of evidence may be delegated to the clerk of court.
28 29

Morales v. Court of Appeals, G.R. No. 117228, June 19, 1997, 274 SCRA 282.

Rollo, pp. 64-69. CA rollo, pp. 71-72.

Rollo, pp. 44-49. Penned by Associate Justice Isaias P. Dicdican, with Associate Justices Elvi John S. Asuncion and Ramon M. Bato, Jr., concurring.
7 8

Id. at 47. Id. at 41. Veluz v. Justice of the Peace of Sariaga, 42 Phil. 557 (1921).

10

Negotiable Instruments Law, Sec. 185. Check defined. A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check.
11

Section 126. Bill of exchange defined. A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer.
12

Id.

Campos, J.C., Jr. and Lopez-Campos, M.C., Notes and Selected Cases on Negotiable Instruments Law (1994), 5th ed., pp. 8-9.
13

Bourne v. Maryland Casualty, 192 SE 605 (1937); Norton v. City Bank & Trust Co., 294 F. 839 (1923); United States v. Chase Nat. Bank, 250 F. 105 (1918).
14 15

Mueller & Martin v. Liberty Insurance Bank, 187 Ky. 44, 218 SW 465 (1920). Id. Mueller & Martin v. Liberty Insurance Bank, id. 90 NY 2d 322 (1997), citing the Uniform Commercial Code, Sec. 3-405.

16

17

18

Getty Petroleum Corp. v. American Express Travel Related Services Company, Inc., id., citing Peck v. Chase Manhattan Bank, 190 AD 2d 547, 548-549 (1993); Touro Coll. v. Bank Leumi Trust Co., 186 AD 2d 425, 427 (1992); Prudential-Bache Sec. v. Citibank, N.A., 73 NY 2d 276 (1989); Merrill Lynch, Pierce, Fenner & Smith v. Chemical Bank, 57 NY 2d 447 (1982).
19 20

See Traders Royal Bank v. Radio Philippines Network, Inc., G.R. No. 138510, October 10, 2002, 390 SCRA 608. Id. Metropolitan Bank and Trust Company v. Cabilzo, G.R. No. 154469, December 6, 2006, 510 SCRA 259.

21

22

29

AMERICAN SASH & DOOR CO. VS. COMMERCE TRUST CO. 56 SW 2d 1034

30

ANG TEK LIAN VS. COURT OF APPEALS 87 Phil. 383

31

THIRD DIVISION G.R. No. 141181 April 27, 2007 SAMSON CHING, Petitioner, vs. CLARITA NICDAO and HON. COURT OF APPEALS, Respondents. DECISION CALLEJO, SR., J.: Before the Court is a petition for review on certiorari filed by Samson Ching of the Decision1 dated November 22, 1999 of the Court of Appeals (CA) in CA-G.R. CR No. 23055. The assailed decision acquitted respondent Clarita Nicdao of eleven (11) counts of violation of Batas Pambansa Bilang (BP) 22, otherwise known as "The Bouncing Checks Law." The instant petition pertains and is limited to the civil aspect of the case as it submits that notwithstanding respondent Nicdaos acquittal, she should be held liable to pay petitioner Ching the amounts of the dishonored checks in the aggregate sum of P20,950,000.00. Factual and Procedural Antecedents On October 21, 1997, petitioner Ching, a Chinese national, instituted criminal complaints for eleven (11) counts of violation of BP 22 against respondent Nicdao. Consequently, eleven (11) Informations were filed with the First Municipal Circuit Trial Court (MCTC) of Dinalupihan-Hermosa, Province of Bataan, which, except as to the amounts and check numbers, uniformly read as follows: The undersigned accuses Clarita S. Nicdao of a VIOLATION OF BATAS PAMBANSA BILANG 22, committed as follows: That on or about October 06, 1997, at Dinalupihan, Bataan, Philippines, and within the jurisdiction of this Honorable Court, the said accused did then and there willfully and unlawfully make or draw and issue Hermosa Savings & Loan Bank, Inc. Check No. [002524] dated October 06, 1997 in the amount of [P20,000,000.00] in payment of her obligation with complainant Samson T.Y. Ching, the said accused knowing fully well that at the time she issued the said check she did not have sufficient funds in or credit with the drawee bank for the payment in full of the said check upon presentment, which check when presented for payment within ninety (90) days from the date thereof, was dishonored by the drawee bank for the reason that it was drawn against insufficient funds and notwithstanding receipt of notice of such dishonor the said accused failed and refused and still fails and refuses to pay the value of the said check in the amount of [P20,000,000.00] or to make arrangement with the drawee bank for the payment in full of the same within five (5) banking days after receiving the said notice, to the damage and prejudice of the said Samson T.Y. Ching in the aforementioned amount of [P20,000,000.00], Philippine Currency. CONTRARY TO LAW. Dinalupihan, Bataan, October 21, 1997. (Sgd.) SAMSON T.Y. CHING Complainant The cases were docketed as Criminal Cases Nos. 9433 up to 9443 involving the following details:

Check No.

Amount

Date

Private Complainant

Reason for the Dishonor DAIF*

0025242

P 20,000,000

Oct. 6, Samson T.Y. Ching 1997 Oct. 6, " 1997 Oct. 6, " 1997 Oct. 6, " 1997 Oct. 6, " 1997 Oct. 6, " 1997 Oct. 6, " 1997 Oct. 6, " 1997 Oct. 6, " 1997 Oct. 6, " 1997 Oct. 6, " 1997

0088563

150,000

"

0121424

100,000

"

0045315

50,000

"

0022546

100,000

"

0088757

100,000

"

0089368

50,000

"

0022739

50,000

"

00894810

150,000

"

00893511

100,000

"

01037712

100,000

"

At about the same time, fourteen (14) other criminal complaints, also for violation of BP 22, were filed against respondent Nicdao by Emma Nuguid, said to be the common law spouse of petitioner Ching. Allegedly fourteen (14) checks, amounting to P1,150,000.00, were issued by respondent Nicdao to Nuguid but were dishonored for lack of sufficient funds. The Informations were filed with the same MCTC and docketed as Criminal Cases Nos. 9458 up to 9471. At her arraignment, respondent Nicdao entered the plea of "not guilty" to all the charges. A joint trial was then conducted for Criminal Cases Nos. 9433-9443 and 9458-9471. For the prosecution in Criminal Cases Nos. 9433-9443, petitioner Ching and Imelda Yandoc, an employee of the Hermosa Savings & Loan Bank, Inc., were presented to prove the charges against respondent Nicdao. On directexamination,13 petitioner Ching preliminarily identified each of the eleven (11) Hermosa Savings & Loan Bank (HSLB) checks that were allegedly

32

issued to him by respondent Nicdao amounting to P20,950,000.00. He identified the signatures appearing on the checks as those of respondent Nicdao. He recognized her signatures because respondent Nicdao allegedly signed the checks in his presence. When petitioner Ching presented these checks for payment, they were dishonored by the bank, HSLB, for being "DAIF" or "drawn against insufficient funds." Petitioner Ching averred that the checks were issued to him by respondent Nicdao as security for the loans that she obtained from him. Their transaction began sometime in October 1995 when respondent Nicdao, proprietor/manager of Vignette Superstore, together with her husband, approached him to borrow money in order for them to settle their financial obligations. They agreed that respondent Nicdao would leave the checks undated and that she would pay the loans within one year. However, when petitioner Ching went to see her after the lapse of one year to ask for payment, respondent Nicdao allegedly said that she had no cash. Petitioner Ching claimed that he went back to respondent Nicdao several times more but every time, she would tell him that she had no money. Then in September 1997, respondent Nicdao allegedly got mad at him for being insistent and challenged him about seeing each other in court. Because of respondent Nicdao's alleged refusal to pay her obligations, on October 6, 1997, petitioner Ching deposited the checks that she issued to him. As he earlier stated, the checks were dishonored by the bank for being "DAIF." Shortly thereafter, petitioner Ching, together with Emma Nuguid, wrote a demand letter to respondent Nicdao which, however, went unheeded. Accordingly, they separately filed the criminal complaints against the latter. On cross-examination,14 petitioner Ching claimed that he had been a salesman of the La Suerte Cigar and Cigarette Manufacturing for almost ten (10) years already. As such, he delivered the goods and had a warehouse. He received salary and commissions. He could not, however, state his exact gross income. According to him, it increased every year because of his business. He asserted that aside from being a salesman, he was also in the business of extending loans to other people at an interest, which varied depending on the person he was dealing with. Petitioner Ching confirmed the truthfulness of the allegations contained in the eleven (11) Informations that he filed against respondent Nicdao. He reiterated that, upon their agreement, the checks were all signed by respondent Nicdao but she left them undated. Petitioner Ching admitted that he was the one who wrote the date, October 6, 1997, on those checks when respondent Nicdao refused to pay him. With respect to the P20,000,000.00 check (Check No. 002524), petitioner Ching explained that he wrote the date and amount thereon when, upon his estimation, the money that he regularly lent to respondent Nicdao beginning October 1995 reached the said sum. He likewise intimated that prior to 1995, they had another transaction amounting to P1,200,000.00 and, as security therefor, respondent Nicdao similarly issued in his favor checks in varying amounts of P100,000.00 and P50,000.00. When the said amount was fully paid, petitioner Ching returned the checks to respondent Nicdao. Petitioner Ching maintained that the eleven (11) checks subject of Criminal Cases Nos. 9433-9443 pertained to respondent Nicdaos loan transactions with him beginning October 1995. He also mentioned an instance when respondent Nicdaos husband and daughter approached him at a casino to borrow money from him. He lent them P300,000.00. According to petitioner

Ching, since this amount was also unpaid, he included it in the other amounts that respondent Nicdao owed to him which totaled P20,000,000.00 and wrote the said amount on one of respondent Nicdaos blank checks that she delivered to him. Petitioner Ching explained that from October 1995 up to 1997, he regularly delivered money to respondent Nicdao, in the amount of P1,000,000.00 until the total amount reached P20,000,000.00. He did not ask respondent Nicdao to acknowledge receiving these amounts. Petitioner Ching claimed that he was confident that he would be paid by respondent Nicdao because he had in his possession her blank checks. On the other hand, the latter allegedly had no cause to fear that he would fill up the checks with just any amount because they had trust and confidence in each other. When asked to produce the piece of paper on which he allegedly wrote the amounts that he lent to respondent Nicdao, petitioner Ching could not present it; he reasoned that it was not with him at that time. It was also averred by petitioner Ching that respondent Nicdao confided to him that she told her daughter Janette, who was married to a foreigner, that her debt to him was only between P3,000,000.00 and P5,000,000.00. Petitioner Ching claimed that he offered to accompany respondent Nicdao to her daughter in order that they could apprise her of the amount that she owed him. Respondent Nicdao refused for fear that it would cause disharmony in the family. She assured petitioner Ching, however, that he would be paid by her daughter. Petitioner Ching reiterated that after the lapse of one (1) year from the time respondent Nicdao issued the checks to him, he went to her several times to collect payment. In all these instances, she said that she had no cash. Finally, in September 1997, respondent Nicdao allegedly went to his house and told him that Janette was only willing to pay him between P3,000,000.00 and P5,000,000.00 because, as far as her daughter was concerned, that was the only amount borrowed from petitioner Ching. On hearing this, petitioner Ching angrily told respondent Nicdao that she should not have allowed her debt to reach P20,000,000.00 knowing that she would not be able to pay the full amount. Petitioner Ching identified the demand letter that he and Nuguid sent to respondent Nicdao. He explained that he no longer informed her about depositing her checks on his account because she already made that statement about seeing him in court. Again, he admitted writing the date, October 6, 1997, on all these checks. Another witness presented by the prosecution was Imelda Yandoc, an employee of HSLB. On direct-examination,15 she testified that she worked as a checking account bookkeeper/teller of the bank. As such, she received the checks that were drawn against the bank and verified if they were funded. On October 6, 1997, she received several checks issued by respondent Nicdao. She knew respondent Nicdao because the latter maintained a savings and checking account with them. Yandoc identified the checks subject of Criminal Cases Nos. 9433-9443 and affirmed that stamped at the back of each was the annotation "DAIF". Further, per the banks records, as of October 8, 1997, only a balance of P300.00 was left in respondent Nicdaos checking account and P645.83 in her savings account. On even date, her account with the bank was considered inactive. On cross-examination,16 Yandoc stated anew that respondent Nicdaos checks bounced on October 7, 1997 for being "DAIF" and her account was closed the following day, on October 8, 1997. She informed the trial court that there were actually twenty-five (25) checks of respondent Nicdao that

33

were dishonored at about the same time. The eleven (11) checks were purportedly issued in favor of petitioner Ching while the other fourteen (14) were purportedly issued in favor of Nuguid. Yandoc explained that respondent Nicdao or her employee would usually call the bank to inquire if there was an incoming check to be funded. For its part, the defense proffered the testimonies of respondent Nicdao, Melanie Tolentino and Jocelyn Nicdao. On direct-examination,17 respondent Nicdao stated that she only dealt with Nuguid. She vehemently denied the allegation that she had borrowed money from both petitioner Ching and Nuguid in the total amount of P22,950,000.00. Respondent Nicdao admitted, however, that she had obtained a loan from Nuguid but only for P2,100,000.00 and the same was already fully paid. As proof of such payment, she presented a Planters Bank demand draft dated August 13, 1996 in the amount of P1,200,000.00. The annotation at the back of the said demand draft showed that it was endorsed and negotiated to the account of petitioner Ching. In addition, respondent Nicdao also presented and identified several cigarette wrappers18 at the back of which appeared computations. She explained that Nuguid went to the grocery store everyday to collect interest payments. The principal loan was P2,100,000.00 with 12% interest per day. Nuguid allegedly wrote the payments for the daily interests at the back of the cigarette wrappers that she gave to respondent Nicdao. The principal loan amount of P2,100,000.00 was allegedly delivered by Nuguid to respondent Nicdao in varying amounts of P100,000.00 and P150,000.00. Respondent Nicdao refuted the averment of petitioner Ching that prior to 1995, they had another transaction. With respect to the P20,000,000.00 check, respondent Nicdao admitted that the signature thereon was hers but denied that she issued the same to petitioner Ching. Anent the other ten (10) checks, she likewise admitted that the signatures thereon were hers while the amounts and payee thereon were written by either Jocelyn Nicdao or Melanie Tolentino, who were employees of Vignette Superstore and authorized by her to do so. Respondent Nicdao clarified that, except for the P20,000,000.00 check, the other ten (10) checks were handed to Nuguid on different occasions. Nuguid came to the grocery store everyday to collect the interest payments. Respondent Nicdao said that she purposely left the checks undated because she would still have to notify Nuguid if she already had the money to fund the checks. Respondent Nicdao denied ever confiding to petitioner Ching that she was afraid that her daughter would get mad if she found out about the amount that she owed him. What allegedly transpired was that when she already had the money to pay them (presumably referring to petitioner Ching and Nuguid), she went to them to retrieve her checks. However, petitioner Ching and Nuguid refused to return the checks claiming that she (respondent Nicdao) still owed them money. She demanded that they show her the checks in order that she would know the exact amount of her debt, but they refused. It was at this point that she got angry and dared them to go to court. After the said incident, respondent Nicdao was surprised to be notified by HSLB that her check in the amount of P20,000,000.00 was just presented to the bank for payment. She claimed that it was only then that she remembered that sometime in 1995, she was informed by her employee

that one of her checks was missing. At that time, she did not let it bother her thinking that it would eventually surface when presented to the bank. Respondent Nicdao could not explain how the said check came into petitioner Chings possession. She explained that she kept her checks in an ordinary cash box together with a stapler and the cigarette wrappers that contained Nuguids computations. Her saleslady had access to this box. Respondent Nicdao averred that it was Nuguid who offered to give her a loan as she would allegedly need money to manage Vignette Superstore. Nuguid used to run the said store before respondent Nicdaos daughter bought it from Nuguids family, its previous owner. According to respondent Nicdao, it was Nuguid who regularly delivered the cash to respondent Nicdao or, if she was not at the grocery store, to her saleslady. Respondent Nicdao denied any knowledge that the money loaned to her by Nuguid belonged to petitioner Ching. At the continuation of her direct-examination,19 respondent Nicdao said that she never dealt with petitioner Ching because it was Nuguid who went to the grocery store everyday to collect the interest payments. When shown the P20,000,000.00 check, respondent Nicdao admitted that the signature thereon was hers but she denied issuing it as a blank check to petitioner Ching. On the other hand, with respect to the other ten (10) checks, she also admitted that the signatures thereon were hers and that the amounts thereon were written by either Josie Nicdao or Melanie Tolentino, her employees whom she authorized to do so. With respect to the payee, it was purposely left blank allegedly upon instruction of Nuguid who said that she would use the checks to pay someone else. On cross-examination,20 respondent Nicdao explained that Josie Nicdao and Melanie Tolentino were caretakers of the grocery store and that they manned it when she was not there. She likewise confirmed that she authorized them to write the amounts on the checks after she had affixed her signature thereon. She stressed, however, that the P20,000,000.00 check was the one that was reported to her as lost or missing by her saleslady sometime in 1995. She never reported the matter to the bank because she was confident that it would just surface when it would be presented for payment. Again, respondent Nicdao identified the cigarette wrappers which indicated the daily payments she had made to Nuguid. The latter allegedly went to the grocery store everyday to collect the interest payments. Further, the figures at the back of the cigarette wrappers were written by Nuguid. Respondent Nicdao asserted that she recognized her handwriting because Nuguid sometimes wrote them in her presence. Respondent Nicdao maintained that she had already paid Nuguid the amount of P1,200,000.00 as evidenced by the Planters Bank demand draft which she gave to the latter and which was subsequently negotiated and deposited in petitioner Chings account. In connection thereto, respondent Nicdao refuted the prosecutions allegation that the demand draft was payment for a previous transaction that she had with petitioner Ching. She clarified that the payments that Nuguid collected from her everyday were only for the interests due. She did not ask Nuguid to make written acknowledgements of her payments. Melanie Tolentino was presented to corroborate the testimony of respondent Nicdao. On direct-examination,21 Tolentino stated that she worked at the Vignette Superstore and she knew Nuguid because her employer, respondent Nicdao, used to borrow money from her. She knew petitioner Ching only by name and that he was the "husband" of Nuguid.

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As an employee of the grocery store, Tolentino stated that she acted as its caretaker and was entrusted with the custody of respondent Nicdaos personal checks. Tolentino identified her own handwriting on some of the checks especially with respect to the amounts and figures written thereon. She said that Nuguid instructed her to leave the space for the payee blank as she would use the checks to pay someone else. Tolentino added that she could not recall respondent Nicdao issuing a check to petitioner Ching in the amount of P20,000,000.00. She confirmed that they lost a check sometime in 1995. When informed about it, respondent Nicdao told her that the check could have been issued to someone else, and that it would just surface when presented to the bank. Tolentino recounted that Nuguid came to the grocery store everyday to collect the interest payments of the loan. In some instances, upon respondent Nicdaos instruction, Tolentino handed to Nuguid checks that were already signed by respondent Nicdao. Sometimes, Tolentino would be the one to write the amount on the checks. Nuguid, in turn, wrote the amounts on pieces of paper which were kept by respondent Nicdao. On cross-examination,22 Tolentino confirmed that she was authorized by respondent Nicdao to fill up the checks and hand them to Nuguid. The latter came to the grocery store everyday to collect the interest payments. Tolentino claimed that in 1995, in the course of chronologically arranging respondent Nicdaos check booklets, she noticed that a check was missing. Respondent Nicdao told her that perhaps she issued it to someone and that it would just turn up in the bank. Tolentino was certain that the missing check was the same one that petitioner Ching presented to the bank for payment in the amount of P20,000,000.00. Tolentino stated that she left the employ of respondent Nicdao sometime in 1996. After the checks were dishonored in October 1997, Tolentino got a call from respondent Nicdao. After she was shown a fax copy thereof, Tolentino confirmed that the P20,000,000.00 check was the same one that she reported as missing in 1995. Jocelyn Nicdao also took the witness stand to corroborate the testimony of the other defense witnesses. On direct-examination,23 she averred that she was a saleslady at the Vignette Superstore from August 1994 up to April 1998. She knew Nuguid as well as petitioner Ching. Jocelyn Nicdao further testified that respondent Nicdao was indebted to Nuguid. Jocelyn Nicdao used to fill up the checks of respondent Nicdao that had already been signed by her and give them to Nuguid. The latter came to the grocery store everyday to pick up the interest payments. Jocelyn Nicdao identified the checks on which she wrote the amounts and, in some instances, the name of Nuguid as payee. However, most of the time, Nuguid allegedly instructed her to leave as blank the space for the payee. Jocelyn Nicdao identified the cigarette wrappers as the documents on which Nuguid acknowledged receipt of the interest payments. She explained that she was the one who wrote the minus entries and they represented the daily interest payments received by Nuguid. On cross-examination,24 Jocelyn Nicdao stated that she was a distant cousin of respondent Nicdao. She stopped working for her in 1998 because she wanted to take a rest. Jocelyn Nicdao reiterated that she handed the checks to Nuguid at the grocery store. After due trial, on December 8, 1998, the MCTC rendered judgment in Criminal Cases Nos. 9433-9443 convicting respondent Nicdao of eleven

(11) counts of violation of BP 22. The MCTC gave credence to petitioner Chings testimony that respondent Nicdao borrowed money from him in the total amount of P20,950,000.00. Petitioner Ching delivered P1,000,000.00 every month to respondent Nicdao from 1995 up to 1997 until the sum reached P20,000,000.00. The MCTC also found that subsequent thereto, respondent Nicdao still borrowed money from petitioner Ching. As security for these loans, respondent Nicdao issued checks to petitioner Ching. When the latter deposited the checks (eleven in all) on October 6, 1997, they were dishonored by the bank for being "DAIF." The MCTC explained that the crime of violation of BP 22 has the following elements: (a) the making, drawing and issuance of any check to apply to account or for value; (b) the knowledge of the maker, drawer or issuer that at the time of issue he does not have sufficient funds in or credit with the drawee bank for the payment of such check in full upon its presentment; and (c) subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or dishonor for the same reason had not the drawer, without any valid cause, ordered the bank to stop payment.25 According to the MCTC, all the foregoing elements are present in the case of respondent Nicdaos issuance of the checks subject of Criminal Cases Nos. 9433-9443. On the first element, respondent Nicdao was found by the MCTC to have made, drawn and issued the checks. The fact that she did not personally write the payee and date on the checks was not material considering that under Section 14 of the Negotiable Instruments Law, "where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount x x x." Respondent Nicdao admitted that she authorized her employees to provide the details on the checks after she had signed them. The MCTC disbelieved respondent Nicdaos claim that the P20,000,000.00 check was the same one that she lost in 1995. It observed that ordinary prudence would dictate that a lost check would at least be immediately reported to the bank to prevent its unauthorized endorsement or negotiation. Respondent Nicdao made no such report to the bank. Even if the said check was indeed lost, the MCTC faulted respondent Nicdao for being negligent in keeping the checks that she had already signed in an unsecured box. The MCTC further ruled that there was no evidence to show that petitioner Ching was not a holder in due course as to cause it (the MCTC) to believe that the said check was not issued to him. Respondent Nicdaos admission of indebtedness was sufficient to prove that there was consideration for the issuance of the checks. The second element was also found by the MCTC to be present as it held that respondent Nicdao, as maker, drawer or issuer, had knowledge that at the time of issue she did not have sufficient funds in or credit with the drawee bank for the payment in full of the checks upon their presentment. As to the third element, the MCTC established that the checks were subsequently dishonored by the drawee bank for being "DAIF" or drawn against insufficient funds. Stamped at the back of each check was the annotation "DAIF." The bank representative likewise testified to the fact of dishonor.

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Under the foregoing circumstances, the MCTC declared that the conviction of respondent Nicdao was warranted. It stressed that the mere act of issuing a worthless check was malum prohibitum; hence, even if the checks were issued in the form of deposit or guarantee, once dishonored, the same gave rise to the prosecution for and conviction of BP 22.26 The decretal portion of the MCTC decision reads: WHEREFORE, in view of the foregoing, the accused is found guilty of violating Batas Pambansa Blg. 22 in 11 counts, and is hereby ordered to pay the private complainant the amount of P20,950,000.00 plus 12% interest per annum from date of filing of the complaint until the total amount had been paid. The prayer for moral damages is denied for lack of evidence to prove the same. She is likewise ordered to suffer imprisonment equivalent to 1 year for every check issued and which penalty shall be served successively. SO ORDERED.27 Incidentally, on January 11, 1999, the MCTC likewise rendered its judgment in Criminal Cases Nos. 9458-9471 and convicted respondent Nicdao of the fourteen (14) counts of violation of BP 22 filed against her by Nuguid. On appeal, the Regional Trial Court (RTC) of Dinalupihan, Bataan, Branch 5, in separate Decisions both dated May 10, 1999, affirmed in toto the decisions of the MCTC convicting respondent Nicdao of eleven (11) and fourteen (14) counts of violation of BP 22 in Criminal Cases Nos. 9433-9443 and 9458-9471, respectively. Respondent Nicdao forthwith filed with the CA separate petitions for review of the two decisions of the RTC. The petition involving the eleven (11) checks purportedly issued to petitioner Ching was docketed as CA-G.R. CR No. 23055 (assigned to the 13th Division). On the other hand, the petition involving the fourteen (14) checks purportedly issued to Nuguid was docketed as CA-G.R. CR No. 23054 (originally assigned to the 7th Division but transferred to the 6th Division). The Office of the Solicitor General (OSG) filed its respective comments on the said petitions. Subsequently, the OSG filed in CA-G.R. CR No. 23055 a motion for its consolidation with CA-G.R. CR No. 23054. The OSG prayed that CA-G.R. CR No. 23055 pending before the 13th Division be transferred and consolidated with CA-G.R. CR No. 23054 in accordance with the Revised Internal Rules of the Court of Appeals (RIRCA). Acting on the motion for consolidation, the CA in CA-G.R. CR No. 23055 issued a Resolution dated October 19, 1999 advising the OSG to file the motion in CA-G.R. CR No. 23054 as it bore the lowest number. Respondent Nicdao opposed the consolidation of the two cases. She likewise filed her reply to the comment of the OSG in CA-G.R. CR No. 23055. On November 22, 1999, the CA (13th Division) rendered the assailed Decision in CA-G.R. CR No. 23055 acquitting respondent Nicdao of the eleven (11) counts of violation of BP 22 filed against her by petitioner Ching. The decretal portion of the assailed CA Decision reads: WHEREFORE, being meritorious, the petition for review is hereby GRANTED. Accordingly, the decision dated May 10, 1999, of the Regional Trial Court, 3rd Judicial Region, Branch 5, Bataan, affirming the decision dated December 8, 1998, of the First Municipal Circuit Trial Court of DinalupihanHermosa, Bataan, convicting petitioner Clarita S. Nicdao in Criminal Cases No. 9433 to 9443 of violation of B.P. Blg. 22 is REVERSED and SET ASIDE

and another judgment rendered ACQUITTING her in all these cases, with costs de oficio. SO ORDERED.28 On even date, the CA issued an Entry of Judgment declaring that the above decision has become final and executory and is recorded in the Book of Judgments. In acquitting respondent Nicdao in CA-G.R. CR No. 23055, the CA made the following factual findings: Petitioner [respondent herein] Clarita S. Nicdao, a middle-aged mother and housekeeper who only finished high school, has a daughter, Janette Boyd, who is married to a wealthy expatriate. Complainant [petitioner herein] Samson Ching is a Chinese national, who claimed he is a salesman of La Suerte Cigar and Cigarette Factory. Emma Nuguid, complainants live-in partner, is a CPA and formerly connected with Sycip, Gorres and Velayo. Nuguid used to own a grocery store now known as the Vignette Superstore. She sold this grocery store, which was about to be foreclosed, to petitioners daughter, Janette Boyd. Since then, petitioner began managing said store. However, since petitioner could not always be at the Vignette Superstore to keep shop, she entrusted to her salesladies, Melanie Tolentino and Jocelyn Nicdao, presigned checks, which were left blank as to amount and the payee, to cover for any delivery of merchandise sold at the store. The blank and personal checks were placed in a cash box at Vignette Superstore and were filled up by said salesladies upon instruction of petitioner as to amount, payee and date. Soon thereafter, Emma Nuguid befriended petitioner and offered to lend money to the latter which could be used in running her newly acquired store. Nuguid represented to petitioner that as former manager of the Vignette Superstore, she knew that petitioner would be in need of credit to meet the daily expenses of running the business, particularly in the daily purchases of merchandise to be sold at the store. After Emma Nuguid succeeded in befriending petitioner, Nuguid was able to gain access to the Vignette Superstore where petitioners blank and pre-signed checks were kept.29 In addition, the CA also made the finding that respondent Nicdao borrowed money from Nuguid in the total amount of P2,100,000.00 secured by twenty-four (24) checks drawn against respondent Nicdaos account with HSLB. Upon Nuguids instruction, the checks given by respondent Nicdao as security for the loans were left blank as to the payee and the date. The loans consisted of (a) P950,000.00 covered by ten (10) checks subject of the criminal complaints filed by petitioner Ching (CA-G.R. CR No. 23055); and (b) P1,150,000.00 covered by fourteen (14) checks subject of the criminal complaints filed by Nuguid (CA-G.R. CR No. 23054). The loans totaled P2,100,000.00 and they were transacted between respondent Nicdao and Nuguid only. Respondent Nicdao never dealt with petitioner Ching. Against the foregoing factual findings, the CA declared that, based on the evidence, respondent Nicdao had already fully paid the loans. In particular, the CA referred to the Planters Bank demand draft in the amount of P1,200,000.00 which, by his own admission, petitioner Ching had received. The appellate court debunked petitioner Chings allegation that the said demand draft was payment for a previous transaction. According to the CA,

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petitioner Ching failed to adduce evidence to prove the existence of a previous transaction between him and respondent Nicdao. Apart from the demand draft, the CA also stated that respondent Nicdao made interest payments on a daily basis to Nuguid as evidenced by the computations written at the back of the cigarette wrappers. Based on these computations, as of July 21, 1997, respondent Nicdao had made a total of P5,780,000.00 payments to Nuguid for the interests alone. Adding up this amount and that of the Planters Bank demand draft, the CA placed the payments made by respondent Nicdao to Nuguid as already amounting to P6,980,000.00 for the principal loan amount of only P2,100,000.00. The CA negated petitioner Chings contention that the payments as reflected at the back of the cigarette wrappers could be applied only to the interests due. Since the transactions were not evidenced by any document or writing, the CA ratiocinated that no interests could be collected because, under Article 1956 of the Civil Code, "no interest shall be due unless it has been expressly stipulated in writing." The CA gave credence to the testimony of respondent Nicdao that when she had fully paid her loans to Nuguid, she tried to retrieve her checks. Nuguid, however, refused to return the checks to respondent Nicdao. Instead, Nuguid and petitioner Ching filled up the said checks to make it appear that: (a) petitioner Ching was the payee in five checks; (b) the six checks were payable to cash; (c) Nuguid was the payee in fourteen (14) checks. Petitioner Ching and Nuguid then put the date October 6, 1997 on all these checks and deposited them the following day. On October 8, 1997, through a joint demand letter, they informed respondent Nicdao that her checks were dishonored by HSLB and gave her three days to settle her indebtedness or else face prosecution for violation of BP 22. With the finding that respondent Nicdao had fully paid her loan obligations to Nuguid, the CA declared that she could no longer be held liable for violation of BP 22. It was explained that to be held liable under BP 22, it must be established, inter alia, that the check was made or drawn and issued to apply on account or for value. According to the CA, the word "account" refers to a pre-existing obligation, while "for value" means an obligation incurred simultaneously with the issuance of the check. In the case of respondent Nicdaos checks, the pre-existing obligations secured by them were already extinguished after full payment had been made by respondent Nicdao to Nuguid. Obligations are extinguished by, among others, payment.30 The CA believed that when petitioner Ching and Nuguid refused to return respondent Nicdaos checks despite her total payment of P6,980,000.00 for the loans secured by the checks, petitioner Ching and Nuguid were using BP 22 to coerce respondent Nicdao to pay a debt which she no longer owed them. With respect to the P20,000,000.00 check, the CA was not convinced by petitioner Chings claim that he delivered P1,000,000.00 every month to respondent Nicdao until the amount reached P20,000,000.00 and, when she refused to pay the same, he filled up the check, which she earlier delivered to him as security for the loans, by writing thereon the said amount. In disbelieving petitioner Ching, the CA pointed out that, contrary to his assertion, he was never employed by the La Suerte Cigar and Cigarette Manufacturing per the letter of Susan Resurreccion, VicePresident and Legal Counsel of the said company. Moreover, as admitted by petitioner Ching, he did not own the house where he and Nuguid lived. Moreover, the CA characterized as incredible and contrary to human experience that petitioner Ching would, as he claimed, deliver a total sum

of P20,000,000.00 to respondent Nicdao without any documentary proof thereof, e.g., written acknowledgment that she received the same. On the other hand, it found plausible respondent Nicdaos version of the story that the P20,000,000.00 check was the same one that was missing way back in 1995. The CA opined that this missing check surfaced in the hands of petitioner Ching who, in cahoots with Nuguid, wrote the amount P20,000,000.00 thereon and deposited it in his account. To the mind of the CA, the inference that the check was stolen was anchored on competent circumstantial evidence. Specifically, Nuguid, as previous manager/owner of the grocery store, had access thereto. Likewise applicable, according to the CA, was the presumption that the person in possession of the stolen article was presumed to be guilty of taking the stolen article.31 The CA emphasized that the P20,000,000.00 check was never delivered by respondent Nicdao to petitioner Ching. As such, the said check without the details as to the date, amount and payee, was an incomplete and undelivered instrument when it was stolen and ended up in petitioner Chings hands. On this point, the CA applied Sections 15 and 16 of the Negotiable Instruments Law: SEC. 15. Incomplete instrument not delivered. Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. SEC. 16. Delivery; when effectual; when presumed. Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting or indorsing, as the case may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved. The CA held that the P20,000,000.00 check was filled up by petitioner Ching without respondent Nicdaos authority. Further, it was incomplete and undelivered. Hence, petitioner Ching did not acquire any right or interest therein and could not assert any cause of action founded on the stolen checks.32 Under these circumstances, the CA concluded that respondent could not be held liable for violation of BP 22. The Petitioners Case As mentioned earlier, the instant petition pertains and is limited solely to the civil aspect of the case as petitioner Ching argues that notwithstanding respondent Nicdaos acquittal of the eleven (11) counts of violation of BP 22, she should be held liable to pay petitioner Ching the amounts of the dishonored checks in the aggregate sum of P20,950,000.00. He urges the Court to review the findings of facts made by the CA as they are allegedly based on a misapprehension of facts and manifestly erroneous and contradicted by the evidence. Further, the CAs factual findings are in conflict with those of the RTC and MCTC.

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Petitioner Ching vigorously argues that notwithstanding respondent Nicdaos acquittal by the CA, the Supreme Court has the jurisdiction and authority to resolve and rule on her civil liability. He invokes Section 1, Rule 111 of the Revised Rules of Court which, prior to its amendment, provided, in part: SEC. 1. Institution of criminal and civil actions. When a criminal action is instituted, the civil action for the recovery of civil liability is impliedly instituted with the criminal action, unless the offended party waives the civil action, reserves his right to institute it separately, or institutes the civil action prior to the criminal action. Such civil action includes the recovery of indemnity under the Revised Penal Code, and damages under Articles 32, 33, 34 and 2176 of the Civil Code of the Philippines arising from the same act or omission of the accused. x x x Supreme Court Circular No. 57-9733 dated September 16, 1997 is also cited as it provides in part: 1. The criminal action for violation of Batas Pambansa Blg. 22 shall be deemed to necessarily include the corresponding civil action, and no reservation to file such civil action separately shall be allowed or recognized. x x x Petitioner Ching theorizes that, under Section 1, Rule 111 of the Revised Rules of Court, the civil action for the recovery of damages under Articles 32, 33, 34, and 2176 arising from the same act or omission of the accused is impliedly instituted with the criminal action. Moreover, under the abovequoted Circular, the criminal action for violation of BP 22 necessarily includes the corresponding civil action, which is the recovery of the amount of the dishonored check representing the civil obligation of the drawer to the payee. In seeking to enforce the alleged civil liability of respondent Nicdao, petitioner Ching maintains that she had loan obligations to him totaling P20,950,000.00. The existence of the same is allegedly established by his testimony before the MCTC. Also, he asks the Court to take judicial notice that for a monetary loan secured by a check, the check itself is the evidence of indebtedness. He insists that, contrary to her protestation, respondent Nicdao also transacted with him, not only with Nuguid. Petitioner Ching pointed out that during respondent Nicdaos testimony, she referred to her creditors in plural form, e.g. "[I] told them, most checks that I issued I will inform them if I have money." Even respondent Nicdaos employees allegedly knew him; they testified that Nuguid instructed them at times to leave as blank the payee on the checks as they would be paid to someone else, who turned out to be petitioner Ching. It was allegedly erroneous for the CA to hold that he had no capacity to lend P20,950,000.00 to respondent Nicdao. Petitioner Ching clarified that what he meant when he testified before the MCTC was that he was engaged in dealership with La Suerte Cigar and Cigarette Manufacturing, and not merely its sales agent. He stresses that he owns a warehouse and is also in the business of lending money. Further, the CAs reasoning that he could not possibly have lent P20,950,000.00 to respondent Nicdao since petitioner Ching and Nuguid did not own the house where they live, is allegedly non sequitur.

Petitioner Ching maintains that, contrary to the CAs finding, the Planters Bank demand draft for P1,200,000.00 was in payment for respondent Nicdaos previous loan transaction with him. Apart from the P20,000,000.00 check, the other ten (10) checks (totaling P950,000.00) were allegedly issued by respondent Nicdao to petitioner Ching as security for the loans that she obtained from him from 1995 to 1997. The existence of another loan obligation prior to the said period was allegedly established by the testimony of respondent Nicdaos own witness, Jocelyn Nicdao, who testified that when she started working in Vignette Superstore in 1994, she noticed that respondent Nicdao was already indebted to Nuguid. Petitioner Ching also takes exception to the CAs ruling that the payments made by respondent Nicdao as reflected on the computations at the back of the cigarette wrappers were for both the principal loan and interests. He insists that they were for the interests alone. Even respondent Nicdaos testimony allegedly showed that they were daily interest payments. Petitioner Ching further avers that the interest payments totaling P5,780,000.00 can only mean that, contrary to respondent Nicdaos claim, her loan obligations amounted to much more than P2,100,000.00. Further, she is allegedly estopped from questioning the interests because she willingly paid the same. Petitioner Ching also harps on respondent Nicdaos silence when she received his and Nuguids demand letter to her. Through the said letter, they notified her that the twenty-five (25) checks valued at P22,100,000.00 were dishonored by the HSLB, and that she had three days to settle her ndebtedness with them, otherwise, face prosecution. Respondent Nicdaos silence, i.e., her failure to deny or protest the same by way of reply, vis-vis the demand letter, allegedly constitutes an admission of the statements contained therein. On the other hand, the MCTCs decision, as affirmed by the RTC, is allegedly based on the evidence on record; it has been established that the checks were respondent Nicdaos personal checks, that the signatures thereon were hers and that she had issued them to petitioner Ching. With respect to the P20,000,000.00 check, petitioner Ching assails the CAs ruling that it was stolen and was never delivered or issued by respondent Nicdao to him. The issue of the said check being stolen was allegedly not raised during trial. Further, her failure to report the alleged theft to the bank to stop payment of the said lost or missing check is allegedly contrary to human experience. Petitioner Ching describes respondent Nicdaos defense of stolen or lost check as incredible and, therefore, false. Aside from the foregoing substantive issues that he raised, petitioner Ching also faults the CA for not acting and ordering the consolidation of CA-G.R. CR No. 23055 with CA-G.R. CR No. 23054. He informs the Court that latter case is still pending with the CA. In fine, it is petitioner Chings view that the CA gravely erred in disregarding the findings of the MCTC, as affirmed by the RTC, and submits that there is more than sufficient preponderant evidence to hold respondent Nicdao civilly liable to him in the amount of P20,950,000.00. He thus prays that the Court direct respondent Nicdao to pay him the said amount plus 12% interest per annum computed from the date of written demand until the total amount is fully paid. The Respondents Counter-Arguments

38

Respondent Nicdao urges the Court to deny the petition. She posits preliminarily that it is barred under Section 2(b), Rule 111 of the Revised Rules of Court which states: SEC. 2. Institution of separate of civil action. - Except in the cases provided for in Section 3 hereof, after the criminal action has been commenced, the civil action which has been reserved cannot be instituted until final judgment in the criminal action. xxxx (b) Extinction of the penal action does not carry with it extinction of the civil, unless the extinction proceeds from a declaration in a final judgment that the fact from which the civil might arise did not exist. According to respondent Nicdao, the assailed CA decision has already made a finding to the effect that the fact upon which her civil liability might arise did not exist. She refers to the ruling of the CA that the P20,000,000.00 check was stolen; hence, petitioner Ching did not acquire any right or interest over the said check and could not assert any cause of action founded on the said check. Consequently, the CA held that respondent Nicdao had no obligation to make good the stolen check and cannot be held liable for violation of BP 22. She also refers to the CAs pronouncement relative to the ten (10) other checks that they were not issued to apply on account or for value, considering that the loan obligations secured by these checks had already been extinguished by her full payment thereof. To respondent Nicdaos mind, these pronouncements are equivalent to a finding that the facts upon which her civil liability may arise do not exist. The instant petition, which seeks to enforce her civil liability based on the eleven (11) checks, is thus allegedly already barred by the final and executory decision acquitting her. In any case, respondent Nicdao contends that the CA did not commit serious misapprehension of facts when it found that the P20,000,000.00 check was a stolen check and that she never made any transaction with petitioner Ching. Moreover, the other ten (10) checks were not issued to apply on account or for value. These findings are allegedly supported by the evidence on record which consisted of the respective testimonies of the defense witnesses to the effect that: respondent Nicdao had the practice of leaving pre-signed checks placed inside an unsecured cash box in the Vignette Superstore; the salesladies were given the authority to fill up the said checks as to the amount, payee and date; Nuguid beguiled respondent Nicdao to obtain loans from her; as security for the loans, respondent Nicdao issued checks to Nuguid; when the salesladies gave the checks to Nuguid, she instructed them to leave blank the payee and date; Nuguid had access to the grocery store; in 1995, one of the salesladies reported that a check was missing; in 1997, when she had fully paid her loans to Nuguid, respondent Nicdao tried to retrieve her checks but Nuguid and petitioner Ching falsely told her that she still owed them money; they then maliciously filled up the checks making it appear that petitioner Ching was the payee in the five checks and the six others were payable to "cash"; and knowing fully well that these checks were not funded because respondent Nicdao already fully paid her loans, petitioner Ching and Nuguid deposited the checks and caused them to be dishonored by HSLB. It is pointed out by respondent Nicdao that her testimony (that the P20,000,000.00 check was the same one that she lost sometime in 1995) was corroborated by the respective testimonies of her employees. Another indication that it was stolen was the fact that among all the checks which

ended up in the hands of petitioner Ching and Nuguid, only the P20,000,000.00 check was fully typewritten; the rest were invariably handwritten as to the amounts, payee and date. Respondent Nicdao defends the CAs conclusion that the P20,000,000.00 check was stolen on the ground that an appeal in a criminal case throws open the whole case to the appellate courts scrutiny. In any event, she maintains that she had been consistent in her theory of defense and merely relied on the disputable presumption that the person in possession of a stolen article is presumed to be the author of the theft. Considering that it was stolen, respondent Nicdao argues, the P20,000,000.00 check was an incomplete and undelivered instrument in the hands of petitioner Ching and he did not acquire any right or interest therein. Further, he cannot assert any cause of action founded on the said stolen check. Accordingly, petitioner Chings attempt to collect payment on the said check through the instant petition must fail. Respondent Nicdao describes as downright incredible petitioner Chings testimony that she owed him a total sum of P20,950,000.00 without any documentary proof of the loan transactions. She submits that it is contrary to human experience for loan transactions involving such huge amounts of money to be devoid of any documentary proof. In relation thereto, respondent Nicdao underscores that petitioner Ching lied about being employed as a salesman of La Suerte Cigar and Cigarette Manufacturing. It is underscored that he has not adequately shown that he possessed the financial capacity to lend such a huge amount to respondent Nicdao as he so claimed. Neither could she be held liable for the ten (10) other checks (in the total amount of P950,000,000.00) because as respondent Nicdao asseverates, she merely issued them to Nuguid as security for her loans obtained from the latter beginning October 1995 up to 1997. As evidenced by the Planters Bank demand draft in the amount of P1,200,000.00, she already made payment in 1996. The said demand draft was negotiated to petitioner Chings account and he admitted receipt thereof. Respondent Nicdao belies his claim that the demand draft was payment for a prior existing obligation. She asserts that petitioner Ching was unable to present evidence of such a previous transaction. In addition to the Planters Bank demand draft, respondent Nicdao insists that petitioner Ching received, through Nuguid, cash payments as evidenced by the computations written at the back of the cigarette wrappers. Nuguid went to the Vignette Superstore everyday to collect these payments. The other defense witnesses corroborated this fact. Petitioner Ching allegedly never disputed the accuracy of the accounts appearing on these cigarette wrappers; nor did he dispute their authenticity and accuracy. Based on the foregoing evidence, the CA allegedly correctly held that, computing the amount of the Planters Bank demand draft (P1,200,000.00) and those reflected at the back of the cigarette wrappers (P5,780,000.00), respondent Nicdao had already paid petitioner Ching and Nuguid a total sum of P6,980,000.00 for her loan obligations totaling only P950,000.00, as secured by the ten (10) HSLB checks excluding the stolen P20,000,000.00 check. Respondent Nicdao rebuts petitioner Chings argument (that the daily payments were applied to the interests), and claims that this is illegal. Petitioner Ching cannot insist that the daily payments she made applied

39

only to the interests on the loan obligations, considering that there is admittedly no document evidencing these loans, hence, no written stipulation for the payment of interests thereon. On this point, she invokes Article 1956 of the Civil Code, which proscribes the collection of interest payments unless expressly stipulated in writing. Respondent Nicdao emphasizes that the ten (10) other checks that she issued to Nuguid as security for her loans had already been discharged upon her full payment thereof. It is her belief that these checks can no longer be used to coerce her to pay a debt that she does not owe. On the CAs failure to consolidate CA-G.R. CR No. 23055 and CA-G.R. CR No. 23054, respondent Nicdao proffers the explanation that under the RIRCA, consolidation of the cases is not mandatory. In fine, respondent Nicdao urges the Court to deny the petition as it failed to discharge the burden of proving her civil liability with the required preponderance of evidence. Moreover, the CAs acquittal of respondent Nicdao is premised on the finding that, apart from the stolen check, the ten (10) other checks were not made to apply to a valid, due and demandable obligation. This, in effect, is a categorical ruling that the fact from which the civil liability of respondent Nicdao may arise does not exist. The Courts Rulings The petition is denied for lack of merit. Notwithstanding respondent Nicdaos acquittal, petitioner Ching is entitled to appeal the civil aspect of the case within the reglementary period It is axiomatic that "every person criminally liable for a felony is also civilly liable."34 Under the pertinent provision of the Revised Rules of Court, the civil action is generally impliedly instituted with the criminal action. At the time of petitioner Chings filing of the Informations against respondent Nicdao, Section 1,35 Rule 111 of the Revised Rules of Court, quoted earlier, provided in part: SEC. 1. Institution of criminal and civil actions. When a criminal action is instituted, the civil action for the recovery of civil liability is impliedly instituted with the criminal action, unless the offended party waives the civil action, reserves his right to institute it separately, or institutes the civil action prior to the criminal action. Such civil action includes the recovery of indemnity under the Revised Penal Code, and damages under Articles 32, 33, 34 and 2176 of the Civil Code of the Philippines arising from the same act or omission of the accused. xxxx As a corollary to the above rule, an acquittal does not necessarily carry with it the extinguishment of the civil liability of the accused. Section 2(b)36 of the same Rule, also quoted earlier, provided in part: (b) Extinction of the penal action does not carry with it extinction of the civil, unless the extinction proceeds from a declaration in a final judgment that the fact from which the civil might arise did not exist. It is also relevant to mention that judgments of acquittal are required to state "whether the evidence of the prosecution absolutely failed to prove the guilt of the accused or merely failed to prove his guilt beyond reasonable doubt. In either case, the judgment shall determine if the act or omission from which the civil liability might arise did not exist."37

In Sapiera v. Court of Appeals,38 the Court enunciated that the civil liability is not extinguished by acquittal: (a) where the acquittal is based on reasonable doubt; (b) where the court expressly declares that the liability of the accused is not criminal but only civil in nature; and (c) where the civil liability is not derived from or based on the criminal act of which the accused is acquitted. Thus, under Article 29 of the Civil Code ART. 29. When the accused in a criminal prosecution is acquitted on the ground that his guilt has not been proved beyond reasonable doubt, a civil action for damages for the same act or omission may be instituted. Such action requires only a preponderance of evidence. Upon motion of the defendant, the court may require the plaintiff to file a bond to answer for damages in case the complaint should be found to be malicious. If in a criminal case the judgment of acquittal is based upon reasonable doubt, the court shall so declare. In the absence of any declaration to that effect, it may be inferred from the text of the decision whether or not the acquittal is due to that ground. The Court likewise expounded in Salazar v. People39 the consequences of an acquittal on the civil aspect in this wise: The acquittal of the accused does not prevent a judgment against him on the civil aspect of the criminal case where: (a) the acquittal is based on reasonable doubt as only preponderance of evidence is required; (b) the court declared that the liability of the accused is only civil; (c) the civil liability of the accused does not arise from or is not based upon the crime of which the accused is acquitted. Moreover, the civil action based on the delict is extinguished if there is a finding in the final judgment in the criminal action that the act or omission from which the civil liability may arise did not exist or where the accused did not commit the act or omission imputed to him. If the accused is acquitted on reasonable doubt but the court renders judgment on the civil aspect of the criminal case, the prosecution cannot appeal from the judgment of acquittal as it would place the accused in double jeopardy. However, the aggrieved party, the offended party or the accused or both may appeal from the judgment on the civil aspect of the case within the period therefor. From the foregoing, petitioner Ching correctly argued that he, as the offended party, may appeal the civil aspect of the case notwithstanding respondent Nicdaos acquittal by the CA. The civil action was impliedly instituted with the criminal action since he did not reserve his right to institute it separately nor did he institute the civil action prior to the criminal action. Following the long recognized rule that "the appeal period accorded to the accused should also be available to the offended party who seeks redress of the civil aspect of the decision," the period to appeal granted to petitioner Ching is the same as that granted to the accused.40 With petitioner Chings timely filing of the instant petition for review of the civil aspect of the CAs decision, the Court thus has the jurisdiction and authority to determine the civil liability of respondent Nicdao notwithstanding her acquittal. In order for the petition to prosper, however, it must establish that the judgment of the CA acquitting respondent Nicdao falls under any of the three categories enumerated in Salazar and Sapiera, to wit:

40

(a) where the acquittal is based preponderance of evidence is required;

on

reasonable

doubt

as

only

(b) where the court declared that the liability of the accused is only civil; and (c) where the civil liability of the accused does not arise from or is not based upon the crime of which the accused is acquitted. Salazar also enunciated that the civil action based on the delict is extinguished if there is a finding in the final judgment in the criminal action that the act or omission from which the civil liability may arise did not exist or where the accused did not commit the act or omission imputed to him. For reasons that will be discussed shortly, the Court holds that respondent Nicdao cannot be held civilly liable to petitioner Ching. The acquittal of respondent Nicdao likewise effectively extinguished her civil liability A painstaking review of the case leads to the conclusion that respondent Nicdaos acquittal likewise carried with it the extinction of the action to enforce her civil liability. There is simply no basis to hold respondent Nicdao civilly liable to petitioner Ching. First, the CAs acquittal of respondent Nicdao is not merely based on reasonable doubt. Rather, it is based on the finding that she did not commit the act penalized under BP 22. In particular, the CA found that the P20,000,000.00 check was a stolen check which was never issued nor delivered by respondent Nicdao to petitioner Ching. As such, according to the CA, petitioner Ching "did not acquire any right or interest over Check No. 002524 and cannot assert any cause of action founded on said check,"41 and that respondent Nicdao "has no obligation to make good the stolen check and cannot, therefore, be held liable for violation of B.P. Blg. 22."42 With respect to the ten (10) other checks, the CA established that the loans secured by these checks had already been extinguished after full payment had been made by respondent Nicdao. In this connection, the second element for the crime under BP 22, i.e., "that the check is made or drawn and issued to apply on account or for value," is not present. Second, in acquitting respondent Nicdao, the CA did not adjudge her to be civilly liable to petitioner Ching. In fact, the CA explicitly stated that she had already fully paid her obligations. The CA computed the payments made by respondent Nicdao vis--vis her loan obligations in this manner: Clearly, adding the payments recorded at the back of the cigarette cartons by Emma Nuguid in her own handwriting totaling P5,780,000.00 and the P1,200,000.00 demand draft received by Emma Nuguid, it would appear that petitioner [respondent herein] had already made payments in the total amount of P6,980,000.00 for her loan obligation of only P2,100,000.00 (P950,000.00 in the case at bar and P1,150,000.00 in CA-G.R. CR No. 23054).43 On the other hand, its finding relative to the P20,000,000.00 check that it was a stolen check necessarily absolved respondent Nicdao of any civil liability thereon as well. Third, while petitioner Ching attempts to show that respondent Nicdaos liability did not arise from or was not based upon the criminal act of which she was acquitted (ex delicto) but from her loan obligations to him (ex

contractu), however, petitioner Ching miserably failed to prove by preponderant evidence the existence of these unpaid loan obligations. Significantly, it can be inferred from the following findings of the CA in its decision acquitting respondent Nicdao that the act or omission from which her civil liability may arise did not exist. On the P20,000,000.00 check, the CA found as follows: True, indeed, the missing pre-signed and undated check no. 002524 surfaced in the possession of complainant Ching who, in cahoots with his paramour Emma Nuguid, filled up the blank check with his name as payee and in the fantastic amount of P20,000,000.00, dated it October 6, 1997, and presented it to the bank on October 7, 1997, along with the other checks, for payment. Therefore, the inference that the check was stolen is anchored on competent circumstantial evidence. The fact already established is that Emma Nuguid , previous owner of the store, had access to said store. Moreover, the possession of a thing that was stolen , absent a credible reason, as in this case, gives rise to the presumption that the person in possession of the stolen article is presumed to be guilty of taking the stolen article (People v. Zafra, 237 SCRA 664). As previously shown, at the time check no. 002524 was stolen, the said check was blank in its material aspect (as to the name of payee, the amount of the check, and the date of the check), but was already presigned by petitioner. In fact, complainant Ching himself admitted that check no. 002524 in his possession was a blank check (TSN, Jan. 7, 1998, pp. 24-27, Annex J, Petition). Moreover, since it has been established that check no. 002524 had been missing since 1995 (TSN, Sept. 9, 1998, pp. 14-15, Annex DD, Petition; TSN, Sept. 10, 1998, pp. 43-46, Annex EE, Petition), it is abundantly clear that said check was never delivered to complainant Ching. Check no. 002524 was an incomplete and undelivered instrument when it was stolen and ended up in the hands of complainant Ching. Sections 15 and 16 of the Negotiable Instruments Law provide: xxxx In the case of check no. 002524, it is admitted by complainant Ching that said check in his possession was a blank check and was subsequently completed by him alone without authority from petitioner. Inasmuch as check no. 002524 was incomplete and undelivered in the hands of complainant Ching, he did not acquire any right or interest therein and cannot, therefore, assert any cause of action founded on said stolen check (Development Bank of the Philippines v. Sima We, 219 SCRA 736, 740). It goes without saying that since complainant Ching did not acquire any right or interest over check no. 002524 and cannot assert any cause of action founded on said check, petitioner has no obligation to make good the stolen check and cannot, therefore, be held liable for violation of B.P. Blg. 22.44 Anent the other ten (10) checks, the CA made the following findings: Evidence sufficiently shows that the loans secured by the ten (10) checks involved in the cases subject of this petition had already been paid. It is not controverted that petitioner gave Emma Nuguid a demand draft valued at P1,200,000 to pay for the loans guaranteed by said checks and other checks issued to her. Samson Ching admitted having received the demand draft which he deposited in his bank account. However, complainant Samson Ching claimed that the said demand draft represents payment for

41

a previous obligation incurred by petitioner. However, complainant Ching failed to adduce any evidence to prove the existence of the alleged obligation of the petitioner prior to those secured by the subject checks. Apart from the payment to Emma Nuguid through said demand draft, it is also not disputed that petitioner made cash payments to Emma Nuguid who collected the payments almost daily at the Vignette Superstore. As of July 21, 1997, Emma Nuguid collected cash payments amounting to approximately P5,780,000.00. All of these cash payments were recorded at the back of cigarette cartons by Emma Nuguid in her own handwriting, the authenticity and accuracy of which were never denied by either complainant Ching or Emma Nuguid. Clearly, adding the payments recorded at the back of the cigarette cartons by Emma Nuguid in her own handwriting totaling P5,780,000.00 and the P1,200,000.00 demand draft received by Emma Nuguid, it would appear that petitioner had already made payments in the total amount of P6,980,000.00 for her loan in the total amount of P6,980,000.00 for her loan obligation of only P2,100,000.00 (P950,000.00 in the case at bar and P1,150,000.00 in CA-G.R. CR No. 23054).45 Generally checks may constitute evidence of indebtedness.46 However, in view of the CAs findings relating to the eleven (11) checks - that the P20,000,000.00 was a stolen check and the obligations secured by the other ten (10) checks had already been fully paid by respondent Nicdao they can no longer be given credence to establish respondent Nicdaos civil liability to petitioner Ching. Such civil liability, therefore, must be established by preponderant evidence other than the discredited checks. After a careful examination of the records of the case,47 the Court holds that the existence of respondent Nicdaos civil liability to petitioner Ching in the amount of P20,950,000.00 representing her unpaid obligations to the latter has not been sufficiently established by preponderant evidence. Petitioner Ching mainly relies on his testimony before the MCTC to establish the existence of these unpaid obligations. In gist, he testified that from October 1995 up to 1997, respondent Nicdao obtained loans from him in the total amount of P20,950,000.00. As security for her obligations, she issued eleven (11) checks which were invariably blank as to the date, amounts and payee. When respondent Nicdao allegedly refused to pay her obligations despite his due demand, petitioner filled up the checks in his possession with the corresponding amounts and date and deposited them in his account. They were subsequently dishonored by the HSLB for being "DAIF" and petitioner Ching accordingly filed the criminal complaints against respondent Nicdao for violation of BP 22. It is a basic rule in evidence that the burden of proof lies on the party who makes the allegations Et incumbit probatio, qui dicit, non qui negat; cum per rerum naturam factum negantis probatio nulla sit (The proof lies upon him who affirms, not upon him who denies; since, by the nature of things, he who denies a fact cannot produce any proof).48 In civil cases, the party having the burden of proof must establish his case by a preponderance of evidence. Preponderance of evidence is the weight, credit, and value of the aggregate evidence on either side and is usually considered to be synonymous with the term "greater weight of evidence" or "greater weight of the credible evidence." Preponderance of evidence is a phrase which, in the last analysis, means probability of the truth. It is evidence which is more convincing to the court as worthy of belief than that which is offered in opposition thereto.49 Section 1, Rule 133 of the Revised Rules of Court offers the guidelines in determining preponderance of evidence:

SEC. 1. Preponderance of evidence, how determined. In civil cases, the party having the burden of proof must establish his case by a preponderance of evidence. In determining where the preponderance or superior weight of evidence on the issues involved lies, the court may consider all the facts and circumstances of the case, the witnesses manner of testifying, their intelligence, their means and opportunity of knowing the facts to which they are testifying, the nature of the facts to which they testify, the probability or improbability of their testimony, their interest or want of interest, and also their personal credibility so far as the same may legitimately appear upon the trial. The court may also consider the number of witnesses, though the preponderance is not necessarily with the greater number. Unfortunately, petitioner Chings testimony alone does not constitute preponderant evidence to establish respondent Nicdaos civil liability to him amounting to P20,950,000.00. Apart from the discredited checks, he failed to adduce any other documentary evidence to prove that respondent Nicdao still has unpaid obligations to him in the said amount. Bare allegations, unsubstantiated by evidence, are not equivalent to proof under our Rules.50 In contrast, respondent Nicdaos defense consisted in, among others, her allegation that she had already paid her obligations to petitioner Ching through Nuguid. In support thereof, she presented the Planters Bank demand draft for P1,200,000.00. The said demand draft was negotiated to petitioner Chings account and he admitted receipt of the value thereof. Petitioner Ching tried to controvert this by claiming that it was payment for a previous transaction between him and respondent Nicdao. However, other than his self-serving claim, petitioner Ching did not proffer any documentary evidence to prove the existence of the said previous transaction. Considering that the Planters Bank demand draft was dated August 13, 1996, it is logical to conclude that, absent any evidence to the contrary, it formed part of respondent Nicdaos payment to petitioner Ching on account of the loan obligations that she obtained from him since October 1995. Additionally, respondent Nicdao submitted as evidence the cigarette wrappers at the back of which were written the computations of the daily payments that she had made to Nuguid. The fact of the daily payments was corroborated by the other witnesses for the defense, namely, Jocelyn Nicdao and Tolentino. As found by the CA, based on these computations, respondent Nicdao had made a total payment of P5,780,000.00 to Nuguid as of July 21, 1997.51 Again, the payments made, as reflected at the back of these cigarette wrappers, were not disputed by petitioner Ching. Hence, these payments as well as the amount of the Planters Bank demand draft establish that respondent Nicdao already paid the total amount of P6,980,000.00 to Nuguid and petitioner Ching. The Court agrees with the CA that the daily payments made by respondent Nicdao amounting to P5,780,000.00 cannot be considered as interest payments only. Even respondent Nicdao testified that the daily payments that she made to Nuguid were for the interests due. However, as correctly ruled by the CA, no interests could be properly collected in the loan transactions between petitioner Ching and respondent Nicdao because there was no stipulation therefor in writing. To reiterate, under Article 1956 of the Civil Code, "no interest shall be due unless it has been expressly stipulated in writing."

42

Neither could respondent Nicdao be considered to be estopped from denying the validity of these interests. Estoppel cannot give validity to an act that is prohibited by law or one that is against public policy.52 Clearly, the collection of interests without any stipulation therefor in writing is prohibited by law. Consequently, the daily payments made by respondent Nicdao amounting to P5,780,000.00 were properly considered by the CA as applying to the principal amount of her loan obligations. With respect to the P20,000,000.00 check, the defense of respondent Nicdao that it was stolen and that she never issued or delivered the same to petitioner Ching was corroborated by the other defense witnesses, namely, Tolentino and Jocelyn Nicdao. All told, as between petitioner Ching and respondent Nicdao, the requisite quantum of evidence - preponderance of evidence - indubitably lies with respondent Nicdao. As earlier intimated, she cannot be held civilly liable to petitioner Ching for her acquittal; under the circumstances which have just been discussed lengthily, such acquittal carried with it the extinction of her civil liability as well. The CA committed no reversible error in not consolidating CA-G.R. CR No. 23055 and CA-G.R. CR No. 23054 During the pendency of CA-G.R. CR No. 23055 and CA-G.R. CR No. 23054 in the CA, the pertinent provision of the RIRCA on consolidation of cases provided: SEC. 7. Consolidation of Cases. Whenever two or more allied cases are assigned to different Justices, they may be consolidated for study and report to a single Justice. (a) At the instance of any party or Justice to whom the case is assigned for study and report, and with the conformity of all the Justices concerned, the consolidation may be allowed when the cases to be consolidated involve the same parties and/or related questions of fact and/or law.53 The use of the word "may" denotes the permissive, not mandatory, nature of the above provision, Thus, no grave error could be imputed to the CA when it proceeded to render its decision in CA-G.R. CR No. 23055, without consolidating it with CA-G.R. CR No. 23054. WHEREFORE, premises considered, the Petition is DENIED for lack of merit. SO ORDERED.
Footnotes
Penned by Associate Justice Artemio G. Tuquero, with Associate Justices Eubulo G. Verzola and Elvi John S. Asuncion concurring; rollo, pp. 58-67.
1 2

12

Criminal Case No. 9443. TSN, December 10, 1997, pp. 9-36. TSN, January 7, 1998, pp. 5-39. TSN, January 28, 1998, pp. 7-15. Id. at 16-20. TSN, August 5, 1998, pp. 10-36. Exhibits "7" to "14". Also referred to as "cigarette cartons". TSN, August 19, 1998, pp. 8-14. TSN, September 9, 1998, pp. 10-32. TSN, September 30, 1998, pp. 14-35. Id. at 37-53. TSN, October 21, 1998, pp. 4-16. Id. at 17-21. Citing Navarro v. Court of Appeals, G.R. Nos. 112389-90, August 1, 1994, 234 SCRA 639, 643-644. Citing Cruz v. Court of Appeals, G.R. No. 108738, June 17, 1994, 233 SCRA 301, 308. Rollo (Vol. I), p. 80. Id. at 66-67. Id. at 60-61. Citing Civil Code, Art. 1231, par. 1. Citing People v. Zafra, G.R. No. 110079, October 19, 1994, 237 SCRA 664, 667.

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

Citing Development Bank of the Philippines v. Sima Wei, G.R. No. 85419, March 9, 1993, 219 SCRA 736, 741.
32 33

Rules and Guidelines in the Filing and Prosecution of Criminal Cases under Batas Pambansa Bilang 22. Revised Penal Code, Article 100.

34

In 2000, the Supreme Court amended the Rules on Criminal Procedure. Section 1, Rule 111 now reads in full:
35

SEC. 1. Institution of criminal and civil actions. (a) When a criminal action is instituted, the civil action for the recovery of civil liability arising from the offense charged shall be deemed instituted with the criminal action unless the offended party waives the civil action, reserves the right to institute it separately or institutes the civil action prior to the criminal action. The reservation of the right to institute separately the civil action shall be made before the prosecution starts presenting its evidence and under circumstances affording the offended party a reasonable opportunity to make such a reservation. When the offended party seeks to enforce civil liability against the accused by way of moral, nominal, temperate, or exemplary damages without specifying the amount thereof in the complaint or information, the filing fees therefor shall constitute a first lien on the judgment awarding such damages. Where the amount of damages, other than actual, is specified in the complaint or information, the corresponding filing fees shall be paid by the offended party upon the filing thereof in court. Except as otherwise provided in these Rules, no filing fees shall be required for actual damages. No counterclaim, cross-claim or third-party complaint may be filed by the accused in the criminal case, but any cause of action which could have been the subject thereof may be litigated in a separate civil action. (b) The criminal action for violation of Batas Pambansa Blg. 22 shall be deemed to include the corresponding civil action. No reservation to file such civil action separately shall be allowed. Upon filing of the aforesaid joint criminal and civil actions, the offended party shall pay in full the filing fees based on the amount of the check involved, which shall be considered as the actual damages claimed. Where the complaint or information also seeks to recover liquidated, moral, nominal, temperate or exemplary damages, the offended party shall pay additional filing fees based on the amounts alleged therein. If the amounts are not so alleged but any of these damages are subsequently awarded by the court, the filing fees based on the amount awarded shall constitute a first lien on the judgment. Where the civil action has been filed separately and trial thereof has not yet commenced, it may be consolidated with the criminal action upon application with the court trying the latter case. If the application is granted, the trial of both actions shall proceed in accordance with section 2 of this Rule governing consolidation of the civil and criminal actions.

Criminal Case No. 9433. Criminal Case No. 9434. Criminal Case No. 9435. Criminal Case No. 9436. Criminal Case No. 9437. Criminal Case No. 9438. Criminal Case No. 9439. Criminal Case No. 9440. Criminal Case No. 9441. Criminal Case No. 9442.

10

11

43

36

As amended, Section 2, Rule 111 now reads:

SEC. 2. When separate civil action is suspended. After the criminal action has been commenced, the separate civil action arising therefrom cannot be instituted until final judgment has been entered in the criminal action. If the criminal action is filed after the said civil action has already been instituted, the latter shall be suspended in whatever stage it may be found before judgment on the merits. The suspension shall last until final judgment is rendered in the criminal action. Nevertheless, before judgment on the merits is rendered in the civil action, the same may, upon motion of the offended party, be consolidated with the criminal action in the court trying the criminal action. In case of consolidation, the evidence already adduced in the civil action shall be deemed automatically reproduced in the criminal action without prejudice to the right of the prosecution to cross-examine the witnesses presented by the offended party in the criminal case and of the parties to present additional evidence. The consolidated criminal and civil actions shall be tried and decided jointly. During the pendency of the criminal action, the running of the period of prescription of the civil action which cannot be instituted separately or whose proceeding has been suspended shall be tolled. The extinction of the penal action does not carry with it extinction of the civil action. However, the civil action based on delict shall be deemed extinguished if there is a finding in a final judgment in the criminal action that the act or omission from which the civil liability may arise did not exist.
37

Revised Rules of Court, Rule 120, Sec. 2, last paragraph. 373 Phil. 150, 153 (1999). 458 Phil. 504, 515 (2003).

38

39

Sanchez v. Far East Bank and Trust Company, G.R. No. 115308, November 15, 2005, 475 SCRA 97, 109 citing, among others, People v. Ursua, 60 Phil. 252 (1934); People v. Rodriguez, 97 Phil. 349 (1955).
40 41

CA Decision, p. 9; rollo (Vol. I), p. 66. Id.; id. Id. at 5; id. at 62. CA Decision, pp. 8-9; rollo, pp. 65-66. Id. at 4-5; id. at 61-62. Go v. Bacaron, G.R. No. 159048, October 11, 2005, 472 SCRA 339, 349.

42

43

44

45

46

Ordinarily, questions of facts are not taken up in a petition for review in certiorari under Rule 45 of the Rules of Court. However, the Court has been constrained to review the factual issues in this case, as they fall under one of the recognized exceptions to this rule, in particular, the findings of the CA in this case are contrary to those of the MCTC and RTC. See, for example, Menchavez v. Teves, Jr., G.R. No. 153201, January 26, 2005, 449 SCRA 380, 395.
47 48

Acabal v. Acabal, G.R. No. 148376, March 31, 2005, 454 SCRA 555, 569. Republic v. Orfinada, Sr., G.R No. 141145, November 12, 2004, 442 SCRA 342, 351-352. Manzano v. Perez, Sr., 414 Phil. 728, 738 (2001). CA Decision, p. 5; rollo (vol. I), p. 62. Ouano v. Court of Appeals, 446 Phil. 690, 708 (2003).

49

50

51

52

Rule 3 of the 1994 Revised IRCA. In the 2002 RIRCA, the pertinent provision (Section 3, Rule 3) on consolidation now reads:
53

SEC. 3. Consolidation of Cases. When related cases are assigned to different Justices, they may be consolidated and assigned to one Justice. (a) At the instance of a party with notice to the other party; or at the instance of the Justice to whom the case is assigned, and with the conformity of the Justice to whom the cases shall be consolidated, upon notice to the parties, consolidation may be allowed when the cases involve the same parties and/or related questions of facts or law.

44

SECOND DIVISION G.R. No. 85419 March 9, 1993

DEVELOPMENT BANK OF RIZAL, plaintiff-Petitioner, vs. SIMA WEI and/or LEE KIAN HUAT, MARY CHENG UY, SAMSON TUNG, ASIAN INDUSTRIAL PLASTIC CORPORATION and PRODUCERS BANK OF THE PHILIPPINES, defendantsrespondents. CAMPOS, JR., J.: On July 6, 1986, the Development Bank of Rizal (petitioner Bank for brevity) filed a complaint for a sum of money against respondents Sima Wei and/or Lee Kian Huat, Mary Cheng Uy, Samson Tung, Asian Industrial Plastic Corporation (Plastic Corporation for short) and the Producers Bank of the Philippines, on two causes of action: (1) To enforce payment of the balance of P1,032,450.02 on a promissory note executed by respondent Sima Wei on June 9, 1983; and (2) To enforce payment of two checks executed by Sima Wei, payable to petitioner, and drawn against the China Banking Corporation, to pay the balance due on the promissory note. Except for Lee Kian Huat, defendants filed their separate Motions to Dismiss alleging a common ground that the complaint states no cause of action. The trial court granted the defendants' Motions to Dismiss. The Court of Appeals affirmed this decision, * to which the petitioner Bank, represented by its Legal Liquidator, filed this Petition for Review by Certiorari, assigning the following as the alleged errors of the Court of Appeals: 1 (1) THE COURT OF APPEALS ERRED IN HOLDING THAT THE PLAINTIFF-PETITIONER HAS NO CAUSE OF ACTION AGAINST DEFENDANTS-RESPONDENTS HEREIN. (2) THE COURT OF APPEALS ERRED IN HOLDING THAT SECTION 13, RULE 3 OF THE REVISED RULES OF COURT ON ALTERNATIVE DEFENDANTS IS NOT APPLICABLE TO HEREIN DEFENDANTSRESPONDENTS. The antecedent facts of this case are as follows: In consideration for a loan extended by petitioner Bank to respondent Sima Wei, the latter executed and delivered to the former a promissory note, engaging to pay the petitioner Bank or order the amount of P1,820,000.00 on or before June 24, 1983 with interest at 32% per annum. Sima Wei made partial payments on the note, leaving a balance of P1,032,450.02. On November 18, 1983, Sima Wei issued two crossed checks payable to petitioner Bank drawn against China Banking Corporation, bearing respectively the serial numbers 384934, for the amount of P550,000.00 and 384935, for the amount of P500,000.00. The said

checks were allegedly issued in full settlement of the drawer's account evidenced by the promissory note. These two checks were not delivered to the petitioner-payee or to any of its authorized representatives. For reasons not shown, these checks came into the possession of respondent Lee Kian Huat, who deposited the checks without the petitioner-payee's indorsement (forged or otherwise) to the account of respondent Plastic Corporation, at the Balintawak branch, Caloocan City, of the Producers Bank. Cheng Uy, Branch Manager of the Balintawak branch of Producers Bank, relying on the assurance of respondent Samson Tung, President of Plastic Corporation, that the transaction was legal and regular, instructed the cashier of Producers Bank to accept the checks for deposit and to credit them to the account of said Plastic Corporation, inspite of the fact that the checks were crossed and payable to petitioner Bank and bore no indorsement of the latter. Hence, petitioner filed the complaint as aforestated. The main issue before Us is whether petitioner Bank has a cause of action against any or all of the defendants, in the alternative or otherwise. A cause of action is defined as an act or omission of one party in violation of the legal right or rights of another. The essential elements are: (1) legal right of the plaintiff; (2) correlative obligation of the defendant; and (3) an act or omission of the defendant in violation of said legal right. 2 The normal parties to a check are the drawer, the payee and the drawee bank. Courts have long recognized the business custom of using printed checks where blanks are provided for the date of issuance, the name of the payee, the amount payable and the drawer's signature. All the drawer has to do when he wishes to issue a check is to properly fill up the blanks and sign it. However, the mere fact that he has done these does not give rise to any liability on his part, until and unless the check is delivered to the payee or his representative. A negotiable instrument, of which a check is, is not only a written evidence of a contract right but is also a species of property. Just as a deed to a piece of land must be delivered in order to convey title to the grantee, so must a negotiable instrument be delivered to the payee in order to evidence its existence as a binding contract. Section 16 of the Negotiable Instruments Law, which governs checks, provides in part: Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. . . . Thus, the payee of a negotiable instrument acquires no interest with respect thereto until its delivery to him. 3 Delivery of an instrument means transfer of possession, actual or constructive, from one person to another. 4 Without the initial delivery of the instrument from the drawer to the payee, there can be no liability

45

on the instrument. Moreover, such delivery must be intended to give effect to the instrument. The allegations of the petitioner in the original complaint show that the two (2) China Bank checks, numbered 384934 and 384935, were not delivered to the payee, the petitioner herein. Without the delivery of said checks to petitioner-payee, the former did not acquire any right or interest therein and cannot therefore assert any cause of action, founded on said checks, whether against the drawer Sima Wei or against the Producers Bank or any of the other respondents. In the original complaint, petitioner Bank, as plaintiff, sued respondent Sima Wei on the promissory note, and the alternative defendants, including Sima Wei, on the two checks. On appeal from the orders of dismissal of the Regional Trial Court, petitioner Bank alleged that its cause of action was not based on collecting the sum of money evidenced by the negotiable instruments stated but on quasi-delict - a claim for damages on the ground of fraudulent acts and evident bad faith of the alternative respondents. This was clearly an attempt by the petitioner Bank to change not only the theory of its case but the basis of his cause of action. It is well-settled that a party cannot change his theory on appeal, as this would in effect deprive the other party of his day in court. 5 Notwithstanding the above, it does not necessarily follow that the drawer Sima Wei is freed from liability to petitioner Bank under the loan evidenced by the promissory note agreed to by her. Her allegation that she has paid the balance of her loan with the two checks payable to petitioner Bank has no merit for, as We have earlier explained, these checks were never delivered to petitioner Bank. And even granting, without admitting, that there was delivery to petitioner Bank, the delivery of checks in payment of an obligation does not constitute payment unless they are cashed or their value is impaired through the fault of the creditor. 6 None of these exceptions were alleged by respondent Sima Wei. Therefore, unless respondent Sima Wei proves that she has been relieved from liability on the promissory note by some other cause, petitioner Bank has a right of action against her for the balance due thereon. However, insofar as the other respondents are concerned, petitioner Bank has no privity with them. Since petitioner Bank never received the checks on which it based its action against said respondents, it never owned them (the checks) nor did it acquire any interest therein. Thus, anything which the respondents may have done with respect to said checks could not have prejudiced petitioner Bank. It had no right or interest in the checks which could have been violated by said respondents. Petitioner Bank has therefore no cause of action against said respondents, in the alternative or otherwise. If at all, it is Sima Wei, the drawer, who

would have a cause of action against her co-respondents, if the allegations in the complaint are found to be true. With respect to the second assignment of error raised by petitioner Bank regarding the applicability of Section 13, Rule 3 of the Rules of Court, We find it unnecessary to discuss the same in view of Our finding that the petitioner Bank did not acquire any right or interest in the checks due to lack of delivery. It therefore has no cause of action against the respondents, in the alternative or otherwise. In the light of the foregoing, the judgment of the Court of Appeals dismissing the petitioner's complaint is AFFIRMED insofar as the second cause of action is concerned. On the first cause of action, the case is REMANDED to the trial court for a trial on the merits, consistent with this decision, in order to determine whether respondent Sima Wei is liable to the Development Bank of Rizal for any amount under the promissory note allegedly signed by her. SO ORDERED. Narvasa, C.J., Padilla, Regalado and Nocon, JJ., concur.
Endnotes: * CA G.R. CV No. 11980 dated October 12, 1988. Penned by Associate Justice Venancio D. Aldecoa, Jr. with Associate Justices Ricardo P. Tensuan and Luis L. Victor, concurring.chanrobles virtual law library 1 Petition, p. 7; Rollo, p. 20.chanrobles virtual law library 2 Caseas vs. Rosales, et al., 19 SCRA 462 (1967); Remitere, et al. vs. Vda. de Yulo, et al., 16 SCRA 251 (1966).chanrobles virtual law library 3 In re Martens' Estate, 226 Iowa 162, 283 N.W. 885 (1939); Shriver vs. Danby, 113 A. 612 (1921).chanrobles virtual law library 4 Negotiable Instruments Law, Sec. 191, par. 6.chanrobles virtual law library 5 Ganzon vs. Court of Appeals, 161 SCRA 646 (1988). See also 1 M. MORAN, COMMENTS ON THE RULES OF COURT 715 (1957 ed.), citing San Agustin vs. Barrios, 68 Phil. 475 (1939), Toribio vs. Decasa, 55 Phil. 461 (1930), American Express Co. vs. Natividad, 46 Phil. 207 (1924), Agoncillo vs. Javier, 38 Phil. 424 (1918).chanrobles virtual law library 6 CIVIL CODE, Art. 1249, par. 2.

46

FIRST DIVISION G.R. No. 112985 April 21, 1999 PEOPLE OF THE PHILIPPINES, plaintiff-appellee vs. MARTIN L. ROMERO and ERNESTO C. RODRIGUEZ, accused-appellants. PARDO, J The case before the Court is an appeal of accused Martin L. Romero and Ernesto C. Rodriguez from the Joint Judgment 1 of the Regional Trial Court, Branch 2, Butuan City, convicting each of them of estafa under Article 315, par. 2 (d) of the Revised Penal Code, in relation to Presidential Decree No. 1689, for widescale swindling, and sentencing each of them to suffer the penalty of life imprisonment and to jointly and severally pay Ernesto A. Ruiz the amount of one hundred fifty thousand pesos (P150,000.00), with interest at the rate of twelve percent (12%) per annum, starting September 14, 1989, until fully paid, and to pay ten thousand pesos (P10,000.00), as moral damages. On October 25, 1989, Butuan City acting fiscal Ernesto M. Brocoy filed with the Regional Trial Court, Butuan City, in Information against the two (2) accused estafa, 2 as follows: That on or about September 14, 1989, at Butuan City, Philippines, and within the jurisdiction of this Honorable Court, the above-named accused being the General Manager and Operation Manager which solicit funds from the general public for investment, conspiring, confederating together and mutually helping, one another, by means of deceit and false pretense, did then and there willfully, unlawfully and feloniously deliberately defraud one Ernesto A. Ruiz by convincing the latter to invest his money in the amount of P150,000.00 with a promise return of 800 % profit within 21 days and in the process caused the issuance of Butuan City Rural [sic] Bank Check No. 158181 postdated to October 5, 1989 in the amount of One Million Two Hundred Thousand Pesos (P1,200,000.00) Philippine Currency, that upon presentation of said check to the drawee bank for payment the same was dishonored and that notwithstanding repeated demands made on said accused to pay and/or change the check to cash, they consistently failed and refused and still fail and refuse to pay or redeem the check, to the damage and prejudice of

the complainant P1,200,000.00. 3

in

the

aforestated

amount

of

On the same day, the city fiscal filed with the same court another information against the two (2) accused for violation of Batas Pambansa Bilang 22, arising from the issuance of the same check. 4 On January 11, 1990, both accused were arraigned before the Regional Trial Court, Branch 5, 5 Butuan City, where they plead not guilty to both informations. The prosecution presented its evidence on January 10, 1991, with complainant, Ernesto A. Ruiz, and Daphne Parrocho, the usher/collector of the corporation being managed by accused, testifying for the prosecution. On August 12, 1991, the defense presented its only witness, accused Martin L. Romero. On November 13, 1992, the parties submitted a joint stipulation of facts, signed only by their respective counsels. Thereafter, the case was submitted for decision. On March 30, 1993, the trail court promulgated a Joint Judgment dated March 25, 1993. The trial court acquitted the accused in Criminal Case No. 3806 6 based on reasonable doubt, but convicted them in Criminal Case No. 3808 7 and accordingly sentenced each of them, as follows: IN VIEW OF THE FOREGOING, the Court hereby renders judgments, finding or declaring (a) Accused Martin L. Romero and Ernesto C. Rodriguez innocent on reasonable doubt in Criminal Case No. 3806, for violation of Batas Pambansa Bilang 22; (b) Accused Martin L. Romero and Ernesto C. Rodriguez guilty beyond reasonable doubt in Criminal Case No. 3808 for estafa under P.D. 1689 for wide scale [sic] swindling and accordingly sentences them to suffer life imprisonment (Section 1 P.D. 1689) and ordered jointly and severally to return to Ernesto A. Ruiz the amount of One Hundred Fifty Thousand Pesos (P150,000.00) with interest thereon at the rate of Twelve percent (12%) per annum starting from September 14, 1989 until fully paid and to pay the amount Of Ten Thousand Pesos (P10,000.00) as moral damages. In the service of their sentence, the accused pursuant to R.A. 6127, shall be credited for the preventive imprisonment they have undergone (PP vs. Ortencio, 38 Phil 941; PP vs.

47

Gabriel, No. L-13750, October 30, 1959, cited in Gregorio's "Fundamentals of Criminal Law Review", P. 178, Seventh Edition, 1985). 8 On March 31, 1993, accused filed their notice of appeal, which the trial court gave due course on April 5, 1993. On March 16, 1994, this Court ordered the, accused to file their appellants' brief. Accused-appellants filed their brief on October 30, 1995, while the Solicitor General filed the appellee's brief on March 8, 1996. During the pendency of the appeal, on November 12, 1997, accused Ernesto Rodriguez died. 9 As a consequence of his death before final judgment, his criminal and civil liability ex delicto, were extinguished. 10 Complainant Ernesto A. Ruiz was a radio commentator of Radio DXRB, Butuan City. In August, 1989, he came to know the business of Surigao San Andres Industrial Development Corporation (SAIDECOR), when he interviewed accused Martin Romero and Ernesto Rodriguez regarding the corporation's investment operations in Butuan City and Agusan del Norte. Romero was the president and general manager of SAIDECOR, while Rodriguez was the operations manager. SAIDECOR started its operation on August 24, 1989 as a marketing business. Later, it engaged in soliciting funds and investments from the public. The corporation guaranteed an 800% return on investment within fifteen (15) or twenty one (21) days. Investors were given coupons containing the capital and the return on the capital collectible on the date agreed upon. It stopped operations in September, 1989. On September 14, 1989, complainant Ernesto A. Ruiz went to SAIDECOR office in Butuan City to make an investment, accompanied by his friend Jimmy Acebu, and SAIDECOR collection agent Daphne Parrocho. After handing over the amount of one hundred fifty thousand pesos (P150,000.00) to Ernesto Rodriguez, complainant received a postdated Butuan City Rural Bank check instead of the usual redeemable coupon. The check indicated P1,000,200.00 as the amount in words, but the amount in figures was for P1,200,000.00, as the return on the investment. Compliant did not notice the discrepancy.

When the check was presented to the bank for payment on October 5, 1989, it was dishonored for insufficiency of funds, as evidenced by the check return slip issued by the bank. 11 Both accused could not be located and demand for payment was made only sometime in November 1989 during the preliminary investigation of this case. Accused responded that they had no money. Daphne Parrocho, 12 testified that on September 14, 1989, complainant, with his friend Jimmy Acebu, approached her to invest the amount of P150,000.00 at SAIDECOR. As she has reached her quota, and therefore, no longer authorized to receive the amount, she accompanied them to the office of SAIDECOR at Ong Yiu District, Butuan City. Accused Ernesto Rodriguez accepted the investment and issued the check signed by him and Martin Romero. For their defense, accused Martin Romero 13 testified that on September 14, 1989, he issued a check in the amount of P1,2000,000.00 corresponding to the total of the P150,000.00 investment and the 800% return thereon. He claimed that the corporation had a deposit of fourteen million pesos (P14,000,000.00) at the time of the issuance of the check and four million pesos (P4,000,000.00) at the time SAIDDECOR stopped operations. Romero knew these things because he used to monitor the funds of the corporation with the bank. He was not aware that the check he issued was dishonored because he never had the occasion to meet the complainant again after the September 14, 1989 transaction. He only came to know about this when the case was already filed in court sometime in the second or third week of January 1990. In this appeal, both accused did not deny that complainant made an investment with SAIDECOR in the amount of P150,000.00. However, they denied that deceit was employed in the transaction. They assigned as errors: (1) their conviction under P.D. 1689 due to the prosecution's failure to establish their guilt beyond reasonable doubt; and (2) the trial court's failure to consider the joint stipulation of facts in their favor. 15 There is no merit in this appeal. We sustain accusedappellant's conviction. Under paragraph 2 (d) of Article 315, as amended by R.A. 4885, 16 the elements of estafa are: (1) a check was postdated or issued in payment of an obligation contracted

48

at the time it was issued; (2) lack or insufficiency of funds to cover the check; (3) damage to the payee thereof. 17 The prosecution has satisfactorily established all these elements. Fraud, in its general sense, is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal equitable duty, trust, or confidence justly reposed, resulting in damage to another, or by which an undue and unconscientious advantage is taken of another. 18 It is a generic term embracing all multifarious means which human ingenuity can device, and which are resorted to by one individual to secure an advantage over another by false suggestions or by suppression of truth and includes all surprise, trick, cunning, dissembling and any unfair way by which another is cheated. 19 Deceit is a specific of fraud. It is actual fraud, and consists in any false representation or contrivance whereby one person overreaches and misleads another, to his hurt. Deceit excludes the idea of mistake. 20 There is deceit when one is misled, either by guide or trickery or by other means, to believe to be true what is really false. 21 In this case, there was deception when accused fraudulently represented to complainant that his investment with the corporation would have an 800% return in 15 or 21 days. Upon receipt of the money, accused-appellant Martin Romero issued a postdated check. Although accusedappellant contends that sufficient funds were deposited in the bank when the check was issued, he presented no officer of the bank to substantiate the contention. The check was dishonored when presented for payment, and the check return slip submitted in evidence indicated that it was dishonored due to insufficiency of funds. Even assuming for the sake of argument that the check was dishonored without any fraudulent pretense or fraudulent act of the drawer, the latter's failure to cover the amount within three days after notice creates a rebuttable presumption of fraud. 22 Admittedly (1) the check was dishonored for insufficiency of funds as evidenced by the check return slip; (2) complainant notified accused of the dishonor; and (3) accused failed to make good the check within three days. Presumption of deceit remained since accused failed to prove otherwise.

Complainant P150,000.00.

sustained

damage

in

the

amount

of

Accused-appellant also contends that had the trial court admitted the Admission and Stipulaion of Facts of November 9, 1992, it would prove that SAIDECOR had sufficient funds in the bank. Accused-appellant relies on the fact that there was a discrepancy between the amount in words and the amount in figures in the check that was dishonored. The amount in words was P1,000,200.00, while the amount in figures was P1,200,000.00. It is admitted that the corporation had in the bank P1,144,760.00 on September 28, 1989, and P1,124,307.14 on April 2, 1990. The check was presented for payment on October 5, 1989. The rule in the Negotiable Instruments Law is that when there is ambiguity in the amount in words and the amount in figures, it would be the amount in words that would prevail. 23 However, this rule of interpretation finds no application in the case. The agreement was perfectly clear that at the end of twenty one (21) days, the investment of P150,000.00 would become P1,200,000.00. Even if the trial court admitted the stipulation of facts, it would not be favorable to accused-appellant. The factual narration in this case established a kind of Ponzi scheme. 24 This is "an investment swindle in which high profits are promised from fictitious sources and early investors are paid off with funds raised from later ones." It is sometimes called a pyramid scheme because a broader base of gullible investors must support the structure as time passes. In the recent case of People vs. Priscilla Balasa, 25 this Court held that a transaction similar to the case at hand is not an investment strategy but a gullibility scheme, which works only as long as there is an ever increasing number of new investors joining the scheme. It is difficult to sustain over a long period of time because the operator needs an ever larger pool of later investors to continue paying the promised profits to early investors. The idea behind this type of swindle is that the "con-man" collects his money from his second or third round of investors and then absconds before anyone else shows up to collect. Necessarily, these schemes only last weeks, or months at most, just like what happened in this case.

49

The Court notes that one of the accused-appellants, Ernesto Rodriguez, died pending appeal. Pursuant to the doctrine established in People vs. Bayotas, 26 the death of the accused pending appeal of his conviction extinguishes his criminal liability as well as the civil liability ex delicto. The criminal action is extinguished inasmuch as there is no longer a defendant to stand as the accused, the civil action instituted therein for recovery of civil liability ex delicto is ipso facto extinguished, grounded as it is on the criminal case. Corollarily, the claim for civil liability survives notwithstanding the death of the accused, if the same may also be predicted on a source of obligation other than delicit. 27 Thus, the outcome of this appeal pertains only remaining accused-appellant, Martin L. Romero. The trail court considered the swindling involved in this case as having been committed by a syndicate 28 and sentenced the accused to life imprisonment based on the provisions of Presidential Decree 1689, which increased the penalty for certain forms of swindling or estafa. 29 However, the prosecution failed to clearly establish that the corporation was a syndicate, as defined under the law. The penalty of life imprisonment cannot be imposed. What would be applicable in the present case is the second paragraph of a Presidential Decree No. 1689, Section 1, which provides that: When not committed by a syndicate as above defined, the penalty imposable shall be reclusion temporal to reclusion perpetua if the amount of the fraud exceeds 100.000 pesos. Art. 77 of the Revised Penal Code on complex penalties provides that "whenever the penalty prescribed does not have one of the forms specially provided for in this Code, the periods shall be distributed, applying by analogy the prescribed rules," that is, those in Articles 61 and 76. 30 Hence, where as in this case, the penalty provided by Section 1 of Presidential Decree No. 1689 for estafa under Articles 315 and 316 of the Code is reclusion temporal to reclusion perpetua, the minimum period thereof is twelve (12) year and one (1) day to sixteen (16) years of reclusion temporal; the medium period is sixteen (16) years and one (1) day to twenty (20) years of reclusion temporal; and the maximum period is reclusion perpetua. In the case at bar, no mitigating or aggravating circumstance has been alleged or proved. Applying the rules

in the Revised Penal Code for graduating penalties by degreses 31 to determine the proper period, 32 the penalty for the offense of estafa under Article 315, 2(d) as amended by P.D. 1689 involving the amount of P150,000.00 is the medium of the period of the complex penalty in said Section 1, that is, sixteen (16) years and one (1) day to twenty (20) years. This penalty, being that which is to be actually imposed in accordance with the therefor and not merely imposable as a general prescription under the law, shall be the maximum range of the indeterminate sentence. 33 The minimum thereof shall be taken, as aforesaid, from any period of the penalty next lower in degree which is prision mayor. To enable the complainant to obtain means, diversion or amusements that will serve to alleviate the moral sufferings undergone by him, by reason of the failure of the accused to return his money, moral damages are imposed against accused-appellant Martin L. Romero in the amount of twenty thousand pesos (P20,000.00), 34 To serve as an example for the public good, exemplary damages are awarded against him in the amount of fifteen thousand pesos (P15,000. 00).
35

WHEREFORE, the Court hereby AFFIRMS WITH MODIFICATION the appealed judgment. The Court hereby sentences accused-appellant Martin Romero to suffer an indeterminate penalty of ten (10) years and one (1) day of prision mayor, as minimum, to sixteen (16) years and one (1) day of reclusion temporal, as maximum, to indemnify Ernesto A. Ruiz in the amount of one hundred fifty thousand pesos (P150,000.00) with interest thereon at six (6%) per centrum per annum from September 14, 1989, until fully paid, to pay twenty thousand pesos (P20,000.00) as moral damages and fifteen thousand pesos (P15,000.00), as exemplary damages, and the costs.1wphi1.nt SO ORDERED. Davide, Jr., C.J., Melo, Kapunan and Ynares-Santiago, JJ., concur.
Footnotes 1 Joint Judgment, dated March 25, 1993, Rollo, pp. 15-23. 2 Docketed as Criminal Case No. 3808. 3 Rollo, p. 7. 4 Docketed as Criminal Case No. 3806.

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5 During the arraignment of the accused the presiding judge of Branch 5, Regional Trial Court, Butuan City was Hon. Edelwina C. Pastoral. 6 Violation of Batas Pambansa Bilang 22. 7 Violation of Article 315, par. 2 (d) of the Revised Penal Code, in relation to Presidential Decree 1689. 8 Joint Judgment, Rollo, pp. 92-93. 9 Rollo, p. 170. 10 People vs. Tugbang, 196 SCRA 341, 345 citing People vs. Satorre, 72 SCRA 439. 11 Original Records, Criminal Case No. 3808, p. 41-42. 12 tsn, January 10, 1991. 13 tsn, August 12, 1991. 14 tsn, August 12, 1991, Rollo, p. 206. 15 Rollo, pp. 72-85. 16 Art. 315 Swindling (estafa) Any person who shall defraud another by any of the means mentioned hereinbelow shall be punished by: 1. . . . 2. By means of any of the following false pretenses or fraudulent acts executed prior to or simultaneous with the commission of the fraud: (a) . . . (d) by postdating a check, or issuing a check in payment of an obligation when the offender had no funds in the bank, or his funds deposited therein were not sufficient to cover the amount of the check. The failure of the drawer of the check to deposit the amount necessary to cover his check within three (3) days from receipt of notice from the bank and or the payee or holder that said check has been dishonored for lack or insufficiency of funds shall be prima facie evidence of deceit constituting false pretense or fraudulent act. (As amended by RA 4885, BP 22 and P.D. 1689) 17 Jovita Sales vs. Court of Appeals, 164 SCRA 717, 721, citing the case of People vs. Sabio, 86 SCRA 568. 18 37 Am Jur 2d 1, p. 19. 19 People vs. Priscilla Balasas, G.R. No. 106357, G.R. Nos. 108601-02, September 3, 1998. 20 37 Am Jur 2d 2 , p. 20. 21 Quirico Abela vs. Cesario C. Golez, 131 SCRA 12. 22 Reyes Inc. Revised Penal Code, Book II, p. 697, citing the explanatory note of Senate Bill No. 413, Article 315, par 2 (d), Revised Penal Code, as amended by Republic Act 4885; Vallarta vs. Court of Appeals, 150 SCRA 336, 343. 23 Section 17, Act No. 2031. 24 Named after Charles Ponzi who promoted the scheme in the 1920s, the original scheme involved the issuance of bonds which offered 50% interest in 45 days or a 100% profit if held for 90 days,; People vs. Priscilla Balasa, supra. 25 People vs. Priscilla Balasa, supra. 26 236 SCRA 239, 251. 27 People vs. Bayotas, supra. 28 A syndicate consists of five or more persons formed with the intention of carrying out the unlawful or illegal act, transaction, enterprises or scheme, and the defraudation results in the misappropriation of moneys contributed by stockholders or members of rural banks, cooperatives, "samahang nayon(s)," or farmers' associations, or funds solicited by corporations associations from the general publics [Section 1, P. D. 1689] 29 There was a need to provide for higher penalty to prevent acts of defraudation or misappropriation of funds solicited by corporations/associations from the general public which erodes the confidence of the public in the banking and cooperative system, contravenes the public interest, and constitutes economic sabotage that threatens the stability of the nation. [Preamble, P.D. 1689] 30 People vs. Lian, 255 SCRA 532, on p. 541.

31 Art. 61, Revised Penal Code. 32 Art. 64, Ibid. 33 People vs. Lian, supra on p. 542. 34 Prudenciado vs. Alliance Transport System, Inc., 148 SCRA 440, 449. 35 Lopez vs. Pan American World Airways, 16 SCRA 431.

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CALINOG vs. PNB 51 O.G. 4104

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FIRST DIVISION G.R. No. L-53194 March 14, 1988 PHILIPPINE NATIONAL BANK petitioner, vs. HON. ROMULO S. QUIMPO, Presiding Judge, Court of First Instance of Rizal, Branch XIV, and FRANCISCO S. GOZON II, respondents. GANCAYCO, J.: On July 3, 1973, Francisco S. Gozon II, who was a depositor of the Caloocan City Branch of the Philippine National Bank, went to the bank in his car accompanied by his friend Ernesto Santos whom he left in the car while he transacted business in the bank. When Santos saw that Gozon left his check book he took a check therefrom, filled it up for the amount of P5,000.00, forged the signature of Gozon, and thereafter he encashed the check in the bank on the same day. The account of Gozon was debited the said amount. Upon receipt of the statement of account from the bank, Gozon asked that the said amount of P5,000.00 should be returned to his account as his signature on the check was forged but the bank refused. Upon complaint of private respondent on February 1, 1974 Ernesto Santos was apprehended by the police authorities and upon investigation he admitted that he stole the check of Gozon, forged his signature and encashed the same with the Bank. Hence Gozon filed the complaint for recovery of the amount of P5,000.00, plus interest, damages, attorney's fees and costs against the bank in the Court of First Instance of Rizal. After the issues were joined and the trial on the merits ensued, a decision was rendered on February 4, 1980, the dispositive part of which reads as follows: WHEREFORE, judgment is hereby rendered in favor of the plaintiff. The defendant is hereby condemned to return to plaintiff the amount of P5,000.00 which it had unlawfully withheld from the latter, with interest at the legal rate from September 22, 1972 until the amount is fully delivered. The defendant is further condemned to pay plaintiff the sum of P2,000.00 as attorney's fees and to pay the costs of this suit.

Not satisfied therewith, the bank now filed this petition for review on certiorari in this Court raising the sole legal issue that THE ACT OF RESPONDENT FRANCISCO GOZON, II IN PUTTING HIS CHECK BOOK CONTAINING THE CHECK IN QUESTION INTO THE HANDS OF ERNESTO SANTOS WAS INDEED THE PROXIMATE CAUSE OF THE LOSS, THEREBY PRECLUDING HIM FROM SETTING UP THE DEFENSE OF FORGERY OR WANT 0F AUTHORITY UNDER SECTION 23 OF THE NEGOTIABLE INSTRUMENTS LAW, ACT NO. 3201 The petition is devoid of merit. This Court reproduces with approval the disquisition of the court a quo as follows: A bank is bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily change the amount so paid to the account of the depositor whose name was forged' (San Carlos Milling Co. vs. Bank of the P.I., 59 Phil. 59). This rule is absolutely necessary to the circulation of drafts and checks, and is based upon the presumed negligence of the drawee in failing to meet its obligation to know the signature of its correspondent. ... There is nothing inequitable in such a rule. If the paper comes to the drawee in the regular course of business, and he, having the opportunity ascertaining its character, pronounces it to be valid and pays it, it is not only a question of payment under mistake, but payment in neglect of duty which the commercial law places upon him, and the result of his negligence must rest upon him (12 ALR 1901, citing many cases found in I Agbayani, supra). Defendant, however, interposed the defense that it exercised diligence in accordance with the accepted norms of banking practice when it accepted and paid Exhibit "A". It presented evidence that the check had to pass scrutiny by a signature verifier as well as an officer of the bank. A comparison of the signature (Exhibit "A-l") on the forged check (Exhibit "A") with plaintiffs exemplar signatures (Exhibits "5-N" and "5-B") found in the PNB Form 35-A would immediately show the negligence of the employees of the defendant bank. Even a not too careful comparison would immediately arrest one's attention and direct it to the

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graceful lines of plaintiffs exemplar signatures found in Exhibits "5-A" and "5-B". The formation of the first letter "F" in the exemplars, which could be regarded as artistic, is completely different from the way the same letter is formed in Exhibit "A-l". That alone should have alerted a more careful and prudent signature verifier. The prime duty of a bank is to ascertain the genuineness of the signature of the drawer or the depositor on the check being encashed. 1 It is expected to use reasonable business prudence in accepting and cashing a check presented to it. In this case the findings of facts of the court a quo are conclusive. The trial court found that a comparison of the signature on the forged check and the sample signatures of private respondent show marked differences as the graceful lines in the sample signature which is completely different from those of the signature on the forged check. Indeed the NBI handwriting expert Estelita Santiago Agnes whom the trial court considered to be an "unbiased scientific expert" indicated the marked differences between the signature of private respondent on the sample signatures and the questioned signature. Notwithstanding the testimony of Col. Fernandez, witness for petitioner, advancing the opinion that the questioned signature appears to be genuine, the trial court by merely examining the pictorial report presented by said witness, found a marked difference in the second "c" in Francisco as written on the questioned signature as compared to the sample signatures, and the separation between the "s" and the "c" in the questioned signature while they are connected in the sample signatures. 2 Obviously, petitioner was negligent in encashing said forged check without carefully examining the signature which shows marked variation from the genuine signature of private respondent. In reference to the allegation of the petitioner that it is the negligence of private respondent that is the cause of the loss which he suffered, the trial court held: The act of plaintiff in leaving his checkbook in the car while he went out for a short while can not be considered negligence sufficient to excuse the defendant bank from its own negligence. It should be home in mind that when defendant left his car, Ernesto Santos, a long time classmate and friend remained in the same. Defendant could not have

been expected to know that the said Ernesto Santos would remove a check from his checkbook. Defendant had trust in his classmate and friend. He had no reason to suspect that the latter would breach that trust . We agree. Private respondent trustee Ernesto Santos as a classmate and a friend. He brought him along in his car to the bank and he left his personal belongings in the car. Santos however removed and stole a check from his cheek book without the knowledge and consent of private respondent. No doubt private respondent cannot be considered negligent under the circumstances of the case. WHEREFORE, the petition is DISMISSED for lack of merit with costs against petitioner. SO ORDERED. Teehankee, C.J., Narvasa, Cruz and Grio-Aquino, JJ., concur.
Footnotes 1 PNB vs. National City Bank, 63 Phil. 711, 742; Banco de Oro Savings & Mortgage Bank vs. Equitable Bank Corp., G.R. No. 74917, Jan. 20, 1988. 2 See Decision; p. 59, Rollo.

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SECOND DIVISION G.R. No. 92244 February 9, 1993 NATIVIDAD GEMPESAW, petitioner, vs. THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS, respondents.
L.B. Camins for petitioner. Angara, Abello, Concepcion, Regals & Cruz for private respondent

THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT FINDING AND RULING THAT IT IS THE GROSS AND INEXCUSABLE NEGLIGENCE AND FRAUDULENT ACTS OF THE OFFICIALS AND EMPLOYEES OF THE RESPONDENT BANK IN FORGING THE SIGNATURE OF THE PAYEES AND THE WRONG AND/OR ILLEGAL PAYMENTS MADE TO PERSONS, OTHER THAN TO THE INTENDED PAYEES SPECIFIED IN THE CHECKS, IS THE DIRECT AND PROXIMATE CAUSE OF THE DAMAGE TO PETITIONER WHOSE SAVING (SIC) ACCOUNT WAS DEBITED. III THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT ORDERING THE RESPONDENT BANK TO RESTORE OR RE-CREDIT THE CHECKING ACCOUNT OF THE PETITIONER IN THE CALOOCAN CITY BRANCH BY THE VALUE OF THE EIGHTY-TWO (82) CHECKS WHICH IS IN THE AMOUNT OF P1,208,606.89 WITH LEGAL INTEREST.

CAMPOS, JR., J.: From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447), petitioner, Natividad Gempesaw, appealed to this Court in a Petition for Review, on the issue of the right of the drawer to recover from the drawee bank who pays a check with a forged indorsement of the payee, debiting the same against the drawer's account. The records show that on January 23, 1985, petitioner filed a Complaint against the private respondent Philippine Bank of Communications (respondent drawee Bank) for recovery of the money value of eighty-two (82) checks charged against the petitioner's account with the respondent drawee Bank on the ground that the payees' indorsements were forgeries. The Regional Trial Court, Branch CXXVIII of Caloocan City, which tried the case, rendered a decision on November 17, 1987 dismissing the complaint as well as the respondent drawee Bank's counterclaim. On appeal, the Court of Appeals in a decision rendered on February 22, 1990, affirmed the decision of the RTC on two grounds, namely (1) that the plaintiff's (petitioner herein) gross negligence in issuing the checks was the proximate cause of the loss and (2) assuming that the bank was also negligent, the loss must nevertheless be borne by the party whose negligence was the proximate cause of the loss. On March 5, 1990, the petitioner filed this petition under Rule 45 of the Rules of Court setting forth the following as the alleged errors of the respondent Court: 1
I THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE NEGLIGENCE OF THE DRAWER IS THE PROXIMATE CAUSE OF THE RESULTING INJURY TO THE DRAWEE BANK, AND THE DRAWER IS PRECLUDED FROM SETTING UP THE FORGERY OR WANT OF AUTHORITY. II

From the records, the relevant facts are as follows: Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery stores located at Rizal Avenue Extension and at Second Avenue, Caloocan City. Among these groceries are D.G. Shopper's Mart and D.G. Whole Sale Mart. Petitioner maintains a checking account numbered 13-00038-1 with the Caloocan City Branch of the respondent drawee Bank. To facilitate payment of debts to her suppliers, petitioner draws checks against her checking account with the respondent bank as drawee. Her customary practice of issuing checks in payment of her suppliers was as follows: the checks were prepared and filled up as to all material particulars by her trusted bookkeeper, Alicia Galang, an employee for more than eight (8) years. After the bookkeeper prepared the checks, the completed checks were submitted to the petitioner for her signature, together with the corresponding invoice receipts which indicate the correct obligations due and payable to her suppliers. Petitioner signed each and every check without bothering to verify the accuracy of the checks against the corresponding invoices because she reposed full and implicit trust and confidence on her bookkeeper. The issuance and delivery of the checks to the payees named therein were left to the bookkeeper. Petitioner admitted that she did not make any verification as to whether or not the checks were delivered to their respective payees. Although the respondent drawee Bank notified her of all checks presented to and paid by the bank, petitioner did not verify he correctness of the returned checks, much less check if the payees actually received the checks in payment for the supplies she received. In the course of her business operations covering a period of two years, petitioner issued,

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following her usual practice stated above, a total of eightytwo (82) checks in favor of several suppliers. These checks were all presented by the indorsees as holders thereof to, and honored by, the respondent drawee Bank. Respondent drawee Bank correspondingly debited the amounts thereof against petitioner's checking account numbered 30-000381. Most of the aforementioned checks were for amounts in excess of her actual obligations to the various payees as shown in their corresponding invoices. To mention a few: . . . 1) in Check No. 621127, dated June 27, 1984 in the amount of P11,895.23 in favor of Kawsek Inc. (Exh. A-60), appellant's actual obligation to said payee was only P895.33 (Exh. A-83); (2) in Check No. 652282 issued on September 18, 1984 in favor of Senson Enterprises in the amount of P11,041.20 (Exh. A-67) appellant's actual obligation to said payee was only P1,041.20 (Exh. 7); (3) in Check No. 589092 dated April 7, 1984 for the amount of P11,672.47 in favor of Marchem (Exh. A-61) appellant's obligation was only P1,672.47 (Exh. B); (4) in Check No. 620450 dated May 10, 1984 in favor of Knotberry for P11,677.10 (Exh. A-31) her actual obligation was only P677.10 (Exhs. C and C-1); (5) in Check No. 651862 dated August 9, 1984 in favor of Malinta Exchange Mart for P11,107.16 (Exh. A-62), her obligation was only P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated August 11, 1984 in favor of Grocer's International Food Corp. in the amount of P11,335.60 (Exh. A-66), her obligation was only P1,335.60 (Exh. E and E-1); (7) in Check No. 589019 dated March 17, 1984 in favor of Sophy Products in the amount of P11,648.00 (Exh. A-78), her obligation was only P648.00 (Exh. G); (8) in Check No. 589028 dated March 10, 1984 for the amount of P11,520.00 in favor of the Yakult Philippines (Exh. A-73), the latter's invoice was only P520.00 (Exh. H-2); (9) in Check No. 62033 dated May 23, 1984 in the amount of P11,504.00 in favor of Monde Denmark Biscuit (Exh. A-34), her obligation was only P504.00 (Exhs. I-1 and I-2). 2 Practically, all the checks issued and honored by the respondent drawee bank were crossed checks. 3 Aside from the daily notice given to the petitioner by the respondent drawee Bank, the latter also furnished her with a monthly statement of her transactions, attaching thereto all the cancelled checks she had issued and which were debited against her current account. It was only after the lapse of more two (2) years that petitioner found out about the fraudulent manipulations of her bookkeeper.

All the eighty-two (82) checks with forged signatures of the payees were brought to Ernest L. Boon, Chief Accountant of respondent drawee Bank at the Buendia branch, who, without authority therefor, accepted them all for deposit at the Buendia branch to the credit and/or in the accounts of Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very close friend of Alfredo Y. Romero. Sixty-three (63) out of the eighty-two (82) checks were deposited in Savings Account No. 00844-5 of Alfredo Y. Romero at the respondent drawee Bank's Buendia branch, and four (4) checks in his Savings Account No. 32-81-9 at its Ongpin branch. The rest of the checks were deposited in Account No. 0443-4, under the name of Benito Lam at the Elcao branch of the respondent drawee Bank. About thirty (30) of the payees whose names were specifically written on the checks testified that they did not receive nor even see the subject checks and that the indorsements appearing at the back of the checks were not theirs. The team of auditors from the main office of the respondent drawee Bank which conducted periodic inspection of the branches' operations failed to discover, check or stop the unauthorized acts of Ernest L. Boon. Under the rules of the respondent drawee Bank, only a Branch Manager and no other official of the respondent drawee bank, may accept a second indorsement on a check for deposit. In the case at bar, all the deposit slips of the eighty-two (82) checks in question were initialed and/or approved for deposit by Ernest L. Boon. The Branch Managers of the Ongpin and Elcao branches accepted the deposits made in the Buendia branch and credited the accounts of Alfredo Y. Romero and Benito Lam in their respective branches. On November 7, 1984, petitioner made a written demand on respondent drawee Bank to credit her account with the money value of the eighty-two (82) checks totalling P1,208.606.89 for having been wrongfully charged against her account. Respondent drawee Bank refused to grant petitioner's demand. On January 23, 1985, petitioner filed the complaint with the Regional Trial Court. This is not a suit by the party whose signature was forged on a check drawn against the drawee bank. The payees are not parties to the case. Rather, it is the drawer, whose signature is genuine, who instituted this action to recover from the drawee bank the money value of eighty-two (82)

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checks paid out by the drawee bank to holders of those checks where the indorsements of the payees were forged. How and by whom the forgeries were committed are not established on the record, but the respective payees admitted that they did not receive those checks and therefore never indorsed the same. The applicable law is the Negotiable Instruments Law 4 (heretofore referred to as the NIL). Section 23 of the NIL provides: 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. Under the aforecited provision, forgery is a real or absolute defense by the party whose signature is forged. A party whose signature to an instrument was forged was never a party and never gave his consent to the contract which gave rise to the instrument. Since his signature does not appear in the instrument, he cannot be held liable thereon by anyone, not even by a holder in due course. Thus, if a person's signature is forged as a maker of a promissory note, he cannot be made to pay because he never made the promise to pay. Or where a person's signature as a drawer of a check is forged, the drawee bank cannot charge the amount thereof against the drawer's account because he never gave the bank the order to pay. And said section does not refer only to the forged signature of the maker of a promissory note and of the drawer of a check. It covers also a forged indorsement, i.e., the forged signature of the payee or indorsee of a note or check. Since under said provision a forged signature is "wholly inoperative", no one can gain title to the instrument through such forged indorsement. Such an indorsement prevents any subsequent party from acquiring any right as against any party whose name appears prior to the forgery. Although rights may exist between and among parties subsequent to the forged indorsement, not one of them can acquire rights against parties prior to the forgery. Such forged indorsement cuts off the rights of all subsequent parties as against parties prior to the forgery. However, the law makes an exception to these rules where a party is precluded from setting up forgery as a defense.

As a matter of practical significance, problems arising from forged indorsements of checks may generally be broken into two types of cases: (1) where forgery was accomplished by a person not associated with the drawer for example a mail robbery; and (2) where the indorsement was forged by an agent of the drawer. This difference in situations would determine the effect of the drawer's negligence with respect to forged indorsements. While there is no duty resting on the depositor to look for forged indorsements on his cancelled checks in contrast to a duty imposed upon him to look for forgeries of his own name, a depositor is under a duty to set up an accounting system and a business procedure as are reasonably calculated to prevent or render difficult the forgery of indorsements, particularly by the depositor's own employees. And if the drawer (depositor) learns that a check drawn by him has been paid under a forged indorsement, the drawer is under duty promptly to report such fact to the drawee bank. 5 For his negligence or failure either to discover or to report promptly the fact of such forgery to the drawee, the drawer loses his right against the drawee who has debited his account under a forged indorsement. 6 In other words, he is precluded from using forgery as a basis for his claim for re-crediting of his account. In the case at bar, petitioner admitted that the checks were filled up and completed by her trusted employee, Alicia Galang, and were given to her for her signature. Her signing the checks made the negotiable instrument complete. Prior to signing the checks, there was no valid contract yet. Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument to the payee for the purpose of giving effect thereto. 7 The first delivery of the instrument, complete in form, to the payee who takes it as a holder, is called issuance of the instrument. 8 Without the initial delivery of the instrument from the drawer of the check to the payee, there can be no valid and binding contract and no liability on the instrument. Petitioner completed the checks by signing them as drawer and thereafter authorized her employee Alicia Galang to deliver the eighty-two (82) checks to their respective payees. Instead of issuing the checks to the payees as named in the checks, Alicia Galang delivered them to the Chief Accountant of the Buendia branch of the respondent drawee Bank, a certain Ernest L. Boon. It was established

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that the signatures of the payees as first indorsers were forged. The record fails to show the identity of the party who made the forged signatures. The checks were then indorsed for the second time with the names of Alfredo Y. Romero and Benito Lam, and were deposited in the latter's accounts as earlier noted. The second indorsements were all genuine signatures of the alleged holders. All the eighty-two (82) checks bearing the forged indorsements of the payees and the genuine second indorsements of Alfredo Y. Romero and Benito Lam were accepted for deposit at the Buendia branch of respondent drawee Bank to the credit of their respective savings accounts in the Buendia, Ongpin and Elcao branches of the same bank. The total amount of P1,208,606.89, represented by eighty-two (82) checks, were credited and paid out by respondent drawee Bank to Alfredo Y. Romero and Benito Lam, and debited against petitioner's checking account No. 13-00038-1, Caloocan branch. As a rule, a drawee bank who has paid a check on which an indorsement has been forged cannot charge the drawer's account for the amount of said check. An exception to this rule is where the drawer is guilty of such negligence which causes the bank to honor such a check or checks. If a check is stolen from the payee, it is quite obvious that the drawer cannot possibly discover the forged indorsement by mere examination of his cancelled check. This accounts for the rule that although a depositor owes a duty to his drawee bank to examine his cancelled checks for forgery of his own signature, he has no similar duty as to forged indorsements. A different situation arises where the indorsement was forged by an employee or agent of the drawer, or done with the active participation of the latter. Most of the cases involving forgery by an agent or employee deal with the payee's indorsement. The drawer and the payee often time shave business relations of long standing. The continued occurrence of business transactions of the same nature provides the opportunity for the agent/employee to commit the fraud after having developed familiarity with the signatures of the parties. However, sooner or later, some leak will show on the drawer's books. It will then be just a question of time until the fraud is discovered. This is specially true when the agent perpetrates a series of forgeries as in the case at bar. The negligence of a depositor which will prevent recovery of an unauthorized payment is based on failure of the depositor to act as a prudent businessman would under the

circumstances. In the case at bar, the petitioner relied implicitly upon the honesty and loyalty of her bookkeeper, and did not even verify the accuracy of amounts of the checks she signed against the invoices attached thereto. Furthermore, although she regularly received her bank statements, she apparently did not carefully examine the same nor the check stubs and the returned checks, and did not compare them with the same invoices. Otherwise, she could have easily discovered the discrepancies between the checks and the documents serving as bases for the checks. With such discovery, the subsequent forgeries would not have been accomplished. It was not until two years after the bookkeeper commenced her fraudulent scheme that petitioner discovered that eighty-two (82) checks were wrongfully charged to her account, at which she notified the respondent drawee bank. It is highly improbable that in a period of two years, not one of Petitioner's suppliers complained of non-payment. Assuming that even one single complaint had been made, petitioner would have been duty-bound, as far as the respondent drawee Bank was concerned, to make an adequate investigation on the matter. Had this been done, the discrepancies would have been discovered, sooner or later. Petitioner's failure to make such adequate inquiry constituted negligence which resulted in the bank's honoring of the subsequent checks with forged indorsements. On the other hand, since the record mentions nothing about such a complaint, the possibility exists that the checks in question covered inexistent sales. But even in such a case, considering the length of a period of two (2) years, it is hard to believe that petitioner did not know or realize that she was paying more than she should for the supplies she was actually getting. A depositor may not sit idly by, after knowledge has come to her that her funds seem to be disappearing or that there may be a leak in her business, and refrain from taking the steps that a careful and prudent businessman would take in such circumstances and if taken, would result in stopping the continuance of the fraudulent scheme. If she fails to take steps, the facts may establish her negligence, and in that event, she would be estopped from recovering from the bank. 9 One thing is clear from the records that the petitioner failed to examine her records with reasonable diligence whether before she signed the checks or after receiving her bank statements. Had the petitioner examined her records

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more carefully, particularly the invoice receipts, cancelled checks, check book stubs, and had she compared the sums written as amounts payable in the eighty-two (82) checks with the pertinent sales invoices, she would have easily discovered that in some checks, the amounts did not tally with those appearing in the sales invoices. Had she noticed these discrepancies, she should not have signed those checks, and should have conducted an inquiry as to the reason for the irregular entries. Likewise had petitioner been more vigilant in going over her current account by taking careful note of the daily reports made by respondent drawee Bank in her issued checks, or at least made random scrutiny of cancelled checks returned by respondent drawee Bank at the close of each month, she could have easily discovered the fraud being perpetrated by Alicia Galang, and could have reported the matter to the respondent drawee Bank. The respondent drawee Bank then could have taken immediate steps to prevent further commission of such fraud. Thus, petitioner's negligence was the proximate cause of her loss. And since it was her negligence which caused the respondent drawee Bank to honor the forged checks or prevented it from recovering the amount it had already paid on the checks, petitioner cannot now complain should the bank refuse to recredit her account with the amount of such checks. 10 Under Section 23 of the NIL, she is now precluded from using the forgery to prevent the bank's debiting of her account. The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong & Shanghai Bank 11 is not applicable to the case at bar because in said case, the check was fraudulently taken and the signature of the payee was forged not by an agent or employee of the drawer. The drawer was not found to be negligent in the handling of its business affairs and the theft of the check by a total stranger was not attributable to negligence of the drawer; neither was the forging of the payee's indorsement due to the drawer's negligence. Since the drawer was not negligent, the drawee was duty-bound to restore to the drawer's account the amount theretofore paid under the check with a forged payee's indorsement because the drawee did not pay as ordered by the drawer. Petitioner argues that respondent drawee Bank should not have honored the checks because they were crossed checks. Issuing a crossed check imposes no legal obligation on the drawee not to honor such a check. It is more of a warning to the holder that the check cannot be presented to

the drawee bank for payment in cash. Instead, the check can only be deposited with the payee's bank which in turn must present it for payment against the drawee bank in the course of normal banking transactions between banks. The crossed check cannot be presented for payment but it can only be deposited and the drawee bank may only pay to another bank in the payee's or indorser's account. Petitioner likewise contends that banking rules prohibit the drawee bank from having checks with more than one indorsement. The banking rule banning acceptance of checks for deposit or cash payment with more than one indorsement unless cleared by some bank officials does not invalidate the instrument; neither does it invalidate the negotiation or transfer of the said check. In effect, this rule destroys the negotiability of bills/checks by limiting their negotiation by indorsement of only the payee. Under the NIL, the only kind of indorsement which stops the further negotiation of an instrument is a restrictive indorsement which prohibits the further negotiation thereof. Sec. 36. When indorsement restrictive. An indorsement is restrictive which either (a) Prohibits further negotiation of the instrument; or xxx xxx xxx In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written in express words at the back of the instrument, so that any subsequent party may be forewarned that ceases to be negotiable. However, the restrictive indorsee acquires the right to receive payment and bring any action thereon as any indorser, but he can no longer transfer his rights as such indorsee where the form of the indorsement does not authorize him to do so. 12 Although the holder of a check cannot compel a drawee bank to honor it because there is no privity between them, as far as the drawer-depositor is concerned, such bank may not legally refuse to honor a negotiable bill of exchange or a check drawn against it with more than one indorsement if there is nothing irregular with the bill or check and the drawer has sufficient funds. The drawee cannot be compelled to accept or pay the check by the drawer or any holder because as a drawee, he incurs no liability on the check unless he accepts it. But the drawee will make itself

59

liable to a suit for damages at the instance of the drawer for wrongful dishonor of the bill or check. Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of forgery by reason of her gross negligence. But under Section 196 of the NIL, any case not provided for in the Act shall be governed by the provisions of existing legislation. Under the laws of quasi-delict, she cannot point to the negligence of the respondent drawee Bank in the selection and supervision of its employees as being the cause of the loss because negligence is the proximate cause thereof and under Article 2179 of the Civil Code, she may not be awarded damages. However, under Article 1170 of the same Code the respondent drawee Bank may be held liable for damages. The article provides Those who in the performance of their obligations are guilty of fraud, negligence or delay, and those who in any manner contravene the tenor thereof, are liable for damages. There is no question that there is a contractual relation between petitioner as depositor (obligee) and the respondent drawee bank as the obligor. In the performance of its obligation, the drawee bank is bound by its internal banking rules and regulations which form part of any contract it enters into with any of its depositors. When it violated its internal rules that second endorsements are not to be accepted without the approval of its branch managers and it did accept the same upon the mere approval of Boon, a chief accountant, it contravened the tenor of its obligation at the very least, if it were not actually guilty of fraud or negligence. Furthermore, the fact that the respondent drawee Bank did not discover the irregularity with respect to the acceptance of checks with second indorsement for deposit even without the approval of the branch manager despite periodic inspection conducted by a team of auditors from the main office constitutes negligence on the part of the bank in carrying out its obligations to its depositors. Article 1173 provides The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstance of the persons, of the time and of the place. . . . We hold that banking business is so impressed with public interest where the trust and confidence of the public in

general is of paramount importance such that the appropriate standard of diligence must be a high degree of diligence, if not the utmost diligence. Surely, respondent drawee Bank cannot claim it exercised such a degree of diligence that is required of it. There is no way We can allow it now to escape liability for such negligence. Its liability as obligor is not merely vicarious but primary wherein the defense of exercise of due diligence in the selection and supervision of its employees is of no moment. Premises considered, respondent drawee Bank is adjudged liable to share the loss with the petitioner on a fifty-fifty ratio in accordance with Article 172 which provides: Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts according to the circumstances. With the foregoing provisions of the Civil Code being relied upon, it is being made clear that the decision to hold the drawee bank liable is based on law and substantial justice and not on mere equity. And although the case was brought before the court not on breach of contractual obligations, the courts are not precluded from applying to the circumstances of the case the laws pertinent thereto. Thus, the fact that petitioner's negligence was found to be the proximate cause of her loss does not preclude her from recovering damages. The reason why the decision dealt on a discussion on proximate cause is due to the error pointed out by petitioner as allegedly committed by the respondent court. And in breaches of contract under Article 1173, due diligence on the part of the defendant is not a defense. PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court for the reception of evidence to determine the exact amount of loss suffered by the petitioner, considering that she partly benefited from the issuance of the questioned checks since the obligation for which she issued them were apparently extinguished, such that only the excess amount over and above the total of these actual obligations must be considered as loss of which one half must be paid by respondent drawee bank to herein petitioner. SO ORDERED. Narvasa, C.J., Feliciano, Regalado and Nocon, JJ., concur.
# Footnotes

60

* Penned by Associate Justice Celso L. Magsino, Associate Justices Nathanael P. De Pano, Jr. and Cezar D. Francisco, concurring. 1 Rollo, p.11. 2 Rollo, pp. 20-21; CA Decision, pp. 2-3. See Notes 2-6 thereof. 3 A crossed check is defined as a check crossed with two (2) lines, between which are either the name of a bank or the words "and company," in full or abbreviated. In the former case, the banker on whom it is drawn must not pay the money for the check to any other than the banker named; in the latter case, he must not pay it to any other than a banker. Black's Law Dictionary 301 (4th Ed.), citing 2 Steph. Comm. 118, note C; 7 Exch. 389; [1903] A.C. 240; Farmers' Bank v. Johnson, King & Co., 134 Ga. 486, 68 S.E. 65, 30 L.R.A., N.S. 697. 4 Act No. 2031, enacted on February 3, 1911. 5 Britton, Bills and Notes, Sec. 143, pp. 663-664. 6 City of New York vs. Bronx County Trust Co., 261 N.Y. 64, 184 N.E. 495 (1933); Detroit Piston Ring Co. vs. Wayne County & Home Savings Bank, 252 Mich. 163, 233 N.W. 185 (1930); C.E. Erickson Co. vs. Iowa Nat. Bank 211 Iowa 495, 230 N.W. 342 (1930). 7 NIL, Sec. 16. 8 Ibid., Sec. 191, par. 10. 9 Detroit Piston Ring Co. vs. Wayne County & Home Savings Bank, supra, note 3. 10 Defiance Lumber Co. vs. Bank of California, N.A., 180 Wash. 533, 41 P. 2d 135 (1935); National Surety Co. vs. President and Directors of Manhattan Co., et al., 252 N.Y. 247, 169 N.E. 372 (1929); Erickson Co. vs. Iowa National Bank, supra, note 3. 11 43 Phil. 678 (1922). 12 NIL, Sec. 37.

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EN BANC G.R. No. L-26001 October 29, 1968 PHILIPPINE NATIONAL BANK, petitioner, vs. THE COURT OF APPEALS and PHILIPPINE COMMERCIAL AND INDUSTRIAL BANK, respondents.
Tomas Besa, Jose B. Galang and Juan C. Jimenez for petitioner. San Juan, Africa & Benedicto for respondents.

the check: "All prior indorsements and/or Lack of Endorsement Guaranteed, Philippine Commercial and Industrial Bank," Padre Faura Branch, Manila; that, on the same date, the PCIB sent the check to the PNB, for clearance, through the Central Bank; and that, over two (2) months before, or on November 13, 1961, the GSIS had notified the PNB, which acknowledged receipt of the notice, that said check had been lost, and, accordingly, requested that its payment be stopped. In its brief, the PNB maintains that the lower court erred: (1) in not finding the PCIB guilty of negligence; (2) in not finding that the indorsements at the back of the check are forged; (3) in not finding the PCIB liable to the PNB by virtue of the former's warranty on the back of the check; (4) in not holding that "clearing" is not "acceptance", in contemplation of the Negotiable Instruments law; (5) in not finding that, since the check had not been accepted by the PNB, the latter is entitled to reimbursement therefor; and (6) in denying the PNB's right to recover from the PCIB. The first assignment of error will be discussed later, together with the last,with which it is interrelated. As regards the second assignment of error, the PNB argues that, since the signatures of the drawer are forged, so must the signatures of the supposed indorsers be; but this conclusion does not necessarily follow from said premise. Besides, there is absolutely no evidence, and the PNB has not even tried to prove that the aforementioned indorsements are spurious. Again, the PNB refunded the amount of the check to the GSIS, on account of the forgery in the signatures, not of the indorsers or supposed indorsers, but of the officers of the GSIS as drawer of the instrument. In other words, the question whether or not the indorsements have been falsified is immaterial to the PNB's liability as a drawee, or to its right to recover from the PCIB,1 for, as against the drawee, the indorsement of an intermediate bank does not guarantee the signature of the drawer,2 since the forgery of the indorsement is not the cause of the loss.3 With respect to the warranty on the back of the check, to which the third assignment of error refers, it should be noted that the PCIB thereby guaranteed "all prior indorsements," not the authenticity of the signatures of the officers of the GSIS who signed on its behalf, because the GSIS is not an indorser of the check, but its drawer. 4 Said

CONCEPCION, C.J.: The Philippine National Bank hereinafter referred to as the PNB seeks the review by certiorari of a decision of the Court of Appeals, which affirmed that of the Court of First Instance of Manila, dismissing plaintiff's complaint against the Philippine Commercial and Industrial Bank hereinafter referred to as the PCIB for the recovery of P57,415.00. A partial stipulation of facts entered into by the parties and the decision of the Court of Appeals show that, on about January 15, 1962, one Augusto Lim deposited in his current account with the PCIB branch at Padre Faura, Manila, GSIS Check No. 645915- B, in the sum of P57,415.00, drawn against the PNB; that, following an established banking practice in the Philippines, the check was, on the same date, forwarded, for clearing, through the Central Bank, to the PNB, which did not return said check the next day, or at any other time, but retained it and paid its amount to the PCIB, as well as debited it against the account of the GSIS in the PNB; that, subsequently, or on January 31, 1962, upon demand from the GSIS, said sum of P57,415.00 was recredited to the latter's account, for the reason that the signatures of its officers on the check were forged; and that, thereupon, or on February 2, 1962, the PNB demanded from the PCIB the refund of said sum, which the PCIB refused to do. Hence, the present action against the PCIB, which was dismissed by the Court of First Instance of Manila, whose decision was, in turn, affirmed by the Court of Appeals. It is not disputed that the signatures of the General Manager and the Auditor of the GSIS on the check, as drawer thereof, are forged; that the person named in the check as its payee was one Mariano D. Pulido, who purportedly indorsed it to one Manuel Go; that the check purports to have been indorsed by Manuel Go to Augusto Lim, who, in turn, deposited it with the PCIB, on January 15, 1962; that, thereupon, the PCIB stamped the following on the back of

62

warranty is irrelevant, therefore, to the PNB's alleged right to recover from the PCIB. It could have been availed of by a subsequent indorsee5 or a holder in due course6 subsequent to the PCIB, but, the PNB is neither. 7 Indeed, upon payment by the PNB, as drawee, the check ceased to be a negotiable instrument, and became a mere voucher or proof of payment.8 Referring to the fourth and fifth assignments of error, we must bear in mind that, in general, "acceptance", in the sense in which this term is used in the Negotiable Instruments Law9 is not required for checks, for the same are payable on demand.10 Indeed, "acceptance" and "payment" are, within the purview of said Law, essentially different things, for the former is "a promise to perform an act," whereas the latter is the "actual performance" thereof.11 In the words of the Law,12 "the acceptance of a bill is the signification by the drawee of his assent to the order of the drawer," which, in the case of checks, is the payment, on demand, of a given sum of money. Upon the other hand, actual payment of the amount of a check implies not only an assent to said order of the drawer and a recognition of the drawer's obligation to pay the aforementioned sum, but, also, a compliance with such obligation. Let us now consider the first and the last assignments of error. The PNB maintains that the lower court erred in not finding that the PCIB had been guilty of negligence in not discovering that the check was forged. Assuming that there had been such negligence on the part of the PCIB, it is undeniable, however, that the PNB has, also, been negligent, with the particularity that the PNB had been guilty of a greater degree of negligence, because it had a previous and formal notice from the GSIS that the check had been lost, with the request that payment thereof be stopped. Just as important, if not more important and decisive, is the fact that the PNB's negligence was the main or proximate cause for the corresponding loss. In this connection, it will be recalled that the PCIB did not cash the check upon its presentation by Augusto Lim; that the latter had merely deposited it in his current account with the PCIB; that, on the same day, the PCIB sent it, through the Central Bank, to the PNB, for clearing; that the PNB did not return the check to the PCIB the next day or at any other time; that said failure to return the check to the PCIB implied, under the current banking practice, that the PNB

considered the check good and would honor it; that, in fact, the PNB honored the check and paid its amount to the PCIB; and that only then did the PCIB allow Augusto Lim to draw said amount from his aforementioned current account. Thus, by not returning the check to the PCIB, by thereby indicating that the PNB had found nothing wrong with the check and would honor the same, and by actually paying its amount to the PCIB, the PNB induced the latter, not only to believe that the check was genuine and good in every respect, but, also, to pay its amount to Augusto Lim. In other words, the PNB was the primary or proximate cause of the loss, and, hence, may not recover from the PCIB.13 It is a well-settled maxim of law and equity that when one of two (2) innocent persons must suffer by the wrongful act of a third person, the loss must be borne by the one whose negligence was the proximate cause of the loss or who put it into the power of the third person to perpetrate the wrong.14 Then, again, it has, likewise, been held that, where the collecting (PCIB) and the drawee (PNB) banks are equally at fault, the court will leave the parties where it finds them.15 Lastly, Section 62 of Act No. 2031 provides: The acceptor by accepting the instrument engages that he will pay it according to the tenor of his acceptance; and admits: (a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee and his then capacity to indorse. The prevailing view is that the same rule applies in the case of a drawee who pays a bill without having previously accepted it.16 WHEREFORE, the decision appealed from is hereby affirmed, with costs against the Philippine National Bank. It is so ordered. Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles, Fernando and Capistrano, JJ., concur. Zaldivar, J., took no part.
Footnotes

63

First National Bank of Wichita Falls v. First National Bank of Borger, 37 S.W. (2d) 802. VI Banks & Banking, Zollmann, 378. First National Bank of Marshalltown v. Marshalltown State Bank, 77 N.W. 1045. First National Bank of Wichita Falls v. First National Bank of Borger, supra. American Hominy Co. v. Millikin National Bank, 273 F. 550, 556. Wells Fargo Bank & Union Trust Co. v. Bank of Italy, 4 P (2d) 781, 784-785.

The PNB had previous notice of the infirmity of the check when it came into its possession. Art. 52 (d), Act No. 2031.
8

National Bank of Commerce of Seattle v. Seattle Nat. Bank, 187 P. 342, 346. Section 132, Act No. 2031.

10

Sections 143 and 185, Act No. 2031; Phil. Nat. Bank v. Nat. City Bank of New York, 63 Phil. 711; I Morse on Banks and Banking, 6th ed. 898, 899; Wachtel v. Rosen, 249 N. Y. 386, 164 N.E. 326.
11

First National Bank of Washington v. Whitman, 94 U.S. 343, 347, 24 L. ed. 229. Section 132 thereof.

12

13

Marlin National Bank v. Reed, 164 S.W. (2d) 260; First National Bank of Wichita Falls v. First National Bank of Borger, 37 S.W. (2d) 802. See, also, Commerce-Guardian Bank v. Toledo Trust Co., 21 N.E. (2d) 173, 176; National Bank of Rolla v. First National Bank of Salem, 125 S.W. 513, 516; Philippine National Bank v. National City Bank of NY, supra; VIII Banks and Banking, Zollman, 421.
14

Blondeau v. Nano, 61 Phil. 625, 631, 632. VI Banks and Banking by Zollman, 416.

15

16

First National Bank of Portland v. United States National Bank of Portland, 197 P. 547; Fidelity & Casualty Co. of New York v. Planenscheck, 227 NW 387; US v. Bank of NY, National Banking Association, 219 F. 648; US Fidelity & Guaranty Co. v. First Nat. Bank of Omaha, 260 NW 798; First National Bank of Cottage Grove v. Bank of Cottage Grove, 117 F. 293.

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EN BANC G.R. No. L-18657 August 23, 1922 THE GREAT EASTERN LIFE INSURANCE CO., plaintiffappellant, vs. HONGKONG & SHANGHAI BANKING CORPORATION and PHILIPPINE NATIONAL BANK, defendants-appellees.
Camus and Delgado for appellant. Fisher and DeWitt and A. M. Opisso for Hongkong and Shanghai Bank. Roman J. Lacson for Philippine National Bank.

against the Philippine National Bank which denies all liability to either party. Upon the issues being joined, a trial was had and judgment was rendered against the plaintiff and in favor of the defendants, from which the plaintiff appeals, claiming that the court erred in dismissing the case, notwithstanding its finding of fact, and in not rendering a judgment in its favor, as prayed for in its complaint. JOHNS, J.: There is no dispute about any of the findings of fact made by the trial court, and the plaintiff relies upon them for a reversal. Among other things, the trial court says: Who is responsible for the refund to the drawer of the amount of the check drawn and payable to order, when its value was collected by a third person by means of forgery of the signature of the payee? Is it the drawee or the last indorser, who ignored the forgery at the time of making the payment, or the forger? To lower court found that Melicor's name was forged to the check. "So that the person to whose order the check was issued did not receive the money, which was collected by E. M. Maasim," and then says: Now then, the National Bank should not be held responsible for the payment of made to Maasim in good faith of the amount of the check, because the indorsement of Maasim is unquestionable and his signature perfectly genuine, and the bank was not obliged to identify the signature of the former indorser. Neither could the Hongkong and Shanghai Banking Corporation be held responsible in making payment in good faith to the National Bank, because the latter is a holder in due course of the check in question. In other words, the two defendant banks can not be held civilly responsible for the consequences of the falsification or forgery of the signature of Lazaro Melicor, the National Bank having had no notice of said forgery in making payment to Maasim, nor the Hongkong bank in making payment to National Bank. Neither bank incurred in any responsibility arising from that crime, nor was either of the said banks by subsequent acts, guilty of negligence or fault. This was fundamental error.

STATEMENT The plaintiff is an insurance corporation, and the defendants are banking corporations, and each is duly licensed to do its respective business in the Philippines Islands. May 3, 1920, the plaintiff drew its check for P2,000 on the Hongkong and Shanghai Banking Corporation with whom it had an account, payable to the order of Lazaro Melicor. E. M. Maasim fraudulently obtained possession of the check, forged Melicor's signature, as an endorser, and then personally endorsed and presented it to the Philippine National Bank where the amount of the check was placed to his credit. After having paid the check, and on the next day, the Philippine national Bank endorsed the check to the Hongkong and Shanghai Banking Corporation which paid it and charged the amount of the check to the account of the plaintiff. In the ordinary course of business, the Hongkong Shanghai Banking Corporation rendered a bank statement to the plaintiff showing that the amount of the check was charged to its account, and no objection was then made to the statement. About four months after the check was charged to the account of the plaintiff, it developed that Lazaro Melicor, to whom the check was made payable, had never received it, and that his signature, as an endorser, was forged by Maasim, who presented and deposited it to his private account in the Philippine National Bank. With this knowledge , the plaintiff promptly made a demand upon the Hongkong and Shanghai Banking Corporation that it should be given credit for the amount of the forged check, which the bank refused to do, and the plaintiff commenced this action to recover the P2,000 which was paid on the forged check. On the petition of the Shanghai Bank, the Philippine National Bank was made defendant. The Shanghai Bank denies any liability, but prays that, if a judgment should be rendered against it, in turn, it should have like judgment

65

Plaintiff's check was drawn on Shanghai Bank payable to the order of Melicor. In other words, the plaintiff authorized and directed the Shanghai Bank to pay Melicor, or his order, P2,000. It did not authorize or direct the bank to pay the check to any other person than Melicor, or his order, and the testimony is undisputed that Melicor never did part with his title or endorse the check, and never received any of its proceeds. Neither is the plaintiff estopped or bound by the banks statement, which was made to it by the Shanghai Bank. This is not a case where the plaintiff's own signature was forged to one of it checks. In such a case, the plaintiff would have known of the forgery, and it would have been its duty to have promptly notified the bank of any forged signature, and any failure on its part would have released bank from any liability. That is not this case. Here, the forgery was that of Melicor, who was the payee of the check, and the legal presumption is that the bank would not honor the check without the genuine endorsement of Melicor. In other words, when the plaintiff received it banks statement, it had a right to assume that Melicor had personally endorsed the check, and that, otherwise, the bank would not have paid it. Section 23 of Act No. 2031, known as the Negotiable Instruments Law, says: 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. That section is square in point. The money was on deposit in the Shanghai Bank, and it had no legal right to pay it out to anyone except the plaintiff or its order. Here, the plaintiff ordered the Shanghai Bank to pay the P2,000 to Melicor, and the money was actually paid to Maasim and was never paid to Melicor, and he never paid to Melicor, and he never personally endorsed the check, or authorized any one to endorse it for him, and the alleged endorsement was a forgery. Hence, upon the undisputed facts, it must follow that the Shanghai Bank has no defense to this action.

It is admitted that the Philippine National Bank cashed the check upon a forged signature, and placed the money to the credit of Maasim, who was a forger. That the Philippine National Bank then endorsed the check and forwarded it to the Shanghai Bank by whom it was paid. The Philippine National Bank had no license or authority to pay the money to Maasim or anyone else upon a forge signature. It was its legal duty to know that Melicor's endorsment was genuine before cashing the check. Its remedy is against Maasim to whom it paid the money. The judgment of the lower court is reversed, and one will be entered here in favor of the plaintiff and against the Hongkong and Shanghai Banking Corporation for the P2,000, with interest thereon from November 8, 1920 at the rate of 6 per cent per annum, and the costs of this action, and a corresponding judgment will be entered in favor of the Hongkong Shanghai Banking Corporation against the Philippine National Bank for the same amount, together with the amount of its costs in this action. So ordered. Araullo, C.J., Johnson, Street, Malcolm, Avancea, Villamor, Ostrand and Romualdez, JJ., concur.

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FIRST DIVISION G.R. No. 179952 December 4, 2009 METROPOLITAN BANK AND TRUST COMPANY (formerly ASIANBANK CORPORATION), Petitioner, vs. BA FINANCE CORPORATION and MALAYAN INSURANCE CO., INC., Respondents. x-------- -------------------------------------- x DECISION CARPIO MORALES, J.: Lamberto Bitanga (Bitanga) obtained from respondent BA Finance Corporation (BA Finance) a P329,280[1] loan to secure which, he mortgaged his car to respondent BA Finance.[2] The mortgage contained the following stipulation: The MORTGAGOR covenants and agrees that he/it will cause the property(ies) hereinabove mortgaged to be insured against loss or damage by accident, theft and fire for a period of one year from date hereof with an insurance company or companies acceptable to the MORTGAGEE in an amount not less than the outstanding balance of mortgage obligations and that he/it will make all loss, if any, under such policy or policies, payable to the MORTGAGEE or its assigns as its interest may appear x x x.[3] (emphasis and underscoring supplied) Bitanga thus had the mortgaged car insured by respondent Malayan Insurance Co., Inc. (Malayan Insurance)[4] which issued a policy stipulating that, inter alia, Loss, if any shall be payable to BA FINANCE CORP. as its interest may appear. It is hereby expressly understood that this policy or any renewal thereof, shall not be cancelled without prior notification and conformity by BA FINANCE CORPORATION.[5] (emphasis and underscoring supplied) The car was stolen. On Bitangas claim, Malayan Insurance issued a check payable to the order of B.A. Finance Corporation and Lamberto Bitanga for P224,500, drawn against China Banking Corporation (China Bank). The check was crossed with the notation For Deposit Payees Account Only.[6]

Without the indorsement or authority of his co-payee BA Finance, Bitanga deposited the check to his account with the Asianbank Corporation (Asianbank), now merged with herein petitioner Metropolitan Bank and Trust Company (Metrobank). Bitanga subsequently withdrew the entire proceeds of the check. In the meantime, Bitangas loan became past due, but despite demands, he failed to settle it. BA Finance eventually learned of the loss of the car and of Malayan Insurances issuance of a crossed check payable to it and Bitanga, and of Bitangas depositing it in his account at Asianbank and withdrawing the entire proceeds thereof. BA Finance thereupon demanded the payment of the value of the check from Asianbank[7] but to no avail, prompting it to file a complaint before the Regional Trial Court (RTC) of Makati for sum of money and damages against Asianbank and Bitanga,[8] alleging that, inter alia, it is entitled to the entire proceeds of the check. In its Answer with Counterclaim,[9] Asianbank alleged that BA Finance instituted [the] complaint in bad faith to coerce [it] into paying the whole amount of the CHECK knowing fully well that its rightful claim, if any, is against Malayan [Insurance].[10] Asianbank thereafter filed a cross-claim against Bitanga,[11] alleging that he fraudulently induced its personnel to release to him the full amount of the check; and that on being later informed that the entire amount of the check did not belong to Bitanga, it took steps to get in touch with him but he had changed residence without leaving any forwarding address.[12] And Asianbank filed a third-party complaint against Malayan Insurance,[13] alleging that Malayan Insurance was grossly negligent in issuing the check payable to both Bitanga and BA Finance and delivering it to Bitanga without the consent of BA Finance.[14] Bitanga was declared in default in Asianbanks cross-claim. [15] Branch 137 of the Makati RTC, finding that Malayan Insurance was not privy to the contract between BA Finance and Bitanga, and noting the claim of Malayan Insurance that it is its policy to issue checks to both the insured and the financing company, held that Malayan Insurance cannot be

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faulted for negligence for issuing the check payable to both BA Finance and Bitanga. The trial court, holding that Asianbank was negligent in allowing Bitanga to deposit the check to his account and to withdraw the proceeds thereof, without his co-payee BA Finance having either indorsed it or authorized him to indorse it in its behalf,[16] found Asianbank and Bitanga jointly and severally liable to BA Finance following Section 41 of the Negotiable Instruments Law and Associated Bank v. Court of Appeals.[17] Thus the trial court disposed: WHEREFORE, premises considered, judgment is hereby rendered ordering defendants Asian Bank Corporation and Lamberto Bitanga: 1)To pay plaintiff jointly and severally the sum of P224,500.00 with interest thereon at the rate of 12% from September 25, 1992 until fully paid; 2)To pay plaintiff the sum of P50,000.00 as exemplary damages; P20,000.00 as actual damages; P30,000.00 as attorneys fee; and 3)To pay the costs of suit. Asianbanks dismissed. and Bitangas [sic] counterclaims are

the value of the check considering that it is a mere co-payee or joint payee of the check? 3.01.1.3 Whether BA Finance is liable to Asianbank for actual and exemplary damages for wrongfully bringing the case to court. 3.01.1.4 Whether Malayan is liable to Asianbank for reimbursement of any sum of money which this Honorable Court may award to BA Finance in this case.[19] (underscoring supplied) And it proffered the following arguments: A. BA Finance has no cause of action against Asianbank as it has no legal right and title to the check considering that the check was not delivered to BA Finance. Hence, BA Finance is not a holder thereof under the Negotiable Instruments Law. B. Asianbank, as collecting bank, is not liable to BA Finance as there was no privity of contract between them. C. Asianbank, as collecting bank, is not liable to BA Finance, considering that, as the intermediary between the payee and the drawee Chinabank, it merely acted on the instructions of drawee Chinabank to pay the amount of the check to Bitanga, hence, the consequent damage to BA Finance was due to the negligence of Chinabank. D. Malayans act of issuing and delivering the check solely to Bitanga in violation of the loss payee clause in the Policy, is the proximate cause of the alleged damage to BA Finance. E. Assuming Asianbank is liable, BA Finance can claim only his proportionate interest on the check as it is a joint payee thereof. F. Bitanga alone is liable for the amount to BA Finance on the ground of unjust enrichment or solutio indebiti. actual and supplied) G. BA Finance is liable to pay Asianbank exemplary damages.[20] (underscoring

The third party complaint of defendant/third party plaintiff against third-party defendant Malayan Insurance, Co., Inc. is hereby dismissed. Asianbank is ordered to pay Malayan attorneys fee of P50,000.00 and a per appearance fee of P500.00. On the cross-claim of defendant Asianbank, codefendant Lamberto Bitanga is ordered to pay the former the amounts the latter is ordered to pay the plaintiff in Nos. 1, 2 and 3 above-mentioned. SO ORDERED.[18] (emphasis and underscoring supplied) Before the Court of Appeals, Asianbank, in its Appellants Brief, submitted the following issues for consideration: 3.01.1.1 Whether BA Finance has a cause of action against Asianbank. 3.01.1.2 Assuming that BA Finance has a valid cause of action, may it claim from Asianbank more than one-half of

The appellate court, summarizing the errors attributed to the trial court by Asianbank to be whetherBA Finance has

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a cause of action against [it] even if the subject check had not been delivered toBA Finance by the issuer itself, held in the affirmative and accordingly affirmed the trial courts decision but deleted the award of P20,000 as actual damages.[21] Hence, the present Petition for Review on Certiorari[22] filed by Metrobank (hereafter petitioner) to which Asianbank was, as earlier stated, merged, faulting the appellate court I. x x x in applying the case of Associated Bank v. Court of Appeals, in the absence of factual similarity and of the legal relationships necessary for the application of the desirable shortcut rule. x x x II. x x x in not finding that x x x the general rule that the payee has no cause of action against the collecting bank absent delivery to him must be applied. III. x x x in finding that all the elements of a cause of action by BA Finance Corporation against Asianbank Corporation are present. IV. x x x in finding that Article 1208 of the Civil Code is not applicable. V. x x x in awarding of exemplary damages even in the absence of moral, temperate, liquidated or compensatory damages and a finding of fact that Asianbank acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. xxxx VII. x x x in dismissing Asianbanks counterclaim and Third Party complaint [against Malayan Insurance].[23] (italics in the original; underscoring supplied) Petitioner proffers the following arguments against the application of Associated Bank v. CA to the case: x x x [T]he rule established in the Associated Bank case has provided a speedier remedy for the payee to recover from erring collecting banks despite the absence of delivery of the negotiable instrument. However, the application of the rule demands careful consideration of the factual settings and issues raised in the case x x x. One of the relevant circumstances raised in Associated Bank is the existence of forgery or unauthorized indorsement. x x x

xxxx In the case at bar, Bitanga is authorized to indorse the check as the drawer names him as one of the payees. Moreover, his signature is not a forgery nor has he or anyone forged the signature of the representative of BA Finance Corporation. No unauthorized indorsement appears on the check. xxxx Absent the indispensable fact of forgery or unauthorized indorsement, the desirable shortcut rule cannot be applied, [24] (underscoring supplied) The petition fails. Section 41 of the Negotiable Instruments Law provides: Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others. (emphasis and underscoring supplied) Bitanga alone endorsed the crossed check, and petitioner allowed the deposit and release of the proceeds thereof, despite the absence of authority of Bitangas co-payee BA Finance to endorse it on its behalf.[25] Denying any irregularity in accepting the check, petitioner maintains that it followed normal banking procedure. The testimony of Imelda Cruz, Asianbanks then accounting head, shows otherwise, however, viz: Q Now, could you be familiar with a particular policy of the bank with respect to checks with joined (sic) payees? A Yes, sir. Q And what would be the particular policy of the bank regarding this transaction? A The bank policy and procedure regarding the joint checks. Once it is deposited to a single account, we are not accepting joint checks for single account, depositing to a single account (sic). Q What happened to the bank employee who allowed this particular transaction to occur? A Once the branch personnel, the bank personnel (sic) accepted it, he is liable.

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Q What do you mean by the branch personnel being held liable? A Because since (sic) the bank policy, we are not supposed to accept joint checks to a [single] account, so we mean that personnel would be held liable in the sense that (sic) once it is withdrawn or encashed, it will not be allowed. Q In your experience, have you encountered any bank employee who was subjected to disciplinary action by not following bank policies? A The one that happened in that case, since I really dont know who that personnel is, he is no longer connected with the bank. Q What about in general, do you know of any disciplinary action, Madam witness? A Since theres a negligence on the part of the bank personnel, it will be a ground for his separation [from] the bank.[26] (emphasis, italics and underscoring supplied) Admittedly, petitioner dismissed the employee who allowed the deposit of the check in Bitangas account. Petitioners argument that since there was neither forgery, nor unauthorized indorsement because Bitanga was a copayee in the subject check, the dictum in Associated Bank v. CA does not apply in the present case fails. The payment of an instrument over a missing indorsement is the equivalent of payment on a forged indorsement[27] or an unauthorized indorsement in itself in the case of joint payees.[28] Clearly, petitioner, through its employee, was negligent when it allowed the deposit of the crossed check, despite the lone endorsement of Bitanga, ostensibly ignoring the fact that the check did not, it bears repeating, carry the indorsement of BA Finance.[29] As has been repeatedly emphasized, the banking business is imbued with public interest such that the highest degree of diligence and highest standards of integrity and performance are expected of banks in order to maintain the trust and confidence of the public in general in the banking sector.[30] Undoubtedly, BA Finance has a cause of action against petitioner.

Is petitioner liable to BA Finance for the full value of the check? Petitioner, at all events, argue that its liability to BA Finance should only be one-half of the amount covered by the check as there is no indication in the check that Bitanga and BA Finance are solidary creditors to thus make them presumptively joint creditors under Articles 1207 and 1208 of the Civil Code which respectively provide: Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the prestations. There is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. Art. 1208. If from the law, or the nature or wording of the obligations to which the preceding article refers to the contrary does not appear, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors or debtors, the debts or credits being considered distinct from one another, subject to the Rules of Court governing the multiplicity of suits. Petitioners argument is flawed. The provisions of the Negotiable Instruments Law and underlying jurisprudential teachings on the black-letter law provide definitive justification for petitioners full liability on the value of the check. To be sure, a collecting bank, Asianbank in this case, where a check is deposited and which indorses the check upon presentment with the drawee bank, is an indorser.[31] This is because in indorsing a check to the drawee bank, a collecting bank stamps the back of the check with the phrase all prior endorsements and/or lack of endorsement guaranteed[32] and, for all intents and purposes, treats the check as a negotiable instrument, hence, assumes the warranty of an indorser.[33] Without Asianbanks warranty, the drawee bank (China Bank in this case) would not have paid the value of the subject check. Petitioner, as the collecting bank or last indorser, generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements considering that the

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act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of prior indorsements. [34] Accordingly, one who credits the proceeds of a check to the account of the indorsing payee is liable in conversion to the non-indorsing payee for the entire amount of the check.[35] It bears noting that in petitioners cross-claim against Bitanga, the trial court ordered Bitanga to return to petitioner the entire value of the check P224,500.00 with interest as well as damages and cost of suit. Petitioner never questioned this aspect of the trial courts disposition, yet it now prays for the modification of its liability to BA Finance to only one-half of said amount. To pander to petitioners supplication would certainly amount to unjust enrichment at BA Finances expense. Petitioners remedy which is the reimbursement for the full amount of the check from the perpetrator of the irregularity lies with Bitanga. Articles 1207 and 1208 of the Civil Code cannot be applied to the present case as these are completely irrelevant. The drawer, Malayan Insurance in this case, issued the check to answer for an underlying contractual obligation (payment of insurance proceeds). The obligation is merely reflected in the instrument and whether the payees would jointly share in the proceeds or not is beside the point. Moreover, granting petitioners appeal for partial liability would run counter to the existing principles on the liabilities of parties on negotiable instruments, particularly on Section 68 of the Negotiable Instruments Law which instructs that joint payees who indorse are deemed to indorse jointly and severally.[36] Recall that when the maker dishonors the instrument, the holder thereof can turn to those secondarily liable the indorser for recovery.[37] And since the law explicitly mandates a solidary liability on the part of the joint payees who indorse the instrument, the holder thereof (assuming the check was further negotiated) can turn to either Bitanga or BA Finance for full recompense. Respecting petitioners challenge to the award by the appellate court of exemplary damages to BA Finance, the same fails. Contrary to petitioners claim that no moral, temperate, liquidated or compensatory damages were awarded by the trial court,[38] the RTC did in fact award

compensatory or actual damages of P224,500, the value of the check, plus interest thereon. Petitioner argues, however, that assuming arguendo that compensatory damages had been awarded, the same contravened Article 2232 of the Civil Code which provides that in contracts or quasi-contracts, the court may award exemplary damages only if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Since, so petitioner concludes, there was no finding that it acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner,[39] it is not liable for exemplary damages. The argument fails. To reiterate, petitioners liability is based not on contract or quasi-contract but on quasi-delict since there is no pre-existing contractual relation between the parties.[40] Article 2231 of the Civil Code, which provides that in quasi-delict, exemplary damages may be granted if the defendant acted with gross negligence, thus applies. For gross negligence implies a want or absence of or failure to exercise even slight care or diligence, or the entire absence of care,[41] evincing a thoughtless disregard of consequences without exerting any effort to avoid them.[42] x x x The law allows the grant of exemplary damages to set an example for the public good. The business of a bank is affected with public interest; thus it makes a sworn profession of diligence and meticulousness in giving irreproachable service. For this reason, the bank should guard against in injury attributable to negligence or bad faith on its part. The award of exemplary damages is proper as a warning to [the petitioner] and all concerned not to recklessly disregard their obligation to exercise the highest and strictest diligence in serving their depositors.[43] (Italics and underscoring supplied) As for the dismissal by the appellate court of petitioners third-party complaint against Malayan Insurance, the same is well-taken. Petitioner based its third-party complaint on Malayan Insurances alleged gross negligence in issuing the check payable to both BA Finance and Bitanga, despite the stipulation in the mortgage and in the insurance policy that liability for loss shall be payable to BA Finance.[44] Malayan Insurance countered, however, that it

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x x x paid the amount of P224,500 to BA Finance Corporation and Lamberto Bitanga in compliance with the decision in the case of Lamberto Bitanga versus Malayan Insurance Co., Inc., Civil Case No. 88-2802, RTC-Makati Br. 132, and affirmed on appeal by the Supreme Court [3rd Division], G.R. no. 101964, April 8, 1992 x x x.[45] (underscoring supplied) It is noted that Malayan Insurance, which stated that it was a matter of company policy to issue checks in the name of the insured and the financing company, presented a witness to rebut its supposed negligence. [46] Perforce, it thus wrote a crossed check with joint payees so as to serve warning that the check was issued for a definite purpose. [47] Petitioner never ever disputed these assertions. The Court takes exception, however, to the appellate courts affirmance of the trial courts grant of legal interest of 12% per annum on the value of the check. For the obligation in this case did not arise out of a loan or forbearance of money, goods or credit. While Article 1980 of the Civil Code provides that: Fixed savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan, said provision does not find application in this case since the nature of the relationship between BA Finance and petitioner is one of agency whereby petitioner, as collecting bank, is to collect for BA Finance the corresponding proceeds from the check.[48] Not being a loan or forbearance of money, the interest should be 6% per annum computed from the date of extrajudicial demand on September 25, 1992 until finality of judgment; and 12% per annum from finality of judgment until payment, conformably with Eastern Shipping Lines, Inc. v. Court of Appeals.[49] WHEREFORE, the Decision of the Court of Appeals dated May 18, 2007 is AFFIRMED with MODIFICATION in that the rate of interest on the judgment obligation of P224,500 should be 6% per annum, computed from the time of extrajudicial demand on September 25, 1992 until its full payment before finality of judgment; thereafter, if the amount adjudged remains unpaid, the interest rate shall be 12% per annum computed from the time the judgment becomes final and executory until fully satisfied. Costs against petitioner.

SO ORDERED.
[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] [18] [19] [20] Exhibit A, records, pp. 210-211. Exhibit B, id. at 212-215. Id. at 213. Exhibit D, id. at 217. Exhibit D-1, ibid. Exhibit F, id. at 219. Exhibits H, id. at 221-222. Id. at 1-4. Id. at 40-45. Id. at 43. Id. at 53-63. Id. at 60-61. Id. at 69-72. Id. at 82. Id. at 142-143; Order of May 23, 1994. Id. at 306. G.R. No. 89802, May 7, 1992, 208 SCRA 465. Records, p. 307. CA rollo, pp. 39-40. Id. at 40-41.

[21] Decision of May 18, 2007, penned by Court of Appeals Associate Justice Ramon M. Bato, Jr. with the concurrence of Associate Justices Andres B. Reyes, Jr. and Jose C. Mendoza. [22] [23] [24] Rollo, pp. 10-57. Id. at 20-22. Id. at 23-25.

[25] TSN, May 30, 1995, pp. 7-8; The testimony of John Agbayani, vice president of BA Finance, reads as follows: Q Thereafter what happened next, if you know?

A Upon further verification, we were informed by Malayan Insurance Company that in deed a check, a cross check was issued to BA Finance Corporation and Lamberto Bitanga and the check was delivered to Lamberto Bitanga.

Q So, after the said check was delivered to Mr. Lamberto Bitanga, do you have any knowledge Mr. witness, if you know, what happened to the check? A Yes, sir, the check was deposited into the personal account of Mr. Lamberto Bitanga only, with Asian Savings Bank without the knowledge and endorsement of the joint payee of the said check, which is the plaintiff here, BA Finance. xxxx We immediately send a formal letter communication to Asian Bank in order to discuss the possibility of reimbursement of banking on the premise that our check was irregular accepted for deposit into the personal account of Lamberto Bitanga without our endorsement. [26] TSN, October 18, 1995, pp. 5-7.

[27] Kelly v. Central Bank and Trust Co. (Colo App), 794 P2d 1037, 12 UCCRS2d 1089; Humberto Decorators, Inc. v. Plaza Natl Bank, 180 NJ Super 170, 434 A2d 618, 32 UCCRS 494; Vide: 11 Am Jur 2d, Bills and Notes, 224, at p. 557.

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[28] Beyer v. First Natl Bank, 188 Mont 208, 612 P2d 1285, 29 UCCRS 563; Vide: 11 Am Jur 2d, Bills and Notes, 224, at p. 557. [29] Gempesaw v. Court of Appeals, G.R. No. 92244, Feb. 9, 1993, 218 SCRA 682, 695.

[43] 445. [44] [45] [46]

BPI Family Bank v. Buenaventura, G.R. No. 148196, Septenber 30, 2005, 471 SCRA 431, Vide records, p. 82; rollo, p. 50. Id. at 100-101. Testimony of Michael Yap, Malayan Insurances first vice president.

[30] Philippine Commercial International Bank v. Court of Appeals, G.R. No. 121413, January 29, 2001, 350 SCRA 446. [31] Associated Bank v. Court of Appeals, 322 Phil. 677, 697 (1996).

[32] Section 17 of the Philippine Clearing House Corporation Rules states that: BANK GUARANTEE. All checks cleared through the PCHC shall bear the guarantee affixed thereto by the Presenting Bank/Branch which shall read as follows: Cleared thru the Philippine Clearing House Corporation. All prior endorsements and/or lack of endorsement guaranteed. [33] [34] Banco de Oro v. Equitable Banking Corp., 241 Phil. 187, 196-197 (1988). Sections 65 and 66 of the Negotiable Instruments Law state that:

[47] Vide Bataan Cigar and Cigarette Factory v. Court of Appeals, G.R. No. 93048, March 3, 1994, 230 SCRA 643, 648-649, where the Court held that crossing of checks should put the holder on inquiry and upon him or her devolves the duty to ascertain the indorsers title to the check or the nature of his possession. Failing in this respect, the holder is declared guilty of gross negligence amounting to legal absence of good faith, contrary to Section 52 (c) of the Negotiable Instruments Law. (Underscoring supplied) [48] [49] Jai Alai Corp. of the Phils. v. BPI, G.R. No. L-29432, August 6, 1975, 66 SCRA 29, 34. G.R. No. 97412, July 12, 1994, 234 SCRA 78.

Sec. 65. Every person negotiating an instrument by delivery or by a qualified indorsement warrants: (a) (b) (c) 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;

(d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision (c) of this section do not apply to a person negotiating public or corporation securities other than bills and notes.

Sec. 66. Liability of general indorser. Every indorser who indorses without qualification, warrants to all subsequent holders in due course: (a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and (b) That the instrument is, at the time of his indorsement, valid and subsisting;

And in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it.

[35] Vide Peoples Nat. Bank v. American Fidelity Fire Ins. Co., 39 Md. App. 614, 386 A.2d 1254, 24 U.C.C. Rep. Serv. 362 (1978); Middle States Leasing Corp. v. Manufacturers Hanover Trust Co., 62 A.D.2d 273, 404 N.Y.S.2d 846, 23 U.C.C. Rep. Serv. 1215 (1st Dep't 1978) ; Vide 11 Am Jur 2d, Bills and Notes, 225, at p. 557. [36] Sec. 68. Order in which indorsers are liable. As respect one another, indorsers are liable prima facie in the order in which they indorse; but evidence is admissible to show that, as between or among themselves, they have agreed otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally. [37] [38] [39] Section 66 of the NIL, supra note 35. Rollo, pp. 46-47. Id. at 47.

[40] Article 2176 of the Civil Code states: Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties is called a quasi-delict and is governed by the provisions of this Chapter. [41] Acebedo Optical v. National Labor Relations Commission, G.R. No. 150171, July 17, 2007, 527 SCRA 655, 675. [42] Ibid.

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FIRST DIVISION G.R. No. L-33549 January 31, 1978 BANCO ATLANTICO, petitioner, vs. AUDITOR GENERAL, respondent.
Juan G. Collas, Jr., and Luis Ma. Guerrero for petitioner. Solicitor General Estelito P. Mendoza Assistant Solicitor General Rosalio A. de Leon and Solicitor Eulogio Raquel-Santos for respondent.

FERNANDEZ, J: This is an appeal from the decision of the Auditor General contained in a letter dated April 22, 1971 addressed to the counsel of the petitioner, Banco Atlantico, stating that, ... for want of legal basis, this Office cannot snow in audit the payment of the said claim of Banco Atlantico against the Philippine Embassy in Madrid, Spain." 1 The record discloses that the petitioner is a commercial Bank doing business in Madrid, Spain; that on October 31, i968, Virginia Boncan, then the Finance Officer of the Philippine Embassy in Madrid, Spain, negotiated with Banco Atlantico a Philippine Embassy check signed by Luis M. Gonzales, its ambassador and by said Virginia Boncan as Finance Officer, dated October 31, 1968 in the sum of US$10,109.10 payable to Azucena Pace and drawn against the Philippine National Bank branch in New York, U.S.A.; that the check was endorsed by Azucena Pace and Virginia Boncan; that the petitioner, without clearing the check with the drawn bank in New York, U.S.A., paid the full amount of US$10,109.10 to Virginia Boncan; that on November 2, 1968, Virginia Boncan negotiated by endorsement with the petitioner another embassy check signed by Luis M. Gonzales as ambassador and by her as finance officer in the sum of US$35,000.75 dated November 2, 1968 payable to Virginia Boncan and drawn against the Philippine National Bank branch in New York, U.S.A.; that the petitioner paid the full amount of the check to Virginia Boncan without clearing said check with the drawn bank, that on November 5, 1968, Virginia Boncan negotiated by endorsement with petitioner another embassy check signed by Ambassador Luis M. Gonzales and by Finance Officer Virginia Boncan in the sum of US$90,000.00 dated November 5, 1968 payable to Virginia Boncan and drawn against the Philippine National Bank in New York, U.S.A.; that the petitioner paid the full amount of the aforementioned check of US$90,000.00 to

Virginia Boncan without clearing said check with the drawn bank; that upon presentment for acceptance and payment of the aforementioned checks by Banco Atlantico through its collecting bank in New York, U.S.A. to the drawn bank, the Philippine National Bank branch in U.S.A., said drawee bank dishonored the checks by non-acceptance allegedly on the ground that the drawer had ordered payments to be stopped; that upon receipt of the notice of the dishonor, the collecting bank of the petitioner in New York, U.S.A. sent individual notices of protest with respect to the checks in question to the Philippine Embassy in Madrid, Spain and to Virginia Boncan as endorser payee that Virginia Boncan and the Philippine Embassy in Madrid, Spain refused to pay the petitioner the amounts of the aforementioned checks. 2 The petitioner, Banco Atlantico, filed the corresponding money claim with the Auditor General. In denying the claim of the petitioner for the amounts of the three checks in question, the respondent Auditor General concurred in the following views expressed by Ambassador Luis M. Gonzales in his second endorsement dated November 13, 1970: 1) Counsel for Claimant alleges that the "Embassy of the Republic of the Philippines maintained a checking account with Claimant who honored and cashed checks drawn by the Embassy against its depository bank, the Philippine National Bank branch in New York, U.S.A." This claim is erroneous. The Embassy never maintained any checking account with Banco Atlantico at any time in the past. Only the individual staff members of the Embassy, including Miss Virginia Boncan, in their personal and private capacities, maintained accounts with said bank. 2) Counsel for claimant alleges that the three checks for the amount of US$10,109.10, US$35,075.00 and US$90,000.00 were honored and full amount of the aforementioned checks paid to Miss Boncan in the ordinary course of its banking transactions. While the aforementioned checks of the Embassy may have appeared valid, payment to Miss Boncan in her capacity as endorser and payee of the checks without clearing them first with the drawee bank is definitely not in accordance with normal or ordinary banking practice, especially so in this case where the drawee bank was a foreign bank, and the amounts involved were quite large. The normal procedure would have been for the Banco

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Atlantico to clear the three cheeks concerned with the drawee bank before paying Miss Boncan. From our investigation we have gathered enough proof that Miss Boncan had very special relations with the employees and chiefs of the claimant bank's foreign department. This personal relationship that existed between Miss Boncan and said employees and officers was one thing and ordinary banking transactions were something else. Because of this special relationship, the bank took a risk and sacrificed normal banking procedures by cashing the aforementioned checks without prior clearance from the drawee bank. 3) Counsel for claimant says that Banco Atlantico has every right to recover from the Embassy as drawer of the checks because it is a holder in due course. Basis for the claim is Section 61 of the Negotiable Instruments Law, to wit: SEC. 61. Liability of drawer The drawer by drawing the instrument admits the existence of the payee and his then capacity to endorse and engages that on the due presentment the instrument will be accepted or paid, or both, according to its tenor and that if it be dishonored, and the n proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder. It is erroneous for claimant bank's Counsel to single out this particular provision because the interpretation thereof would be out of context. All the other related provisions of said law must be interpreted together, and it would then be doubtful if Banco Atlantico could qualify as a holder in due course. 4) As regards the checks for US$10,109.10 and US$35,075.00 Miss. Boncan had altered them by fraudulently increasing the amounts for which said cheeks were issued, and claimant bank failed to protect itself by cashing them without first clearing them with the drawer bank. When claimant bank gave Miss Boncan special treatment as a privileged client in disregard of the elementary principles of prudence that should attend banking transactions, they should stand to suffer the loss that was due to their own negligence. Further proof of the special relationship between claimant bank and Miss Boncan was the leniency of the bank towards

her when it accepted for deposit to Miss Boncan's dollar account an Embassy check for US$75.00 payable to Mr. Antonio P. Villamor without his indorsement. Such leniency on the part of the bank could even lead to the suspicion that there was collusion between the bank and Miss Boncan A photocopy of this check is enclose for ease of reference. In the particular case of the check for US$90,000.00 we can demonstrate that claimant bank likewise has no ewe at all. Section 61 of the Negotiable instruments Law can only be availed of by holders in due course and Banco Atlantico cannot be considered as one under the definition of Section 52 of the N.I.L., to wit: SEC. 52. What constitutes a holder in due course A holder in due course is a holder who has taken the instrument under the following conditions: a. That it is complete and regular on its face; b. That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact; c. That he took it in good faith and for value; d. That at the time it was negotiated to him he had no notice of infirmity in the instrument or defect in the title of the person negotiating it. All four conditions enumerated under this section must concur before a holder can be considered as a holder in due course. The absence or failure to comply with any of the conditions set forth under this section will make one's title to the instrument defective. The check for US$90,000.00 was a demand note. When Miss Boncan the payee of this check, negotiated the same by depositing it in her account, at the game time informing the bank in writing (copy of her letter is enclosed for ease of reference) that it be not presented for collection until a later date, Banco Atlantico through its agent teller or cashier should have been put on guard that there was something wrong with the check. The fact that the amount involved was quite big and it was the payee herself who made the request that the same not be presented for collection until a fixed date in the future was proof of a glaring infirmity or defect in the instrument. It loudly proclaims, "Take me at your risk." The interest of the payee was the immediate punishment of the check of which she was the beneficiary

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and not the deferment of the presentment for collection of the same to the drawee bank. This being the case, Banco Atlantico was not a holder in due course as defined by Section 52 of the N.I.L., because it was obvious that it had knowledge of the infirmity or defect of the cheek. The fact that the check was honored by claimant bank was proof not only of their gross negligence but a further manifestation of the special treatment they were according Miss Boncan. 3 According to the petitioner, the issues at bar are the follow: 1. Was there a forgery committed on the three (3) checks as contemplated by See. 23 of the Negotiable Instruments Law (NIL) as to bar petitioner from enforcing collection from the drawer-Philippine Embassy in Madrid, Spain? And, if there was such a forgery, is the drawer precluded from setting up forgery or want of authority of Miss Boncan? and, 2. Do the payments of the aforecited checks without clearing them first with the drawee bank constitute an actual notice of a defective title in the endorser thereof and/or an assumption of risk by the petitioner as to defeat collection thereon? 4 The record shows that the chock dated October 31, 1968 and payable to Azucena Pace was intended to be issued for the sum of US$109.10 for the payment of said payee's salary as consular clerk in the Philippine Embassy in Madrid for the second half of October, 1968 as shown in the Embassy's General Payroll. 5 It also appears that the check dated November 2, 1968 was to be issued for the amount of US$75.00 in reimbursement of Virginia Boncan's living quarters allowance for November 1968 as shown in Cash Voucher No. MA-132/69. 6 There is also a showing that on November 8, 1968, Virginia Boncan cashed with the petitioner a check for US$90,000.00 dated November 5, 1968 drawn on the Philippine National Bank branch at New York City, and although said check was payable on demand, Virginia Boncan asked that the same be not presented for collection until a later date. 7 The petitioner paid the amounts of the three (3) checks in question to Virginia Boncan without previously clearing the said checks with the drawee bank, Philippine National Bank, New York. This is contrary to normal or ordinary banking practice specially so where the drawee bank is a foreign bank and the amounts involved were large. The drawer of the aforementioned checks was not even a client of the

petitioner. There is a showing that Virginia Boncan enjoyed special treatment from the employees and chiefs of the petitioner's foreign department. It was probably because of this special relation. ship that the petitioner, in of the elementary principle that should attend banking transactions, cashed the three (3) checks in question without prior clearances from the drawee bank. In view of the foregoing, the Philippine Embassy in Madrid, as drawer of the three (3) checks in question, cannot be held liable. It is apparent that the said three (3) checks were fraudulently altered by Virginia Boncan as to their amounts and, therefore, wholly inoperative. 8 No right of payment thereof against any party thereto could have been acquired by the petitioner. WHEREFORE, the decision of the Auditor General denying the claim of the petitioner for payment of the three (3) checks, Annex "C", Annex "D", and Annex "E" of the petition, is hereby affirmed, without pronouncement as to costs. SO ORDERED. Teehankee (Chairman), Makasiar and Guerrero, JJ., concur. Muoz Palma J., concurs in the result.
Footnotes 1 Rollo p. 9 2 Brief for Petitioner, pp, 2-3, Rollo, p. 75. 3 Rollo, pp. 10-12. 4 Brief for Petitioner, pp. 6-7, Rollo, p. 75. 5 Annex "1" of A answer, Rollo, p. 43. 6 Annex "2" of Answer, Rollo, p. 44. 7 Annex "3" of Answer, Rollo, p. 45. 8 Section 23, Negotiable Instruments.

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SECOND DIVISION G.R. No. 96160 June 17, 1992 STELCO MARKETING CORPORATION, petitioner, vs. HON. COURT OF APPEALS and STEELWELD CORPORATION OF THE PHILIPPINES, INC., respondent. NARVASA, c.J.: Stelco Marketing Corporation is engaged in the distribution and sale to the public of structural steel bars. 1 On seven (7) different occasions in September and October, 1980, it sold to RYL Construction, Inc. quantities of steels bars of various sizes and rolls of G.I. wire. These bars and wire were delivered at different places at the indication of RYL Construction, Inc. The aggregate price for the purchases was P126,859.61. Although the corresponding invoices issued by STELCO stipulated that RYL pay "COD" (cash on delivery), the latter made no payments for the construction materials thus ordered and delivered despite insistent demands for payment by the former. On April 4, 1981, RYL gave to Armstrong, Industries described by STELCO as its "sister corporation" and "manufacturing arm" 2 a check drawn against Metrobank in the amount of P126,129.86, numbered 765380 and dated April 4, 1981. That check was a company check of another corporation, Steelweld Corporation of the Philippines, signed by its President, Peter Rafael Limson, and its Vice-President, Artemio Torres. The check was issued by Limson at the behest of his friend, Romeo Y. Lim, President of RYL. Romeo Lim had asked Limson, for financial assistance, and the latter had agreed to give Lim a check only by way of accommodation, "only as guaranty but not to pay for anything." 3 Why the check was made out in the amount of P126,129.86 is not explained. Anyway, the check was actually issued in said amount of P126, 129.86, and as already stated, was given by R.Y. Lim to Armstrong Industries, 4 in payment of an obligation. When the latter deposited the check at its bank, it was dishonored because "drawn against insufficient funds." 5 When so deposited, the check bore two(2) endorsements, that of "RYL Construction," followed by that of "Armstrong Industries." 6

On account of the dishonor of Metrobank Check No. 765380, and on complaint of Armstrong Industries (through a Mr. Young), Rafael Limson and Artemio Torres were charged in the Regional Trial Court of Manila with a violation of Batas Pambansa Bilang 22. 7 They were acquitted in a decision rendered on June 28, 1984 "on the ground that the check in question was not issued by the drawer "to apply on account for value," it being merely for accommodation purposes. 8 The judgment however conditioned the acquittal with the following pronouncement: This is not however to release Steelweld Corporation from its liability under Sec. 29 of the Negotiable Instruments Law for having issued it for the accommodation of Romeo Lim. Eleven months or so later and some four (4) years after issuance of the check in question in May, 1985, STELCO filed with the Regional Trial Court at Caloocan City a civil complaint 9 against both RYL and STEELWELD for the recovery of the valued of the steel bars and wire sold to and delivered to RYL (as already narrated) in the amount of P126,129.86, "plus 18% interest from August 20, 1980 . . . (and) 25% of the total amount sought to be recovered as and by way of attorney's fees . . . ." 10 Among the allegations of its complaint was that Metrobank Check No. 765380 above mentioned had been given to it in payment of RYL's indebtedness, duly indorsed by R.Y. Lim. 11 A preliminary attachment was issued by the trial court on the basis of the averments of the complaint but was shortly dissolved upon the filing of a counter-bond by STEELWELD. RYL could no longer be located and could not be served with summons. 12 It never appeared. Only STEELWELD filed an answer, under date of July 16, 1985. 13 In said pleading, it specifically denied the facts alleged in the complaint, the truth, according to Steelweld, being basically that 1) STELCO "is a complete stranger to it;" it had "not entered into any transaction or business dealing of any kind" with STELCO, the transactions described in the complaint having been solely and exclusively between the plaintiff and RYL Construction; 2) the check in question was "only given to a certain R. Lim to be used as collateral for another obligation . . . (but) in breach of his agreement (Lim) utilized and negotiated the check for another purpose. . . .;

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3) nevertheless, the check "is wholly inoperative since . . . Steelweld. . . did not issue it for any valuable consideration either to R. Lim or to the plaintiff not to mention also the fact that the said plaintiff failed to comply with the requirements of the law to hold the said defendant (STEELWELD) liable. . ." Trial ensued upon these issues, after which judgment was rendered on June 26, 1986. 14 The judgment sentenced "the defendant Steelweld Corporation to pay to . . . (Stelco Marketing Corporation) the amount of P126,129.86 with legal rate of interest from May 9, 1985, when this case was instituted until fully paid, plus another sum equivalent to 25% of the total amount due as and for attorney's fees . . . 15 That disposition was justified in the judgment as follows: 16 There is no question, then, that as far as any commercial transaction is concerned between plaintiff and defendant Steelweld no such transaction ever occurred. Ordinarily, under civil law rules, there having been no transaction between them involving the purchase of certain merchandise there would be no privity of contract between them, and plaintiff will have no right to sue the defendant for payment of said merchandise for the simple reason that the defendant did not order them, such less receive them. But we have here a case where the defendant Steelweld thru its President Peter Rafael Limson admitted to have issued a check payable to cash in favor of his friend Romeo Lim who was the President of RYL Construction by way of accommodation. Under the Negotiable Instruments Law an accommodation party is liable. Sec. 29. Liability of an accommodation party. An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party. From this adverse judgment STEELWELD appealed to the Court of Appeals 17 and there succeeded in reversing the judgment. By Decision promulgated on May 29, 1990, 18 the Court of Appeals 19 ordered "the complaint against appellant (STEELWELD) DISMISSED; (and the appellee, STELCO) to pay appellant the sum of P15,000.00 as attorney's fees and cost

of litigation, the suit . . . (being) a baseless one that dragged appellant in court and caused it to incur attorney's fees and expense of litigation. STELCO's motion for reconsideration was denied by the Appellate Tribunal's resolution dated November 13, 1990. 20 The Court stressed that . . . as far as Steelweld is concerned, there was no commercial transaction between said appellant and appellee. Moreover, there is no evidence that appellee Stelco Marketing became a holder for value. Nowhere in the check itself does the name of Stelco Marketing appear as payee, indorsee or depositor thereof. Finally, appellee's complaint is for the collection of the unpaid accounts for delivery of steels bars and construction materials. It having been established that appellee had no commercial transaction with appellant Stelco, appellee had no cause of action against said appellant. STELCO appealed to this Court in accordance with Rule 45 of the Rules of Court. In this Court it seeks to make the following points in connection with its plea for the overthrow of the Appellate Tribunal's aforesaid decision, viz.: 1) said decision jurisprudence;" is "not in accord with law and

2) "STELCO is a "holder" within the meaning of the Negotiable Instruments Law;" 3) "STELCO is a holder in due course of Metrobank Check No. 765380 . . . (and hence) holds the same free from personal or equitable defense;" and 4) "Negotiation in breach of faith is a personal defense . . . (and hence) not effective as against a holder in due course." The points are not well taken. The crucial question is whether or not STELCO ever became a holder in due course of Check No. 765380, a bearer instrument, within the contemplation of the Negotiable Instruments Law. It never did. STELCO evidently places much reliance on the pronouncement of the Regional Trial Court in Criminal Case No. 66571, 21 that the acquittal of the two (2) accused (Limson and Torres) did not operate "to release Steelweld Corporation from its liability under Sec. 29 of the Negotiable Instruments Law for having issued . . . (the check) for the

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accommodation of Romeo Lim." The cited provision reads as follows: Sec. 29. Liability of accommodation party. An accommodation party is one who has singed the instrument as maker, drawer, acceptor, or indorser, without receiving valued therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party. It is noteworthy that the Trial Court's pronouncement containing reference to said Section 29 did not specify to whom STEELWELD, as accommodation party, is supposed to be liable; and certain it is that neither said pronouncement nor any other part of the judgment of acquittal declared it liable to STELCO. "A holder in due course," says the law, 22 "is a holder who has taken the instrument under the following conditions: (a) That is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the persons negotiating it. To be sure, as regards an accommodation party (such as STEELWELD), the fourth condition, i.e., lack of notice of any infirmity in the instruments or defect in title of the persons negotiating it, has no application. This is because Section 29 of the law above quoted preserves the right of recourse of a "holder for value" against the accommodation party notwithstanding that "such holder, at the time of taking the instrument, knew him to be only an accommodationparty."
23

presented by STELCO to the drawee bank for payment through Armstrong Industries, the manufacturing arm of STELCO and its sister company." 24 The trouble is, there is no evidence whatever that STELCO's possession of Check No. 765380 ever dated back to nay time before the instrument's presentment and dishonor. There is no evidence whatsoever that the check was ever given to it, or indorsed to it in any manner or form in payment of an obligation or as security for an obligation, or for any other purpose before it was presented for payment. On the contrary, the factual finding of the Court of Appeals, which by traditional precept is normally conclusive on this Court, is that STELCO never became a holder for value and that "(n)owhere in the check itself does the name of Stelco Marketing appear as payee, indorsee or depositor thereof."
25

What the record shows is that: (1) the STEELWELD company check in question was given by its president to R.Y. Lim; (2) it was given only by way of accommodation, to be "used as collateral for another obligation;" (3) in breach of the agreement, however, R.Y. Lim indorsed the check to Armstrong in payment of obligation; (4) Armstrong deposited the check to its account, after indorsing it; (5) the check was dishonored. The record does not show any intervention or participation by STELCO in any manner of form whatsoever in these transactions, or any communication of any sort between STEELWELD and STELCO, or between either of them and Armstrong Industries, at any time before the dishonor of the check. The record does show that after the check had been deposited and dishonored, STELCO came into possession of it in some way, and was able, several years after the dishonor of the check, to give it in evidence at the trial of the civil case it had instituted against the drawers of the check (Limson and Torres) and RYL. But, as already pointed out, possession of a negotiable instrument after presentment and dishonor, or payment, is utterly inconsequential; it does not make the possessor a holder for value within the meaning of the law; it gives rise to no liability on the part of the maker or drawer and indorsers. It is clear from the relevant circumstances that STELCO cannot be deemed a holder of the check for value. It does not meet two of the essential requisites prescribed by the statute. It did not become "the holder of it before it was

Now, STELCO theorizes that it should be deemed a "holder for value" of STEELWELD's Check No. 765380 because the record shows it to have been in "actual possession" thereof; otherwise, it "could not have presented, marked and introduced (said check) in evidence . . . before the court a quo." "Besides," it adds, the check in question was

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overdue, and without notice that it had been previously dishonored," and it did not take the check "in good faith and for value." 26 Neither is there any evidence whatever that Armstrong Industries, to whom R.Y. Lim negotiated the check accepted the instrument and attempted to encash it in behalf, and as agent of STELCO. On the contrary, the indications are that Armstrong was really the intended payee of the check and was the party actually injured by its dishonor; it was after all its representative (a Mr. Young) who instituted the criminal prosecution of the drawers, Limson and Torres, albeit unsuccessfully. The petitioner has failed to show any sufficient cause for modification or reversal of the challenged judgment of the Court of Appeals which, on the contrary, appears to be entirely in accord with the facts and the applicable law. WHEREFORE, the petition is DENIED and the Decision of the Court of Appeals in CA-G.R. CV No. 13418 is AFFIRMED in toto. Costs against petitioner. SO ORDERED Paras, Padilla and Regalado, JJ., concur. Nocon., J., is on leave.
Footnotes 1 Rollo, p. 33. 2 Rollo, pp. 12, 17, 112. 3 Rollo, p. 48: Trial Court Decision, p. 3. 4 Id., p. 55. 5 Idem. 6 Id., p. 63 7 Criminal Case No. 66571, raffled and assigned to Branch 30. 8 Rollo, pp. 48, 63. 9 With prayer for the issuance of a writ of preliminary attachment. 10 Rollo, pp. 32, 38. 11 Id., p. 36. 12 Id., p. 60. 13 "with application for damages against the attachment bond." 14 By Judge Segundino D. Chua, later Associate Justice, Court of Appeals. 15 Rollo, pp. 46, 50. 16 Id., p. 49. 17 The appeal was docketed as CA-G.R. CV No. 13418.

18 By Lapea, Jr., J., with the concurrence of Melo (Chairman) and Martinez, JJ.: Rollo, pp. 59-65. 19 Second Division. 20 Rollo, p. 66. 21 SEE footnote 7 and related text. 22 SEC. 52, Negotiable Instruments Law, Act No. 2031. 23 SEE Agbayani, Commercial Laws of the Philippines, 1975 ed., Vol. I, citing Prudential Bank and Trust Co. v. Ramesh Trading Co. C.A. 32908-R, Sept. 10, 1964. 24 Rollo, p. 119. 25 SEE footnote 19, supra. 26 See footnote 21 and relevant text, supra.

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KHO VS BUILDERS AND HEAVY EQUIPMENT SERVICES CORP 5 CARA 264

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SECOND DIVISION G.R. No. 138074 August 15, 2003 CELY YANG, petitioner, vs. HON. COURT OF APPEALS, PHILIPPINE COMMERCIAL INTERNATIONAL BANK, FAR EAST BANK & TRUST CO., EQUITABLE BANKING CORPORATION, PREM CHANDIRAMANI and FERNANDO DAVID, respondents. DECISION QUISUMBING, J.: For review on certiorari is the decision[1] of the Court of Appeals, dated March 25, 1999, in CA-G.R. CV No. 52398, which affirmed with modification the joint decision of the Regional Trial Court (RTC) of Pasay City, Branch 117, dated July 4, 1995, in Civil Cases Nos. 5479[2] and 5492.[3] The trial court dismissed the complaint against herein respondents Far East Bank & Trust Company (FEBTC), Equitable Banking Corporation (Equitable), and Philippine Commercial International Bank (PCIB) and ruled in favor of respondent Fernando David as to the proceeds of the two cashiers checks, including the earnings thereof pendente lite. Petitioner Cely Yang was ordered to pay David moral damages of P100,000.00 and attorneys fees also in the amount of P100,000.00. The facts of this case are not disputed, to wit: On or before December 22, 1987, petitioner Cely Yang and private respondent Prem Chandiramani entered into an agreement whereby the latter was to give Yang a PCIB managers check in the amount of P4.2 million in exchange for two (2) of Yangs managers checks, each in the amount of P2.087 million, both payable to the order of private respondent Fernando David. Yang and Chandiramani agreed that the difference of P26,000.00 in the exchange would be their profit to be divided equally between them. Yang and Chandiramani also further agreed that the former would secure from FEBTC a dollar draft in the amount of US$200,000.00, payable to PCIB FCDU Account No. 419501165-2, which Chandiramani would exchange for another dollar draft in the same amount to be issued by Hang Seng Bank Ltd. of Hong Kong.

Accordingly, on December 22, 1987, Yang procured the following: a) Equitable Cashiers Check No. CCPS 14-009467 in the sum of P2,087,000.00, dated December 22, 1987, payable to the order of Fernando David; b) FEBTC Cashiers Check No. 287078, in the amount of P2,087,000.00, dated December 22, 1987, likewise payable to the order of Fernando David; and c) FEBTC Dollar Draft No. 4771, drawn on Chemical Bank, New York, in the amount of US$200,000.00, dated December 22, 1987, payable to PCIB FCDU Account No. 4195-01165-2. At about one oclock in the afternoon of the same day, Yang gave the aforementioned cashiers checks and dollar drafts to her business associate, Albert Liong, to be delivered to Chandiramani by Liongs messenger, Danilo Ranigo. Ranigo was to meet Chandiramani at Philippine Trust Bank, Ayala Avenue, Makati City, Metro Manila where he would turn over Yangs cashiers checks and dollar draft to Chandiramani who, in turn, would deliver to Ranigo a PCIB managers check in the sum of P4.2 million and a Hang Seng Bank dollar draft for US$200,000.00 in exchange. Chandiramani did not appear at the rendezvous and Ranigo allegedly lost the two cashiers checks and the dollar draft bought by petitioner. Ranigo reported the alleged loss of the checks and the dollar draft to Liong at half past four in the afternoon of December 22, 1987. Liong, in turn, informed Yang, and the loss was then reported to the police. It transpired, however, that the checks and the dollar draft were not lost, for Chandiramani was able to get hold of said instruments, without delivering the exchange consideration consisting of the PCIB managers check and the Hang Seng Bank dollar draft. At three oclock in the afternoon or some two (2) hours after Chandiramani and Ranigo were to meet in Makati City, Chandiramani delivered to respondent Fernando David at China Banking Corporation branch in San Fernando City, Pampanga, the following: (a) FEBTC Cashiers Check No. 287078, dated December 22, 1987, in the sum of P2.087 million; and (b) Equitable Cashiers Check No. CCPS 14009467, dated December 22, 1987, also in the amount of P2.087 million. In exchange, Chandiramani got

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US$360,000.00 from David, which Chandiramani deposited in the savings account of his wife, Pushpa Chandiramani; and his mother, Rani Reynandas, who held FCDU Account No. 124 with the United Coconut Planters Bank branch in Greenhills, San Juan, Metro Manila. Chandiramani also deposited FEBTC Dollar Draft No. 4771, dated December 22, 1987, drawn upon the Chemical Bank, New York for US$200,000.00 in PCIB FCDU Account No. 4195-01165-2 on the same date. Meanwhile, Yang requested FEBTC and Equitable to stop payment on the instruments she believed to be lost. Both banks complied with her request, but upon the representation of PCIB, FEBTC subsequently lifted the stop payment order on FEBTC Dollar Draft No. 4771, thus enabling the holder of PCIB FCDU Account No. 4195-01165-2 to receive the amount of US$200,000.00. On December 28, 1987, herein petitioner Yang lodged a Complaint[4] for injunction and damages against Equitable, Chandiramani, and David, with prayer for a temporary restraining order, with the Regional Trial Court of Pasay City. The Complaint was docketed as Civil Case No. 5479. The Complaint was subsequently amended to include a prayer for Equitable to return to Yang the amount of P2.087 million, with interest thereon until fully paid.[5] On January 12, 1988, Yang filed a separate case for injunction and damages, with prayer for a writ of preliminary injunction against FEBTC, PCIB, Chandiramani and David, with the RTC of Pasay City, docketed as Civil Case No. 5492. This complaint was later amended to include a prayer that defendants therein return to Yang the amount of P2.087 million, the value of FEBTC Dollar Draft No. 4771, with interest at 18% annually until fully paid.[6] On February 9, 1988, upon the filing of a bond by Yang, the trial court issued a writ of preliminary injunction in Civil Case No. 5479. A writ of preliminary injunction was subsequently issued in Civil Case No. 5492 also. Meanwhile, herein respondent David moved for dismissal of the cases against him and for reconsideration of the Orders granting the writ of preliminary injunction, but these motions were denied. David then elevated the matter to the Court of Appeals in a special civil action for certiorari docketed as CA-G.R. SP No. 14843, which was dismissed by the appellate court.

As Civil Cases Nos. 5479 and 5492 arose from the same set of facts, the two cases were consolidated. The trial court then conducted pre-trial and trial of the two cases, but the proceedings had to be suspended after a fire gutted the Pasay City Hall and destroyed the records of the courts. After the records were reconstituted, the proceedings resumed and the parties agreed that the money in dispute be invested in Treasury Bills to be awarded in favor of the prevailing side. It was also agreed by the parties to limit the issues at the trial to the following: 1. Who, between David and Yang, is legally entitled to the proceeds of Equitable Banking Corporation (EBC) Cashiers Check No. CCPS 14-009467 in the sum of P2,087,000.00 dated December 22, 1987, and Far East Bank and Trust Company (FEBTC) Cashiers Check No. 287078 in the sum of P2,087,000.00 dated December 22, 1987, together with the earnings derived therefrom pendente lite? 2. Are the defendants FEBTC and PCIB solidarily liable to Yang for having allowed the encashment of FEBTC Dollar Draft No. 4771, in the sum of US$200,000.00 plus interest thereon despite the stop payment order of Cely Yang?[7] On July 4, 1995, the trial court handed down its decision in Civil Cases Nos. 5479 and 5492, to wit: WHEREFORE, the Court renders judgment in favor of defendant Fernando David against the plaintiff Cely Yang and declaring the former entitled to the proceeds of the two (2) cashiers checks, together with the earnings derived therefrom pendente lite; ordering the plaintiff to pay the defendant Fernando David moral damages in the amount of P100,000.00; attorneys fees in the amount of P100,000.00 and to pay the costs. The complaint against Far East Bank and Trust Company (FEBTC), Philippine Commercial International Bank (PCIB) and Equitable Banking Corporation (EBC) is dismissed. The decision is without prejudice to whatever action plaintiff Cely Yang will file against defendant Prem Chandiramani for reimbursement of the amounts received by him from defendant Fernando David. SO ORDERED.[8] In finding for David, the trial court ratiocinated: The evidence shows that defendant David was a holder in due course for the reason that the cashiers checks were complete on their face when they were negotiated to him.

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They were not yet overdue when he became the holder thereof and he had no notice that said checks were previously dishonored; he took the cashiers checks in good faith and for value. He parted some $200,000.00 for the two (2) cashiers checks which were given to defendant Chandiramani; he had also no notice of any infirmity in the cashiers checks or defect in the title of the drawer. As a matter of fact, he asked the manager of the China Banking Corporation to inquire as to the genuineness of the cashiers checks (tsn, February 5, 1988, p. 21, September 20, 1991, pp. 13-14). Another proof that defendant David is a holder in due course is the fact that the stop payment order on [the] FEBTC cashiers check was lifted upon his inquiry at the head office (tsn, September 20, 1991, pp. 24-25). The apparent reason for lifting the stop payment order was because of the fact that FEBTC realized that the checks were not actually lost but indeed reached the payee defendant David.[9] Yang then moved for reconsideration of the RTC judgment, but the trial court denied her motion in its Order of September 20, 1995. In the belief that the trial court misunderstood the concept of a holder in due course and misapprehended the factual milieu, Yang seasonably filed an appeal with the Court of Appeals, docketed as CA-G.R. CV No. 52398. On March 25, 1999, the appellate court decided CA-G.R. CV No. 52398 in this wise: WHEREFORE, this court AFFIRMS the judgment of the lower court with modification and hereby orders the plaintiffappellant to pay defendant-appellant PCIB the amount of Twenty-Five Thousand Pesos (P25,000.00). SO ORDERED.[10] In affirming the trial courts judgment with respect to herein respondent David, the appellate court found that: In this case, defendant-appellee had taken the necessary precautions to verify, through his bank, China Banking Corporation, the genuineness of whether (sic) the cashiers checks he received from Chandiramani. As no stop payment order was made yet (at) the time of the inquiry, defendantappellee had no notice of what had transpired earlier between the plaintiff-appellant and Chandiramani. All he knew was that the checks were issued to Chandiramani with

whom he was he had (sic) a transaction. Further on, David received the checks in question in due course because Chandiramani, who at the time the checks were delivered to David, was acting as Yangs agent. David had no notice, real or constructive, cogent for him to make further inquiry as to any infirmity in the instrument(s) and defect of title of the holder. To mandate that each holder inquire about every aspect on how the instrument came about will unduly impede commercial transactions, Although negotiable instruments do not constitute legal tender, they often take the place of money as a means of payment. The mere fact that David and Chandiramani knew one another for a long time is not sufficient to establish that they connived with each other to defraud Yang. There was no concrete proof presented by Yang to support her theory. [11] The appellate court awarded P25,000.00 in attorneys fees to PCIB as it found the action filed by Yang against said bank to be clearly unfounded and baseless. Since PCIB was compelled to litigate to protect itself, then it was entitled under Article 2208[12] of the Civil Code to attorneys fees and litigation expenses. Hence, the instant recourse wherein petitioner submits the following issues for resolution: a WHETHER THE CHECKS WERE ISSUED TO PREM CHANDIRAMANI BY PETITIONER; b WHETHER THE ALLEGED TRANSACTION BETWEEN PREM CHANDIRAMANI AND FERNANDO DAVID IS LEGITIMATE OR A SCHEME BY BOTH PRIVATE RESPONDENTS TO SWINDLE PETITIONER; c WHETHER FERNANDO DAVID GAVE PREM CHANDIRAMANI US$360,000.00 OR JUST A FRACTION OF THE AMOUNT REPRESENTING HIS SHARE OF THE LOOT; d WHETHER PRIVATE RESPONDENTS FERNANDO DAVID AND PCIB ARE ENTITLED TO DAMAGES AND ATTORNEYS FEES.[13] At the outset, we must stress that this is a petition for review under Rule 45 of the 1997 Rules of Civil Procedure. It is basic that in petitions for review under Rule 45, the jurisdiction of this Court is limited to reviewing questions of

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law, questions of fact are not entertained absent a showing that the factual findings complained of are totally devoid of support in the record or are glaringly erroneous.[14] Given the facts in the instant case, despite petitioners formulation, we find that the following are the pertinent issues to be resolved: a) Whether the Court of Appeals erred in holding herein respondent Fernando David to be a holder in due course; and b) Whether the appellate court committed a reversible error in awarding damages and attorneys fees to David and PCIB. On the first issue, petitioner Yang contends that private respondent Fernando David is not a holder in due course of the checks in question. While it is true that he was named the payee thereof, David failed to inquire from Chandiramani about how the latter acquired possession of said checks. Given his failure to do so, it cannot be said that David was unaware of any defect or infirmity in the title of Chandiramani to the checks at the time of their negotiation. Moreover, inasmuch as the checks were crossed, then David should have, pursuant to our ruling in Bataan Cigar & Cigarette Factory, Inc. v. Court of Appeals, G.R. No. 93048, March 3, 1994, 230 SCRA 643, been put on guard that the checks were issued for a definite purpose and accordingly, made inquiries to determine if he received the checks pursuant to that purpose. His failure to do so negates the finding in the proceedings below that he was a holder in due course. Finally, the petitioner argues that there is no showing whatsoever that David gave Chandiramani any consideration of value in exchange for the aforementioned checks. Private respondent Fernando David counters that the evidence on record shows that when he received the checks, he verified their genuineness with his bank, and only after said verification did he deposit them. David stresses that he had no notice of previous dishonor or any infirmity that would have aroused his suspicions, the instruments being complete and regular upon their face. David stresses that the checks in question were cashiers checks. From the very nature of cashiers checks, it is highly unlikely that he would have suspected that something was

amiss. David also stresses negotiable instruments are presumed to have been issued for valuable consideration, and he who alleges otherwise must controvert the presumption with sufficient evidence. The petitioner failed to discharge this burden, according to David. He points out that the checks were delivered to him as the payee, and he took them as holder and payee thereof. Clearly, he concludes, he should be deemed to be their holder in due course. We shall now resolve the first issue. Every holder of a negotiable instrument is deemed prima facie a holder in due course. However, this presumption arises only in favor of a person who is a holder as defined in Section 191 of the Negotiable Instruments Law,[15] meaning a payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. In the present case, it is not disputed that David was the payee of the checks in question. The weight of authority sustains the view that a payee may be a holder in due course.[16] Hence, the presumption that he is a prima facie holder in due course applies in his favor. However, said presumption may be rebutted. Hence, what is vital to the resolution of this issue is whether David took possession of the checks under the conditions provided for in Section 52[17] of the Negotiable Instruments Law. All the requisites provided for in Section 52 must concur in Davids case, otherwise he cannot be deemed a holder in due course. We find that the petitioners challenge to Davids status as a holder in due course hinges on two arguments: (1) the lack of proof to show that David tendered any valuable consideration for the disputed checks; and (2) Davids failure to inquire from Chandiramani as to how the latter acquired possession of the checks, thus resulting in Davids intentional ignorance tantamount to bad faith. In sum, petitioner posits that the last two requisites of Section 52 are missing, thereby preventing David from being considered a holder in due course. Unfortunately for the petitioner, her arguments on this score are less than meritorious and far from persuasive. First, with respect to consideration, Section 24[18] of the Negotiable Instruments Law creates a presumption that every party to an instrument acquired the same for a consideration[19] or for value.[20] Thus, the law itself

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creates a presumption in Davids favor that he gave valuable consideration for the checks in question. In alleging otherwise, the petitioner has the onus to prove that David got hold of the checks absent said consideration. In other words, the petitioner must present convincing evidence to overthrow the presumption. Our scrutiny of the records, however, shows that the petitioner failed to discharge her burden of proof. The petitioners averment that David did not give valuable consideration when he took possession of the checks is unsupported, devoid of any concrete proof to sustain it. Note that both the trial court and the appellate court found that David did not receive the checks gratis, but instead gave Chandiramani US$360,000.00 as consideration for the said instruments. Factual findings of the Court of Appeals are conclusive on the parties and not reviewable by this Court; they carry great weight when the factual findings of the trial court are affirmed by the appellate court.[21] Second, petitioner fails to point any circumstance which should have put David on inquiry as to the why and wherefore of the possession of the checks by Chandiramani. David was not privy to the transaction between petitioner and Chandiramani. Instead, Chandiramani and David had a separate dealing in which it was precisely Chandiramanis duty to deliver the checks to David as payee. The evidence shows that Chandiramani performed said task to the letter. Petitioner admits that David took the step of asking the manager of his bank to verify from FEBTC and Equitable as to the genuineness of the checks and only accepted the same after being assured that there was nothing wrong with said checks. At that time, David was not aware of any stop payment order. Under these circumstances, David thus had no obligation to ascertain from Chandiramani what the nature of the latters title to the checks was, if any, or the nature of his possession. Thus, we cannot hold him guilty of gross neglect amounting to legal absence of good faith, absent any showing that there was something amiss about Chandiramanis acquisition or possession of the checks. David did not close his eyes deliberately to the nature or the particulars of a fraud allegedly committed by Chandiramani upon the petitioner, absent any knowledge on his part that the action in taking the instruments amounted to bad faith. [22] Belatedly, and we say belatedly since petitioner did not raise this matter in the proceedings below, petitioner now claims that David should have been put on alert as the

instruments in question were crossed checks. Pursuant to Bataan Cigar & Cigarette Factory, Inc. v. Court of Appeals, David should at least have inquired as to whether he was acquiring said checks for the purpose for which they were issued, according to petitioners submission. Petitioners reliance on the Bataan Cigar case, however, is misplaced. The facts in the present case are not on all fours with Bataan Cigar. In the latter case, the crossed checks were negotiated and sold at a discount by the payee, while in the instant case, the payee did not negotiate further the checks in question but promptly deposited them in his bank account. The Negotiable Instruments Law is silent with respect to crossed checks, although the Code of Commerce[23] makes reference to such instruments. Nonetheless, this Court has taken judicial cognizance of the practice that a check with two parallel lines in the upper left hand corner means that it could only be deposited and not converted into cash.[24] The effects of crossing a check, thus, relates to the mode of payment, meaning that the drawer had intended the check for deposit only by the rightful person, i.e., the payee named therein. In Bataan Cigar, the rediscounting of the check by the payee knowingly violated the avowed intention of crossing the check. Thus, in accepting the cross checks and paying cash for them, despite the warning of the crossing, the subsequent holder could not be considered in good faith and thus, not a holder in due course. Our ruling in Bataan Cigar reiterates that in De Ocampo & Co. v. Gatchalian.[25] The factual circumstances in De Ocampo and in Bataan Cigar are not present in this case. For here, there is no dispute that the crossed checks were delivered and duly deposited by David, the payee named therein, in his bank account. In other words, the purpose behind the crossing of the checks was satisfied by the payee. Proceeding to the issue of damages, petitioner merely argues that respondents David and PCIB are not entitled to damages, attorneys fees, and costs of suit as both acted in bad faith towards her, as shown by her version of the facts which gave rise to the instant case. Respondent David counters that he was maliciously and unceremoniously dragged into this suit for reasons which have nothing to do with him at all, but which arose from

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petitioners failure to receive her share of the profit promised her by Chandiramani. Moreover, in filing this suit which has lasted for over a decade now, the petitioner deprived David of the rightful enjoyment of the two checks, to which he is entitled, under the law, compelled him to hire the services of counsel to vindicate his rights, and subjected him to social humiliation and besmirched reputation, thus harming his standing as a person of good repute in the business community of Pampanga. David thus contends that it is but proper that moral damages, attorneys fees, and costs of suit be awarded him. For its part, respondent PCIB stresses that it was established by both the trial court and the appellate court that it was needlessly dragged into this case. Hence, no error was committed by the appellate court in declaring PCIB entitled to attorneys fees as it was compelled to litigate to protect itself. We have thoroughly perused the records of this case and find no reason to disagree with the finding of the trial court, as affirmed by the appellate court, that: [D]efendant David is entitled to [the] award of moral damages as he has been needlessly and unceremoniously dragged into this case which should have been brought only between the plaintiff and defendant Chandiramani.[26] A careful reading of the findings of facts made by both the trial court and appellate court clearly shows that the petitioner, in including David as a party in these proceedings, is barking up the wrong tree. It is apparent from the factual findings that David had no dealings with the petitioner and was not privy to the agreement of the latter with Chandiramani. Moreover, any loss which the petitioner incurred was apparently due to the acts or omissions of Chandiramani, and hence, her recourse should have been against him and not against David. By needlessly dragging David into this case all because he and Chandiramani knew each other, the petitioner not only unduly delayed David from obtaining the value of the checks, but also caused him anxiety and injured his business reputation while waiting for its outcome. Recall that under Article 2217[27] of the Civil Code, moral damages include mental anguish, serious anxiety, besmirched reputation, wounded feelings, social humiliation, and similar injury. Hence, we find the award of moral damages to be in order.

The appellate court likewise found that like David, PCIB was dragged into this case on unfounded and baseless grounds. Both were thus compelled to litigate to protect their interests, which makes an award of attorneys fees justified under Article 2208 (2)[28] of the Civil Code. Hence, we rule that the award of attorneys fees to David and PCIB was proper. WHEREFORE, the instant petition is DENIED. The assailed decision of the Court of Appeals, dated March 25, 1999, in CA-G.R. CV No. 52398 is AFFIRMED. Costs against the petitioner. SO ORDERED. Bellosillo, concur. (Chairman), Austria-Martinez, and Tinga, JJ.,

Callejo, Sr., J., on leave.

[1] Penned by Associate Justice Bernardo P. Abesamis with Associate Justices Jainal D. Rasul and Conchita Carpio Morales (now a member of this Court) concurring. See Rollo, pp. 95-108. [2] The case is entitled Cely Yang v. Equitable Banking Corporation, Prem Chandiramani, and Fernando David. See Rollo, pp. 38-41. [3] Entitled Cely Yang v. Far East Bank & Trust Company, Philippine Commercial and International Bank, Prem Chandiramani, and Fernando David. See Rollo, pp. 42-46. [4] Records, Vol. I, pp. 1-4. [5] Id. at 8. [6] Id. at 141. [7] Rollo, p. 84. [8] CA Rollo, p. 131. [9] Id. at 195-196. [10] Id. at 462. [11] Id. at 456. [12] ART. 2208. In the absence of stipulation, attorneys fees and expenses of litigation, other than judicial costs, cannot be recovered, except: When exemplary damages are awarded; When the defendants act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest; In criminal cases of malicious prosecution against the plaintiff; In case of a clearly unfounded civil action or proceeding against the plaintiff; Where the defendant acted in gross and evident bad faith in refusing the plaintiffs plainly valid, just, and demandable claim; In actions for legal support; In actions for the recovery of wages of household helpers, laborers, and skilled workers; In actions for indemnity under workmens compensation and employers liability laws; In a separate civil action to recover civil liability arising from a crime; When at least double judicial costs are awarded;

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In any other case where the court deems it just and equitable that attorneys fees and expenses of litigation should be recovered. In all cases, the attorneys fees and expenses of litigation must be reasonable. [13] Rollo, p. 230. [14] Producers Bank of the Phil. v. Court of Appeals, 417 Phil. 646, 656 (2001). [15] Fossum v. Fernandez Hermanos, 44 Phil. 713, 716 (1923). [16] Merchants National Bank v. Smith, 59 Mont. 280, 196 P. 523, 15 ALR 430; Boston Steel & Iron Co. v. Steur, 183 Mass. 140, 66 NE 646. [17] SEC. 52. What constitutes a holder in due course. A holder in due course is a holder who has taken the instrument under the following conditions: That it is complete and regular upon its face; That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact; That he took it in good faith and for value; That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect of the title of the person negotiating it. [18] SEC. 24. Presumption of consideration. Every negotiable instrument is deemed prima facie to have been issued for valuable consideration; and every person whose signature appears thereon to have become a party thereto, for value. [19] SEC. 25. Value; What constitutes. Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value, and is deemed such whether the instrument is payable on demand or at a future date. [20] SEC. 191. Definitions and meaning of terms. In this Act, unless the context otherwise requires: xxx Value means valuable consideration. [21] See Fernandez v. Fernandez, 416 Phil. 322, 337 (2001). [22] See Ozark Motor Co. v. Horton, 196 SW 395. See also Davis v. First National Bank, 26 Ariz. 621, 229 P. 391. [23] ART. 541. The maker or any legal holder of a check shall be entitled to indicate therein that it be paid to a certain banker or institution, which he shall do by writing across the face the name of said banker or institution, or only the words and company. [24] State Investment House v. IAC, G.R. No. 72764, 13 July 1989, 175 SCRA 310, 315. [25] 13 Phil. 574 (1961). We held that under the following circumstances: (1) the drawer had no account with the payee; (2) the check was crossed; (3) the crossed check was used to pay an obligation which did not correspond to the amount of the check; and (4) the holder did not show or tell the payee why he had the check in his possession and why he was using to pay his personal account, then the payee had the duty to ascertain from the holder what the nature of the latters title to the check was or the nature of his possession. [26] CA Rollo, p. 130. [27] ART. 2217. Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation and similar injury. Though incapable of pecuniary computation, moral damages may be recovered if they are the proximate result of the defendants wrongful act or omission. [28] See note 12.

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ASIA BANKING CORPORATION V. TEN SEN GUAN 44 PHIL 511 FACTS: Ten Sen Guan ordered from Snows Ltd. ten cases of mercerized bastite to be shipped from New York to Manila. Upon the arrival of the merchandise, a draft drawn by Snows Ltd. against Ten Sen Guan was presented to them for acceptance. The delivery of the bill of lading and other documents were being put on hold pending acceptance of the draft that is why Ten Sen Guan accepted the same. When the cases were opened however, it was found out that the merchandise wasn't bastite but instead were burlap. Ten Sen Guan then was prompted to return the bill of lading and other documents and requested Asia Banking Corporation, the agent of Snow Ltd. to cancel its acceptance, which the corporation promised to do so. However it didn't do good its promise since it sued Ten Sen Guan for the amount of the draft. The trial court however ruled in favor of Ten Sen Guan. HELD: It is undisputed that the defendants placed the order with Snow Ltd. for 10 cases of mercerized bastite and that the draft was drawn from the corresponding value of 10 cases of mercerized bastite including incidental expenses. That when the cases were examined it was found out that it wasn't bastite but instead were burlap, of which the corporation was notified and that Ten Sen Guan refused to refused the goods. The corporation alleges that it is a holder for value but it failed to prove such allegation. If indeed it was a holder for value, it could have easily proven such fact by competent evidence but it failed to do so. It wasn't able to give an authentic account of the transactions. It being a fact that it is not a holder for value, it is susceptible to any defenses available to Ten Sen Guan. According to the findings, the acceptance was conditional. The draft was for collection and also, the evidence established that the corporation has released Ten Sen Guan from liability from the draft.

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EN BANC G.R. No. L-19397 February 16, 1923 ASIA BANKING CORPORATION, plaintiff-appellant, vs. TEN SEN GUAN Y SOBRINOS and YU BIAO SONTUA, defendants-appellees.
J. A. Wolfson for appellant.Crossfield and O'Brien for appellees.

judgment for the plaintiff, and in the admission of parol evidence tending to vary the terms of the written acceptance of the bill of exchange, that the plaintiff had cancelled defendants' acceptance, that defendants were released, and in the admission of certain exhibits, and the denial of plaintiff's motion for a new trial.

JOHNS, J.: The draft in question was endorsed by "Snow's Ltd." and, with the invoice, bill of lading and other shipping documents, delivered to the plaintiff at its place of business in New York City from where and by which it was sent to its Manila branch and presented to the defendants for acceptance. At first the defendants refused to accept the draft, because the merchandise had not arrived and it had no opportunity to inspect it. It is then claimed, and, in legal effect, the trial court found, that upon the representation of the local bank that the draft was drawn for the ten cases of mercerized batiste in question and that they would arrive, as ordered, June 28, 1920, the defendants accepted the draft, and the plaintiff now claims that they are legally bound upon the acceptance, and that parol testimony is not admissible to vary or contradict the force and effect of their legal liability as it appears upon the face of the draft. It is undisputed that the defendants placed the order with "Snow's Ltd." for ten cases of mercerized batiste, and that the draft was drawn for the corresponding value of ten cases of mercerized batiste, including incidental expenses. That when the cases evidenced by the draft arrived and were examined, they were found to contain "burlap" only which had but little, if any, commercial value, of which the plaintiff was at once notified, and that the defendant refused to receive the goods. Plaintiff alleges that it is the holder of the draft for value and in due course of business. The testimony upon that point is not clear or convincing, and is entitled to but little weight. If it be a fact, as the plaintiff claims, that it was in good faith the purchaser of the draft, it would have been a very easy matter to establish that fact by competent evidence, showing the nature of the transaction in its New York office, when and how it acquired the draft and when and to whom it paid the money and how much it paid and by whom it was actually paid. In other words, to give an authentic account of the whole transaction. There is no such evidence in the record. Upon that point the plaintiff was content to call a local employee of the bank who testified as to the alleged meaning of certain entries made in the bank records. Standing alone that is not sufficient or competent to show that the bank in

STATEMENT Plaintiff alleges that it is a foreign corporation duly licensed to do a banking business in the City of Manila. That the defendant is a duly registered partnership with its principal office in the City of Manila and is indebted to it in the sum of $10,475.51, with interest and exchange, for and on account of a New York draft for that amount drawn by "Snow's Ltd." on Ten Sen Guan payable ninety days after sight. That the draft was duly endorsed, and that the plaintiff is the owner and holder of it in due course of business. That demand therefore had been made and payment refused. Wherefore, plaintiff prays for judgment against the defendants for the amount of the draft, with interest thereon at the rate of 8 per cent per annum from May 12, 1920, to the date of payment, plus exchange at the rate of 14 per centum with costs. The complaint was filed August 4, 1921. For answer, the defendants deny all of the material allegations of the complaint, except such as are hereinafter admitted, and, as a further and separate defense, specifically deny that they are indebted to the plaintiff in the amount alleged or in any other sum, or that the plaintiff is the holder of the draft in due course of business or for value. It is then alleged that on February 25, 1920, the defendants ordered from "Snow's Ltd." ten cases of mercerized batiste of the value of $10,266.98 to be shipped from New York freight prepaid to Manila where they were to be delivered to the defendants. That the merchandise in question arrived in Manila about June 28, 1920, at which time a draft for the amount alleged drawn by "Snow's Ltd." against the defendants was presented to them through the plaintiff as agent of "Snow's, Ltd." for acceptance. That the delivery of the bill of lading and other documents relating to the merchandise was refused by the plaintiff until the draft was accepted by the defendants, and that delivery was contingent upon the acceptance of the draft. That the defendants, being assured by plaintiff, and believing that the merchandise described in the bill of lading was the "batiste" ordered, accepted the draft and received delivery of the bill of lading and made entry of the goods at the Customs House in Manila, and paid charges thereon amounting to P638.07; that when the cases supposed to contain the "batiste" were opened they were found to contain "burlap" of little value, which was not in any sense or manner the "batiste" ordered and guaranteed to be contained in the cases. That immediately the defendants declined to receive the goods and left them in the possession of the Customs authorities, and at once notified the plaintiff and returned to it the bill of lading, and demanded that their acceptance of the draft be cancelled. That plaintiff accepted the return of the bill of lading and documents, and agreed to cancel defendants' acceptance of the draft, for the reason that it was without consideration. Wherefore, defendants pray for judgment, with costs. The lower court found for the defendants for whom judgment was entered, and the plaintiff appeals, claiming that the court erred in falling to make any findings of fact, in dismissing the complaint, and in failing to render

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New York was the purchaser and holder for value. If it be a fact, as the evidence tends to show, that the plaintiff is not a bona fide holder of the draft, and that it was held for collection only, it follows that the defendants would have a right to make any defense to the draft which they would have a right to make against "Snow's, Ltd." The trial court found and the evidence sustains the finding that the acceptance of the draft by the defendants was conditional, and that oral evidence was admissible to explain the terms and conditions of the acceptance. That would specially be true where the plaintiff held the draft for collection. It also found, in legal effect, that the plaintiff released and discharged the defendants from any liability upon the draft, and the evidence sustains that finding. It will be noted that the original draft was dated May 12, 1920, payable ninety days after sight, and that it was accepted by the defendants on June 28, 1920, and that the complaint was filed on August 4, 1921, more than fourteen months after it was accepted and almost one year after it became due. We are not impressed with plaintiff's case on the merits. The record indicates that in truth and in fact the plaintiff held that draft for collection; that relying upon the statements and representations of the plaintiff, the defendants conditionally accepted the draft; that immediately upon discovery of the fraud the defendants promptly notified the bank. Its then officials recognized the fraud and the conditional acceptance of the draft, and accepted the return of the papers and the "burlap," and agreed to release the defendants from all liability. There is no merit in plaintiff's claim that it is affirmed, with costs. So ordered. Araullo, C. J., Malcolm, Avancea, Villamor, Ostrand, and Romualdez, JJ., concur.

through the bank are the same case that were shipped from New York City by that firm. This being true, it was a fraud on the part of Snow's, Ltd., to negotiate the draft now in question to the New York branch of the Asia Banking Corporation, the plaintiff in this case. This fraud having been set up in the defendants' answer and established by the proof, it became incumbent upon the plaintiff in this case to prove that it occupies the position of a bona fide purchaser of said draft for value and without notice. This requirement is not met by the presumption which the law raises in favor of the holder of a negotiable instrument, arising from the mere fact of the possession of the instrument and the form in which the document is indorsed. The plaintiff must go further and prove, as a fact, that it is such a purchaser. Proof upon this point is wanting in the record; and the judgment should therefore be affirmed, not precisely for the reasons given by the trial judge, but became the document had its inception in fraud and the plaintiff has failed to prove that it is an innocent purchaser for value and without notice. (Bills and Notes, 8 C. J., 894.) The reason for this salutary rule given by the courts in innumerable decision is that the guilty maker or holder of an instrument vitiated by fraud or illegality will naturally seek to put it in the hands of some other person in order to cut off the defense to which the instrument is subject, and a presumption arises against the bona fides of the transfer. The law therefore requires the holder of such paper to manifest the most complete can do and show exactly the circumstances under which the paper was acquired. In section 59 of the Negotiable Instruments Law (Act No. 2031), it is declared that every holder of a negotiable instrument is deemed prima facie to be a holder in due course, but when it is shown that the title of any person who has negotiated the instruments was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as holder in due course. In section 55 of the same Law it is declared, among other things, that the title of a person who negotiates and instrument is defective when he negotiates it under such circumstances as amount to a fraud. These provisions are clearly applicable to the present case, and in my opinion they determine the issue against the plaintiff. In Goetz vs. Bank of Kansas City (119 U. S., 551; 30 L. ed., 515), relied on by the appellant, the plaintiff bank had discounted at face value certain drafts which were accompanied by forged bills of lading. The bank was admittedly in the position of an innocent purchaser for value and without notice; and the Supreme Court of the United States held that it could recover on the drafts against the acceptor, notwithstanding the defect in their origin. In the present case we know nothing about the circumstances under which the branch of the Asia Banking Corporation acquired the draft in question in New York City for upon this point the indorsements tell nothing, and no independent proof relative thereto has been submitted.

Separate Opinions STREET, J., concurring: The gross fraud which has come to light in this case, consisting of the sending of jute to the defendants upon a contract calling for mercerized batiste, must be imputed to the drawer of the draft in question, that is, to Snow's, Ltd., of New York City; for it must be assumed, in the absence of proof to the contrary, that the cases arriving in this port upon the documents of shipment transmitted

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SECOND DIVISION G.R. No. 158262, July 21, 2008 SPS. PEDRO AND FLORENCIA VIOLAGO, PETITIONERS, vs. BA FINANCE CORPORATION AND AVELINO VIOLAGO, RESPONDENTS. DECISION VELASCO JR., J.: This is a Petition for Review on Certiorari of the August 20, 2002 Decision[1] and May 15, 2003 Resolution[2] of the Court of Appeals (CA) in CA-G.R. CV No. 48489 entitled BA Finance Corporation, Plaintiff-Appellee v. Sps. Pedro and Florencia Violago, Defendants and Third Party Plaintiffs-Appellants v. Avelino Violago, Third Party Defendant-Appellant. Petitioners-spouses Pedro and Florencia Violago pray for the reversal of the appellate court's ruling which held them liable to respondent BA Finance Corporation (BA Finance) under a promissory note and a chattel mortgage. Petitioners likewise pray that respondent Avelino Violago be adjudged directly liable to BA Finance. The Facts Sometime in 1983, Avelino Violago, President of Violago Motor Sales Corporation (VMSC), offered to sell a car to his cousin, Pedro F. Violago, and the latter's wife, Florencia. Avelino explained that he needed to sell a vehicle to increase the sales quota of VMSC, and that the spouses would just have to pay a down payment of PhP 60,500 while the balance would be financed by respondent BA Finance. The spouses would pay the monthly installments to BA Finance while Avelino would take care of the documentation and approval of financing of the car. Under these terms, the spouses then agreed to purchase a Toyota Cressida Model 1983 from VMSC.[3] On August 4, 1983, the spouses and Avelino signed a promissory note under which they bound themselves to pay jointly and severally to the order of VMSC the amount of PhP 209,601 in 36 monthly installments of PhP 5,822.25 a month, the first installment to be due and payable on September 16, 1983. Avelino prepared a Disclosure Statement of Loan/Credit Transportation which showed the net purchase price of the vehicle, down payment, balance, and finance charges. VMSC then issued a sales invoice in

favor of the spouses with a detailed description of the Toyota Cressida car. In turn, the spouses executed a chattel mortgage over the car in favor of VMSC as security for the amount of PhP 209,601. VMSC, through Avelino, endorsed the promissory note to BA Finance without recourse. After receiving the amount of PhP 209,601, VMSC executed a Deed of Assignment of its rights and interests under the promissory note and chattel mortgage in favor of BA Finance. Meanwhile, the spouses remitted the amount of PhP 60,500 to VMSC through Avelino.[4] The sales invoice was filed with the Land Transportation Office (LTO)-Baliwag Branch, which issued Certificate of Registration No. 0137032 in the name of Pedro on August 8, 1983. The spouses were unaware that the same car had already been sold in 1982 to Esmeraldo Violago, another cousin of Avelino, and registered in Esmeraldo's name by the LTO-San Rafael Branch. Despite the spouses' demand for the car and Avelino's repeated assurances, there was no delivery of the vehicle. Since VMSC failed to deliver the car, Pedro did not pay any monthly amortization to BA Finance.
[5]

On March 1, 1984, BA Finance filed with the Regional Trial Court (RTC), Branch 116 in Pasay City a complaint for Replevin with Damages against the spouses. The complaint, docketed as Civil Case No. 1628-P, prayed for the delivery of the vehicle in favor of BA Finance or, if delivery cannot be effected, for the payment of PhP 199,049.41 plus penalty at the rate of 3% per month from February 15, 1984 until fully paid. BA Finance also asked for the payment of attorney's fees, liquidated damages, replevin bond premium, expenses in the seizure of the vehicle, and costs of suit. The RTC issued an Order of Replevin on March 28, 1984. The Violago spouses, as defendants a quo, were declared in default for failing to file an answer. Eventually, the RTC rendered on December 3, 1984 a decision in favor of BA Finance. A writ of execution was thereafter issued on January 11, 1985, followed by an alias writ of execution.[6] In the meantime, Esmeraldo conveyed the vehicle to Jose V. Olvido who was then issued Certificate of Registration No. 0014830-4 by the LTO-Cebu City Branch on April 29, 1985. On May 8, 1987, Jose executed a Chattel Mortgage over the vehicle in favor of Generoso Lopez as security for a loan covered by a promissory note in the amount of PhP 260,664.

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This promissory note was later endorsed to BA Finance, Cebu City branch.[7] On August 21, 1989, the spouses Violago filed a Motion for Reconsideration and Motion to Quash Writ of Execution on the basis of lack of a valid service of summons on them, among other reasons. The RTC denied the motions; hence, the spouses filed a petition for certiorari under Rule 65 before the CA, docketed as CA G.R. No. 2002-SP. On May 31, 1991, the CA nullified the RTC's order. This CA decision became final and executory. On January 28, 1992, the spouses filed their Answer before the RTC, alleging the following: they never received the vehicle from VMSC; the vehicle was previously sold to Esmeraldo; BA Finance was not a holder in due course under Section 59 of the Negotiable Instruments Law (NIL); and the recourse of BA Finance should be against VMSC. On February 25, 1995, the Violago spouses, with prior leave of court, filed a Third Party Complaint against Avelino praying that he be held liable to them in the event that they be held liable to BA Finance, as well as for damages. VMSC was not impleaded as third party defendant. In his Motion to Dismiss and Answer, Avelino contended that he was not a party to the transaction personally, but VMSC. Avelino's motion was denied and the third party complaint against him was entertained by the trial court. Subsequently, the spouses belabored to prove that they affixed their signatures on the promissory note and chattel mortgage in favor of VMSC in blank.[8] The RTC rendered a Decision on March 5, 1994, finding for BA Finance but against the Violago spouses. The RTC, however, declared that they are entitled to be indemnified by Avelino. The dispositive portion of the RTC's decision reads: WHEREFORE, defendant-[third]-party plaintiffs spouses Pedro F. Violago and Florencia R. Violago are ordered to deliver to plaintiff BA Finance Corporation, at its principal office the BAFC Building, Gamboa St., Legaspi Village, Makati, Metro Manila the Toyota Cressida car, model 1983, bearing Engine No. 21R-02854117, and with Serial No. RX60-804614, covered by the deed of chattel mortgage dated August 4, 1983; or if such delivery cannot be made, to pay, jointly and severally, to the plaintiff the sum of P198,003.06 together with the penalty [thereon] at three

percent (3%) a month, from March 1, 1984, until the amount is fully paid. In either case, the defendant-third-party plaintiffs are required to pay, jointly and severally, to the plaintiff a sum equivalent to twenty-five percent (25%) of P198,003.06 as attorney's fees, and another amount also equivalent to twenty five percent (25%) of the said unpaid balance, as liquidated damages. The defendant-third party-plaintiffs are also required to shoulder the litigation expenses and costs. As indemnification, third-party defendant Avelino Violago is ordered to deliver to defendants-third-party plaintiffs spouses Pedro F. Violago and Florencia R. Violago the aforedescribed motor vehicle; or if such delivery is not possible, to pay to the said spouses the sum of P198,003.06, together with the penalty thereon at three (3%) a month from March 1, 1984, until the amount is entirely paid. In either case, the third-party defendant should pay to the defendant-third-party plaintiffs spouses a sum equivalent to twenty-five percent (25%) of P198,003.06 as attorney's fees, and another sum equivalent also to twenty-five percent (25%) of the said unpaid balance, as liquidated damages. Third-party defendant Avelino Violago is further ordered to return to the third-party plaintiffs the sum of P60,500.00 they paid to him as down payment for the car; and to pay them P15,000.00 as moral damages; P10,000.00 as exemplary damages; and reimburse them for all the expenses and costs of the suit. The counterclaims of the defendants and defendant, for lack of merit, are dismissed.[9] The Ruling of the CA Petitioners-spouses and Avelino appealed to the CA. The spouses argued that the promissory note is a negotiable instrument; hence, the trial court should have applied the NIL and not the Civil Code. The spouses also asserted that since VMSC was not the owner of the vehicle at the time of sale, the sale was null and void for the failure in the "cause or consideration" of the promissory note, which in this case was the sale and delivery of the vehicle. The spouses also alleged that BA Finance was not a holder in due course of the note since it knew, through its Cebu City branch, that the car was never delivered to the spouses. [10] On the other third-party

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hand, Avelino prayed for the dismissal of the complaint against him because he was not a party to the transaction, and for an order to the spouses to pay him moral damages and costs of suit. The appellate court ruled that the promissory note was a negotiable instrument and that BA Finance was a holder in due course, applying Secs. 8, 24, and 52 of the NIL. The CA faulted petitioners for failing to implead VMSC, the seller of the vehicle and creditor in the promissory note, as a party in their Third Party Complaint. Citing Salas v. Court of Appeals, [11] the appellate court reasoned that since VMSC is an indispensable party, any judgment will not bind it or be enforced against it. The absence of VMSC rendered the proceedings in the RTC and the judgment in the Third Party Complaint "null and void, not only as to the absent party but also to the present parties, namely the DefendantsAppellants (petitioners herein) and the Third-PartyDefendant-Appellant (Avelino Violago)." The CA set aside the trial court's order holding Avelino liable for damages to the spouses without prejudice to the action of the spouses against VMSC and Avelino in a separate action.[12] The dispositive portion of the August 20, 2002 CA Decision reads: IN THE LIGHT OF ALL THE FOREGOING, the appeal of the Plaintiffs-Appellants is DISMISSED. The appeal of the ThirdParty-Defendant-Appellant is GRANTED. The Decision of the Court a quo is AFFIRMED, with the modification that the Third-Party Complaint against the Third-Party-Defendantappellant is DISMISSED, without prejudice. The counterclaims of the Third-Party Defendant Appellant against the Defendants-Appellants are DISMISSED, also without prejudice.[13] The spouses Violago sought but were denied reconsideration by the CA per its Resolution of May 15, 2003. The Issues Petitioners raise the following issues:
WHETHER OR NOT THE HOLDER OF AN INVALID NEGOTIABLE PROMISSORY NOTE MAY BE CONSIDERED A HOLDER IN DUE COURSE WHETHER OR NOT A CHATTEL MORTGAGE SHOULD BE CONSIDERED VALID DESPITE VITIATION OF CONSENT OF, AND THE FRAUD COMMITTED ON, THE MORTGAGORS BY AVELINO, AND THE CLEAR ABSENCE OF OBJECT CERTAIN

WHETHER OR NOT THE VEIL OF CORPORATE ENTITY MAY BE INVOKED AND SUSTAINED DESPITE THE FRAUD AND DECEPTION OF AVELINO

The Court's Ruling The ruling of the appellate court is set aside insofar as it dismissed, without prejudice, the third party complaint of petitioners against Avelino thereby effectively absolving Avelino from any liability under the third party complaint. In addressing the threshold issue of whether BA Finance is a holder in due course of the promissory note, we must determine whether the note is a negotiable instrument and, hence, covered by the NIL. In their appeal to the CA, petitioners argued that the promissory note is a negotiable instrument and that the provisions of the NIL, not the Civil Code, should be applied. In the present petition, however, petitioners claim that Article 1318 of the Civil Code[14] should be applied since their consent was vitiated by fraud, and, thus, the promissory note does not carry any legal effect despite its negotiation. Either way, the petitioners' arguments deserve no merit. The promissory note is clearly negotiable. The appellate court was correct in finding all the requisites of a negotiable instrument present. The NIL provides: Section 1. Form of Negotiable Instruments. - An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, determinable future time; or at a fixed or

(d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. The promissory note signed by petitioners reads:
209,601.00 Makati, Metro Manila, Philippines, August 4, 1983 For value received, I/we, jointly and severally, promise to pay to the order of VIOLAGO MOTOR SALES CORPORATION, its office, the principal sum of TWO HUNDRED NINE THOUSAND SIX HUNDRED ONE ONLY Pesos (P209,601.00), Philippines Currency, with interest at the rate stipulated herein below, in installments as follows:

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Thirty Six (36) successive monthly installments of P5,822.25, the first installment to be paid on 9-16-83, and the succeeding monthly installments on the 16th day of each and every succeeding month thereafter until the account is fully paid, provided that the penalty charge of three (3%) per cent per month or a fraction thereof shall be added on each unpaid installment from maturity thereof until fully paid. xxxx Notice of demand, presentment, dishonor and protest are hereby waived. (Sgd.) PEDRO F. VIOLAGO (Sgd.) FLORENCIA R. VIOLAGO

drawees with certainty. The indorsement by VMSC to BA Finance appears likewise to be valid and regular. The more important issue now is whether or not BA Finance is a holder in due course. The resolution of this issue will determine whether petitioners' defense of fraud and nullity of the sale could validly be raised against respondent corporation. Sec. 52 of the NIL provides: Section 52. What constitutes a holder in due course.--A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. The law presumes that a holder of a negotiable instrument is a holder thereof in due course. [16] In this case, the CA is correct in finding that BA Finance meets all the foregoing requisites: In the present recourse, on its face, (a) the "Promissory Note", Exhibit "A", is complete and regular; (b) the "Promissory Note" was endorsed by the VMSC in favor of the Appellee; (c) the Appellee, when it accepted the Note, acted in good faith and for value; (d) the Appellee was never informed, before and at the time the "Promissory Note" was endorsed to the Appellee, that the vehicle sold to the 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.[17] In the hands of one other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable.[18] A holder in due course, however,

763 Constancia St., Sampaloc, Manila (Address)

same (Address)

(Sgd.) Marivic Avaria (WITNESS)

(Sgd.) Jesus Tuazon (WITNESS)

PAY TO THE ORDER OF BA FINANCE CORPORATION WITHOUT RECOURSE

VIOLAGO CORPORATION By: (Sgd.)

MOTOR

SALES

AVELINO A. VIOLAGO, Pres.

[15]

The promissory note clearly satisfies the requirements of a negotiable instrument under the NIL. It is in writing; signed by the Violago spouses; has an unconditional promise to pay a certain amount, i.e., PhP 209,601, on specific dates in the future which could be determined from the terms of the note; made payable to the order of VMSC; and names the

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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.[19] Since BA Finance is a holder in due course, petitioners cannot raise the defense of nondelivery of the object and nullity of the sale against the corporation. The NIL considers every negotiable instrument prima facie to have been issued for a valuable consideration.[20] In Salas, we held that a party holding an instrument may enforce payment of the instrument for the full amount thereof. As such, the maker cannot set up the defense of nullity of the contract of sale. [21] Thus, petitioners are liable to respondent corporation for the payment of the amount stated in the instrument. From the third party complaint to the present petition, however, petitioners pray that the veil of corporate fiction be set aside and Avelino be adjudged directly liable to BA Finance. Petitioners likewise pray for damages for the fraud committed upon them. In Concept Builders, Inc. v. NLRC, we held: It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. But, this separate and distinct personality of a corporation is merely a fiction created by law for convenience and to promote justice. So, when the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws, this separate personality of the corporation may be disregarded or the veil of corporate fiction pierced. This is true likewise when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation. xxxx The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows: Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;

Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust acts in contravention of plaintiffs legal rights; and The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.[22] This case meets the foregoing test. VMSC is a family-owned corporation of which Avelino was president. Avelino committed fraud in selling the vehicle to petitioners, a vehicle that was previously sold to Avelino's other cousin, Esmeraldo. Nowhere in the pleadings did Avelino refute the fact that the vehicle in this case was already previously sold to Esmeraldo; he merely insisted that he cannot be held liable because he was not a party to the transaction. The fact that Avelino and Pedro are cousins, and that Avelino claimed to have a need to increase the sales quota, was likely among the factors which motivated the spouses to buy the car. Avelino, knowing fully well that the vehicle was already sold, and with abuse of his relationship with the spouses, still proceeded with the sale and collected the down payment from petitioners. The trial court found that the vehicle was not delivered to the spouses. Avelino clearly defrauded petitioners. His actions were the proximate cause of petitioners' loss. He cannot now hide behind the separate corporate personality of VMSC to escape from liability for the amount adjudged by the trial court in favor of petitioners. The fact that VMSC was not included as defendant in petitioners' third party complaint does not preclude recovery by petitioners from Avelino; neither would such non-inclusion constitute a bar to the application of the piercing-of-the-corporate-veil doctrine. We suggested as much in Arcilla v. Court of Appeals, an appellate proceeding involving petitioner Arcilla's bid to avoid the adverse CA decision on the argument that he is not personally liable for the amount adjudged since the same constitutes a corporate liability which nevertheless cannot even be enforced against the corporation which has not been impleaded as a party below. In that case, the Court found as well-taken the CA's act of disregarding the separate juridical personality of the corporation and holding its president, Arcilla, liable for the obligations incurred in the name of the corporation although it was not a party to the collection suit before the trial court. An excerpt from Arcilla:

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x x x In short, even if We are to assume arguendo that the obligation was incurred in the name of the corporation, the petitioner [Arcilla] would still be personally liable therefor because for all legal intents and purposes, he and the corporation are one and the same. Csar Marine Resources, Inc. is nothing more than his business conduit and alter ego. The fiction of separate juridical personality conferred upon such corporation by law should be disregarded. Significantly, petitioner does not seriously challenge the [CA's] application of the doctrine which permits the piercing of the corporate veil and the disregarding of the fiction of a separate juridical personality; this is because he knows only too well that from the beginning, he merely used the corporation for his personal purposes.[23] WHEREFORE, the CA's August 20, 2002 Decision and May 15, 2003 Resolution in CA-G.R. CV No. 48489 are SET ASIDE insofar as they dismissed without prejudice the third party complaint of petitioners-spouses Pedro and Florencia Violago against respondent Avelino Violago. The March 5, 1994 Decision of the RTC is REINSTATED and AFFIRMED. Costs against Avelino Violago. SO ORDERED. Quisumbing, (Chairperson), Morales, and Tinga, JJ., concur. Ynares-Santiago, Carpio

(2) Object certain which is the subject matter of the contract; (3) Cause of the obligation which is established.
[15]

Rollo, p. 21. NIL, Sec. 59. Rollo, p. 25. NIL, Sec. 58. Id., Sec. 57. Id., Sec. 24. Supra note 11, at 302-303. G.R. No. 108734, May 29, 1996, 257 SCRA 149, 157-159. G.R. No. 89804, October 23, 1992, 215 SCRA 120, 129.

[16]

[17]

[18]

[19]

[20]

[21]

[22]

[23]

* Additional member as per Special Order No. 509 dated July 1, 2008.
[1]

Rollo, pp. 14-28. Penned by Associate Justice Romeo J. Callejo, Sr. (former member of this Court) and concurred in by Associate Justices Remedios Salazar-Fernando and Danilo B. Pine (now retired).
[2]

Id. at 30-31. Id. at 15. Id. at 15-16. Id. Id. at 16-17. Id. at 18. Id. at 18-19. Id. Id. at 20-26. G.R. No. 76788, January 22, 1990, 181 SCRA 296. Rollo, p. 19. Supra note 1, at 27. Art. 1318. There is no contract unless the following requisites concur:

[3]

[4]

[5]

[6]

[7]

[8]

[9]

[10]

[11]

[12]

[13]

[14]

(1) Consent of the contracting parties;

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FIRST DIVISION G.R. No. 101163 January 11, 1993 STATE INVESTMENT HOUSE, INC., petitioner, vs. COURT OF APPEALS and NORA B. MOULIC, respondents.
Escober, Alon & Associates for petitioner. Martin D. Pantaleon for private respondents.

Corazon Victoriano, who later assumed full responsibility for the checks. On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party Complaint, and ordered STATE to pay MOULIC P3,000.00 for attorney's fees. STATE elevated the order of dismissal to the Court of Appeals, but the appellate court affirmed the trial court on the ground that the Notice of Dishonor to MOULIC was made beyond the period prescribed by the Negotiable Instruments Law and that even if STATE did serve such notice on MOULIC within the reglementary period it would be of no consequence as the checks should never have been presented for payment. The sale of the jewelry was never effected; the checks, therefore, ceased to serve their purpose as security for the jewelry. We are not persuaded. The negotiability of the checks is not in dispute. Indubitably, they were negotiable. After all, at the pre-trial, the parties agreed to limit the issue to whether or not STATE was a holder of the checks in due course. 1 In this regard, Sec. 52 of the Negotiable Instruments Law provides
Sec. 52. What constitutes a holder in due course. A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it was previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

BELLOSILLO, J.: The liability to a holder in due course of the drawer of checks issued to another merely as security, and the right of a real estate mortgagee after extrajudicial foreclosure to recover the balance of the obligation, are the issues in this Petition for Review of the Decision of respondent Court of Appeals. Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of jewelry to be sold on commission, two (2) post-dated Equitable Banking Corporation checks in the amount of Fifty Thousand Pesos (P50,000.00) each, one dated 30 August 1979 and the other, 30 September 1979. Thereafter, the payee negotiated the checks to petitioner State Investment House. Inc. (STATE). MOULIC failed to sell the pieces of jewelry, so she returned them to the payee before maturity of the checks. The checks, however, could no longer be retrieved as they had already been negotiated. Consequently, before their maturity dates, MOULIC withdrew her funds from the drawee bank. Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20 December 1979, STATE allegedly notified MOULIC of the dishonor of the checks and requested that it be paid in cash instead, although MOULIC avers that no such notice was given her. On 6 October 1983, STATE sued to recover the value of the checks plus attorney's fees and expenses of litigation. In her Answer, MOULIC contends that she incurred no obligation on the checks because the jewelry was never sold and the checks were negotiated without her knowledge and consent. She also instituted a Third-Party Complaint against

Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable instrument is a holder in due course. 2 Consequently, the burden of proving that STATE is not a holder in due course lies in the person who disputes the presumption. In this regard, MOULIC failed. The evidence clearly shows that: (a) on their faces the postdated checks were complete and regular: (b) petitioner bought these checks from the payee, Corazon Victoriano, before their due dates; 3 (c) petitioner took these checks in good faith and for value, albeit at a discounted price; and, (d) petitioner was never informed nor made aware that these checks were merely issued to payee as security and not for value.

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Consequently, STATE is indeed a holder in due course. As such, it holds the instruments free from any defect of title of prior parties, and from defenses available to prior parties among themselves; STATE may, therefore, enforce full payment of the checks. 4 MOULIC cannot set up against STATE the defense that there was failure or absence of consideration. MOULIC can only invoke this defense against STATE if it was privy to the purpose for which they were issued and therefore is not a holder in due course. That the post-dated checks were merely issued as security is not a ground for the discharge of the instrument as against a holder in due course. For the only grounds are those outlined in Sec. 119 of the Negotiable Instruments Law:
Sec. 119. Instrument; how discharged. A negotiable instrument is discharged: (a) By payment in due course by or on behalf of the principal debtor; (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other act which will discharge a simple contract for the payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right.

Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the mere expediency of withdrawing her funds from the drawee bank. She is thus liable as she has no legal basis to excuse herself from liability on her checks to a holder in due course. Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment. The need for such notice is not absolute; there are exceptions under Sec. 114 of the Negotiable Instruments Law:
Sec. 114. When notice need not be given to drawer. Notice of dishonor is not required to be given to the drawer in the following cases: (a) Where the drawer and the drawee are the same person; (b) When the drawee is a fictitious person or a person not having capacity to contract; (c) When the drawer is the person to whom the instrument is presented for payment: (d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; (e) Where the drawer had countermanded payment.

Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the discharge of the instrument. But, the intentional cancellation contemplated under paragraph (c) is that cancellation effected by destroying the instrument either by tearing it up, 5 burning it, 6 or writing the word "cancelled" on the instrument. The act of destroying the instrument must also be made by the holder of the instrument intentionally. Since MOULIC failed to get back possession of the post-dated checks, the intentional cancellation of the said checks is altogether impossible. On the other hand, the acts which will discharge a simple contract for the payment of money under paragraph (d) are determined by other existing legislations since Sec. 119 does not specify what these acts are, e.g., Art. 1231 of the Civil Code 7 which enumerates the modes of extinguishing obligations. Again, none of the modes outlined therein is applicable in the instant case as Sec. 119 contemplates of a situation where the holder of the instrument is the creditor while its drawer is the debtor. In the present action, the payee, Corazon Victoriano, was no longer MOULIC's creditor at the time the jewelry was returned.

Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks when she returned the jewelry. She simply withdrew her funds from her drawee bank and transferred them to another to protect herself. After withdrawing her funds, she could not have expected her checks to be honored. In other words, she was responsible for the dishonor of her checks, hence, there was no need to serve her Notice of Dishonor, which is simply bringing to the knowledge of the drawer or indorser of the instrument, either verbally or by writing, the fact that a specified instrument, upon proper proceedings taken, has not been accepted or has not been paid, and that the party notified is expected to pay it. 8 In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating, not hindering or hampering transactions in commercial paper. Thus, the said statute should not be tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a single case. 9 The drawing and negotiation of a check have certain effects aside from the transfer of title or the incurring of liability in regard to the instrument by the transferor. The holder who takes the negotiated paper makes a contract with the parties on the face of the instrument. There is an implied representation that funds or credit are available for the payment of the instrument in the bank upon which it is drawn. 10 Consequently, the withdrawal of the money from the drawee bank to avoid liability on the checks cannot

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prejudice the rights of holders in due course. In the instant case, such withdrawal renders the drawer, Nora B. Moulic, liable to STATE, a holder in due course of the checks. Under the facts of this case, STATE could not expect payment as MOULIC left no funds with the drawee bank to meet her obligation on the checks, 11 so that Notice of Dishonor would be futile. The Court of Appeals also held that allowing recovery on the checks would constitute unjust enrichment on the part of STATE Investment House, Inc. This is error. The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the obligation of Corazon Victoriano and her husband at the time their property mortgaged to STATE was extrajudicially foreclosed amounted to P1.9 million; the bid price at public auction was only P1 million. 12 Thus, the value of the property foreclosed was not even enough to pay the debt in full. Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of mortgage, the mortgagee is entitled to claim the deficiency from the debtor. 13 The step thus taken by the mortgagee-bank in resorting to an extra-judicial foreclosure was merely to find a proceeding for the sale of the property and its action cannot be taken to mean a waiver of its right to demand payment for the whole debt. 14 For, while Act 3135, as amended, does not discuss the mortgagee's right to recover such deficiency, it does not contain any provision either, expressly or impliedly, prohibiting recovery. In this jurisdiction, when the legislature intends to foreclose the right of a creditor to sue for any deficiency resulting from foreclosure of a security given to guarantee an obligation, it so expressly provides. For instance, with respect to pledges, Art. 2115 of the Civil Code 15 does not allow the creditor to recover the deficiency from the sale of the thing pledged. Likewise, in the case of a chattel mortgage, or a thing sold on installment basis, in the event of foreclosure, the vendor "shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary will be void". 16 It is clear then that in the absence of a similar provision in Act No. 3135, as amended, it cannot be concluded that the creditor loses his right recognized by the Rules of Court to take action for the recovery of any unpaid balance on the

principal obligation simply because he has chosen to extrajudicially foreclose the real estate mortgage pursuant to a Special Power of Attorney given him by the mortgagor in the contract of mortgage. 17 The filing of the Complaint and the Third-Party Complaint to enforce the checks against MOULIC and the VICTORIANO spouses, respectively, is just another means of recovering the unpaid balance of the debt of the VICTORIANOs. In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in due course, STATE, without prejudice to any action for recompense she may pursue against the VICTORIANOs as Third-Party Defendants who had already been declared as in default.
WHEREFORE, the petition is GRANTED. The decision appealed from is REVERSED and a new one entered declaring private respondent NORA B. MOULIC liable to petitioner STATE INVESTMENT HOUSE, INC., for the value of EBC Checks Nos. 30089658 and 30089660 in the total amount of P100,000.00, P3,000.00 as attorney's fees, and the costs of suit, without prejudice to any action for recompense she may pursue against the VICTORIANOs as Third-Party Defendants. Costs against private respondent. SO ORDERED. Cruz and Grio-Aquino, JJ., concur. Padilla, J., took no part.
# Footnotes 1 Rollo, pp. 13-14. 2 State Investment House, Inc. v. Court of Appeals, G.R. No. 72764, 13 July 1989; 175 SCRA 310. 3 Per Deeds of Sale of 2 July 1979 and 25 July 1979, respectively; Rollo, p. 13. 4 Salas v. Court of Appeals, G.R. No. 76788, 22 January 1990; 181 SCRA 296. 5 Montgomery v. Schwald, 177 Mo App 75, 166 SW 831; Wilkins v. Shaglund, 127 Neb 589, 256 NW 31. 6 See Henson v. Henson, 268 SW 378. 7 Art. 1231. Obligations are extinguished: (1) By payment or performance; (2) By the loss of the thing due; (3) By the condonation or remission of the debt; (4) By the confusion or merger of the rights of creditor and debtor; (5) By compensation; (6) By novation . . . . . 8 Martin v. Browns, 75 Ala 442. 9 Reinhart v. Lucas, 118 W Va 466, 190 SE 772. 10 11 Am Jur 589. 11 See Agbayani, Commercial Laws of the Philippines, Vol. 1, 1984 Ed., citing Ellenbogen v. State Bank, 197 NY Supp 278. 12 TSN, 25 April 1985, pp. 16-17. 13 Philippine Bank of Commerce v. de Vera, No. L-18816, 29 December 1962;6 SCRA 1029. 14 Medina v. Philippine National Bank, 56 Phil 651. 15. Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. . . . If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary. 16 Art. 1484 [3] of the Civil Code. 17 See Note 14.

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EN BANC G.R. No. L-19278 March 24, 1923 CHARLES A. FOSSUM, plaintiff-appellee, vs. FERNANDEZ HERMANOS, a general commercial partnership, JOSE F. FERNANDEZ Y CASTRO and RAMON FERNANDEZ Y CASTRO, members of the said partnership of Fernandez Hermanos, defendantsappellants.
Jose Varela Calderon and Ernesto Zaragoza for appellants. Chas. E. Tenney for appellee.

judgment in favor of the plaintiff as prayed for in the complaint, from which the defendants appeal, claiming that the lower court erred in holding that "there is in the record evidence sufficient to support this action," in holding that defendants' Exhibit 4 is a certificate issued by Lloyd's register of shipping, in rendering judgment in favor of the plaintiff, and in not rendering judgment for the defendants, and in denying their motion for a new trial.

JOHNS, J.: Under our view it is unnecessary to decide many of the legal question raised and discussed by opposing counsel in their respective briefs. It is admitted that the defendants placed a written order with the American Iron Products Co., Inc., for "300 Fathoms, best quality Iron Chain Links, 6 " X 3 7/8 " X 1 1/4", to be made up in accordance with blueprint which you submitted in your inquiry of December 18, 1919," and that the order specifies that "this chain is to fit into a gipsy wheel, so therefore, the sizes must be exact. Material is to be made up according to Lloyd's rules and the material is to be stamped with test marks and certificate of origin is to be sent with shipping documents. Price, $18.70 per 100 lbs. F. L. F. Manila." It is also admitted that the draft in question was drawn by the American Iron Products Co., Inc., and that it was duly accepted by the defendants, and that a chain was shipped by the American Iron Products Co., Inc., to the defendants at or about the time the draft was drawn, and later it was received by the defendants. Having received the chain and accepted the draft, the defendants became at least primarily liable for the payment of the draft. Assuming that the American Iron Products Co., Inc., was itself the owner and holder of the draft, under such a state of facts, it would devolve upon the defendants to allege and proved that the chain, which was delivered and received, did not comply with the specifications, and did not answer the purposes for which it was intended. On that point it may well be doubted whether the allegations in the answer are sufficient to raise that question. It is alleged "that the chain sent by the American Iron Products Co., Inc., does not meet the conditions imposed by the aforesaid contract, nor were the terms of the said contract complied with." It will be noted that the answer does not specify or point out any specific defect in the chain, or how, or in what manner or particular it does not comply with the conditions or terms of the contract, and it might well be contended that the answer is not sufficient to raise the question of any defects in the chain. Be that as it may, upon the admitted facts, it devolved upon the defendants to prove, by a preponderance

DECISION
STATEMENT Plaintiff alleges that he is a resident of the City of Manila, and that the defendant Fernandez Hermanos is a duly registered commercial partnership with its place of business in the same city, and that the other defendants are members of the partnership. That on November 17, 1920, Fernandez Hermanos accepted a bill of exchange, which is now overdue, drawn in the City of New York by the American Iron Products Co., Inc., upon Fernandez Hermanos for the sum of $4,716.14, United States currency, payable ninety days after sight at the Asia Banking Corporation, with interest at the rate of 9 per cent. That the Bank endorsed the bill of exchange to the plaintiff, a copy of which with the acceptance and endorsement thereon are specifically plead in the complaint. At the time of the maturity of the bill of exchange, the current rate of Bank Demand drafts on New York was 12 3/4 per cent which would make the amount due and payable on the bill of exchange at maturity P11,190.67, Philippine currency. It is then alleged that demand has been made and payment refused. Wherefore, plaintiff prays judgment for the amount, with interest at 9 per cent from February 15, 1921, and costs. For answer, the defendants make a specific denial of all the material allegations of the complaint, and, as a special defense and counterclaim, alleged that the defendant Fernandez Hermanos on February 4, 1920, entered into a contract with the plaintiff in his capacity as manager of the American Iron Products Co., Inc., copy of which is set forth in the pleading. That the Products Company sent the defendant a chain and at the same time and, founded upon the contract, drew the bill of exchange alleged in the complaint. That the defendant Fernandez Hermanos, believing that the claim sent by the American Iron Products Co., Inc., was in conformity with the conditions specified in the contract, accepted the bill of exchange as drawn. That the chain sent does not meet the conditions imposed by the contract. That by reason thereof the defendant refused and still relates to accept the chain sent by the company, of which the defendant was notified, and has refused and still refused to pay the bill of exchange, which was the price of the chain. As a counterclaim, the defendant alleges that due to the fact that the chain could not be used, he was damaged in the sum of P5,000, wherefore, defendants pray judgment for that amount and costs. Upon such issues, the parties entered into a stipulation of facts upon which the case was tried and submitted to the lower court, which rendered

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of the evidence, that the chain was defective, and how and in what manner it was defective. Upon that point, the trial court found as a fact that there was a failure of proof, and the evidence supports the finding. As stated, the chain was bought and sold on a written order, specifying that it was to fit into a gipsy wheel, and that the size must be exact, and that the material it to be made up according to Lloyd's rules and is to be stamped with test marks and the certificate of origin which was to be sent with the shipping documents. There is not allegation or proof that the chain does not fit into a gipsy wheel, or that the size is not exact, and the shipment was accompanied with a certificate made by the "Surveyor to Lloyd's Register of Shipping," in substance and to the effect that the material in the chain was made up according to Lloyd's rule, and the certificate shows that the chain was stamped with the proper test marks and the certificate of origin. This certificate was delivered to, and was in possession of, the defendants, by whom it was introduced in evidence at the trial. It is conclusive evidence that the chain was made of the material and in the manner specified in the written order. In substance that was the finding and theory of the trial court. This case was formally submitted in this Court on December 2, 1922. It appears that on December 29, 1922, the plaintiff formally assigned his claim to the Asia Banking Corporation which now asks that any judgment rendered should be in its name. It also appears that Mr. Tenney, who represented Mr. Fossum in both this and the lower court, had a contract for his legal services, which is more or less contingent upon success. The Bank now claims that Mr. Tenney never was its attorney, and denies any liability for his fee. Be that as it may, the assignment was made about four weeks after the case was formally submitted to this court. Hence, judgment will be entered here in the name of Fossum as plaintiff. The legal service have all been rendered, the agreed fee is reasonable and Mr. Tenney should be paid out of the judgment. Judgment is affirmed, with costs. So ordered. Araullo, C.J., Street, Malcolm, Avancea, Ostrand, and Romualdez, JJ., concur.

EN BANC G.R. No. L-20787-8 June 29, 1965 J. ANTONIO ARANETA, plaintiff-appellee, vs. ANTONIO PEREZ, defendant-appellant.
Araneta, Mendoza and Papa for plaintiff-appellee. Alfonso Felix, Jr. for defendant-appellant.

DECISION BAUTISTA ANGELO, J.: On June 16, 1961, Antonio M. Perez executed a promissory note wherein he agreed to pay J. Antonio Araneta, or order, the sum of P3,700.00 119 days from said date, or on October 13, 1961, and if it is not paid on the date of maturity, to pay interest at 9% per annum on the amount of the loan, and P370.00 as attorney's fees in addition to costs and other disbursements taxable under the Rules of Court. The note having become due and Antonio M. Perez having failed to pay it despite demand made upon him to do so, Araneta filed on October 31, 1961 a complaint in the Municipal Court of Manila to collect its import under the terms therein stipulated (Civil Case No. 92265). In his answer, defendant Perez admitted the execution of the promissory note as well as his failure to pay it despite its maturity and demand, but he averred certain allegations that were irrelevant to the complaint. Thus, Perez alleged that the proceeds of the note were applied by him to the payment of the medical treatment of his minor daughter Angela Perez y Tuason, who is the beneficiary of the trust then administered by Araneta as trustee in Special Proceeding No. Q-73 of the Court of First Instance of Quezon City, and that the trust estate is bound to pay the expenses of said treatment because they were for the benefit of said minor and so the personal fund he borrowed from Araneta and for which he executed the aforesaid promissory note should be paid by Araneta in the manner above-stated. In the same answer, Perez set up a counterclaim demanding several amounts by way of moral damages, exemplary damages, and attorney's fees. On motion for judgment on the pleadings filed by Araneta, and without any opposition on the part of defendant Perez, the municipal court rendered a decision on April 1962

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ordering Perez to pay the amounts prayed for in the complaint and dismissing his counterclaim for damages. His motion for reconsideration having been denied, Perez appealed to the court a quo where the appeal was docketed as Civil Case No. 50707 and where he filed practically the same answer he filed in the municipal court. In the meantime, or on February 8, 1962, Perez filed a complaint in the Municipal Court of Manila against Araneta in his capacity as trustee of the minor child Angela Perez y Tuason in Special Proceeding No. Q-73 of the Court of First Instance of Quezon City wherein, making reference to Civil Case No. 92265 filed against him by Araneta, he repeated the same allegations contained in the answer he interposed to the complaint of Araneta and prayed that Araneta as trustee be required to pay Perez the amount of P3,700.00 advanced by the latter in order to meet the obligation of the trust estate. And on the basis of a motion to dismiss filed by Araneta as trustee, and over the opposition of Perez, the municipal court dismissed the latter's complaint. His motion for reconsideration having been denied, Perez appealed to the court a quo were his case was docketed as Civil Case No. 50706 and where he filed an amended complaint against Araneta. Considering that the two cases involved the same parties and the same promissory note, they were ordered consolidated. And on September 7, 1962, the court a quo issued a joint order wherein it affirmed the judgment on the pleadings rendered by the municipal court in Civil Case No. 50707, while it affirmed the order of dismissal that was likewise issued by the same court in Civil Case No. 50706. His motion for reconsideration filed in the two consolidated cases having been denied, Perez interposed the present joint appeal. Appellant contends that (1) the court a quo erred in finding Antonio Perez indebted to Antonio Araneta in the sum of P3,700.00 requiring him to pay said amount to Araneta with interest at the rate of 9% per annum from October 13, 1961 until its full payment, plus P370.00 as attorney's fees, and in failing to find that the true debtor was the trust estate of the children of Angela I. Tuason; and (2) assuming that the court a quo correctly ruled in requiring Antonio Perez to pay the above amount to Antonio Araneta, nevertheless, the court a quo erred in failing to require Araneta in his capacity as trustee of the aforesaid children to reimburse Antonio Perez

that amount upon proof by the latter of the payment made by him of said amount. 1. The promissory note signed by appellant clearly states that he agreed to pay Araneta or order the sum of P3,700.00 on October 13, 1961 and if the same is not paid on said date to pay 9% interest thereon per annum until fully paid, plus the sum of P370.00 as attorney's fees, in addition to the costs and other disbursements taxable under the Rules of Court. Under these terms it is clear that appellant bound himself to pay personally said promissory note which he cannot shift to another without the consent of the payee. Such is the undertaking of the maker. Indeed, Section 60 of the Negotiable Instrument, Law provides that "the maker of a negotiable instrument by making it engages that he will pay it according to its tenor and admits the existence of the payee and his then capacity to indorse so that appellant cannot now escape liability as maker by alleging that he spent the money for the medical treatment of his daughter since it is not the payee's concern to know how said proceeds should be spent. That is the sole concern of the maker. Payee's interest is merely to see that the note be paid according to its terms. Neither can appellant escape liability by resorting to the expedient that appellee, by moving for judgment on the pleadings, is deemed to have admitted the material allegations of his answer in Civil Case No. 50707, for the reason that said allegations are irrelevant and have no bearing whatsoever on appellant's personal liability. In this connection, it is meet to recall that appellant, after admitting the execution of the promissory note and his failure to pay it despite demand thereof, made averments which in substance had the effect of a recoupment of what he had spent against any share in the trust fund that may come to the minor for whose benefit he claims to have spent the money 8ycBS84P. Thus, he made the following affirmative defenses: That Da. Angela Tuason died in 1948 leaving estate worth five million pesos 2/9 of which she left in trust for the benefit of the children of said Angela Tuason under the administration of appellee Araneta; that the will was prepared by Araneta; that the estate is now worth one million pesos and despite thereof Araneta professed inability to pay the allowance of P18,000.00 a year due the beneficiaries; that Araneta sold some income producing properties of the trust and

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speculated with trust funds in the stock market; that appellant had to advance certain expenses for the minors and secure for them properties worth at least a quarter of a million pesos; that the two beneficiaries are for unknown reasons short of funds so, that the appellant had to borrow the sum of P3,700.00 for the medical treatment of minor Angela Perez y Tuason; that appellant asked the trustee to advance said amount with the concurrence of the beneficiaries but the trustee refused though he offered to lend the money out of his own pocket, and so appellant executed the promissory note in question. It is clear that insofar as the personal liability of appellant Perez on the promissory note is concerned, which he admittedly executed for value in favor of appellee Araneta, all the above recited allegations are irrelevant and immaterial and cannot tender any issue that will affect his personal liability under the note. And this is so because the allegation regarding the existence of the trust and its mismanagement on the part of appellee Araneta as trustee, certainly, has nothing to do with the money lent by him to appellant. Neither has the allegation that the proceeds of the note were spent by appellant for the medical treatment of minor Angela anything to do with his personal obligation because the destination of the proceeds of said note is certainly not the concern of Araneta. We are, therefore, of the opinion that the court a quo did not err in rendering judgment on the pleadings in the light of what is averred in appellee's complaint. 2. But even assuming for the sake of argument that what is claimed by appellant as to how he spent the proceeds of the notes is true, that will not exempt him from his liability to Araneta but would merely give him some basis to claim for recoupment against the share of the trust fund belonging to the benefited minor if it is properly shown that there is fund coming to said minor. Here, no such showing was made. Moreover, the trust herein created merely provides for delivery to the beneficiaries of the share that may correspond to them in the net income of the trust fund, but does not impose upon the trustee the duty to pay any obligation or expenses that may be needed by said beneficiaries. Appellant has cited several authorities to support his stand that the medical expenses in question which were made for the sake of the beneficiary should be borne by the trust

fund, but from an examination thereof one may see that they require that beneficiary be insolvent in order that the trust estate may be obliged to shoulder the expenses. 1 Here the beneficiary is not in that situation for, as appellant himself has admitted, said beneficiary has properties that are worth at least a quarter of a million pesos which are under the Guardianship Court of Manila. There is, therefore, no room for the application of the ruling laid down in the cited authorities. The other authorities cited by appellant to bolster his claim are also inapplicable for they sanction the applications of the trust fund to medical or other expenses of the beneficiaries only when there is absolute necessity therefor, or when they themselves are unable to provide for those expenses. As already stated, the beneficiaries here are well off or have enough to provide for their necessities if only their guardian should take steps to attend to them as required by the circumstances. But instead of doing so, appellant insists on having appellee recoup with trust money what he had allegedly spent for his daughter's benefit thus giving rise to the present dual litigation BPkw. We take note of the written manifestation or "constancia" submitted to this Court by appellant dated August 22, 1963 in his capacity as judicial guardian of the beneficiaries herein, as well as of supplement thereof made on September 20, 1963, inviting attention of this Court to an order issued by the Juvenile and Domestic Relations Court authorizing appellant as such guardian to assign the amount of P3,700.00 to appellee herein for the purpose of reimbursing him for the amount he had advanced and which is the subject of the promissory note for which reason appellant now claims that this case is now moot and should be dismissed. But to such manifestation appellee has filed a rejoinder dated September 2, 1963 stating that the request for dismissal is untenable since the order appealed from calls not only for the payment of the sum of P3,700.00 but of 9% interest thereon per annum from October 13, 1961 until payment and of the sum of P370.00 as attorney's fees. We hold that appellant's claim is not justified considering that appellee was forced to file the present suit in view of appellant's refusal to honor the note under consideration. The request, therefore, for dismissal has no legal basis vW1obeJFtn.

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WHEREFORE, with the modification that the payment of interest on the note should start from the date of extrajudicial demand, or October 18, 1961, we hereby affirm the order appealed from in all other respects, without pronouncement as to costs. Bengzon, C.J., Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur. Barrera, J., is on leave.
Footnotes 1 So where a trust fund is to be applied to the support of the beneficiary, a claim for medical services rendered on the request of the beneficiary with the knowledge of the trustee, may be enforced in equity as against the trustee where the beneficiary is insolvent and it does not appear that the trustee had furnished him with all that is necessary with respect to medical attendance. (90 C.J.S. p. 113).

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SECOND DIVISION G.R. No. 123031 October 12, 1999 CEBU INTERNATIONAL FINANCE CORPORATION, petitioner, vs. COURT OF APPEALS, VICENTE ALEGRE, respondents. QUISUMBING, J.: This petition for review on certiorari assails respondent appellate court's Decision, 1 dated December 8, 1995, in CA G.R. CV No. 44085, which affirmed the ruling of the Regional Trial Court of Makati, Branch 132. The dispositive portion of the trial court's decision reads: WHEREFORE, judgment is hereby rendered ordering defendant [herein petitioner] to pay plaintiff [herein private respondent]: (1) the principal sum of P514,390.94 with legal interest thereon computed from August 6, 1991 until fully paid; and (2) the costs of suit. SO ORDERED.
2

On June 17, 1991, private respondent's wife deposited the CHECK with Rizal Commercial Banking Corp. (RCBC), in Puerto Princesa, Palawan. BPI dishonored the CHECK with the annotation, that the "Check (is) Subject of an Investigation." BPI took custody of the CHECK pending an investigation of several counterfeit checks drawn against CIFC's aforestated checking account. BPI used the check to trace the perpetrators of the forgery. Immediately, private respondent notified CIFC of the dishonored CHECK and demanded, on several occasions, that he be paid in cash. CIFC refused the request, and instead instructed private respondent to wait for its ongoing bank reconciliation with BPI. Thereafter, private respondent, through counsel, made a formal demand for the payment of his money market placement. In turn, CIFC promised to replace the CHECK but required an impossible condition that the original must first be surrendered. On February 25, 1992, private respondent Alegre filed a complaint 3 for recovery of a sum of money against the petitioner with the Regional Trial Court of Makati (RTCMakati), Branch 132. On July 13, 1992, CIFC sought to recover its lost funds and formally filed against BPI, a separate civil action 4 for collection of a sum of money with the RTC-Makati, Branch 147. The collection suit alleged that BPI unlawfully deducted from CIFC's checking account, counterfeit checks amounting to one million, seven hundred twenty-four thousand, three hundred sixty-four pesos and fifty-eight centavos (P1,724,364.58). The action included the prayer to collect the amount of the CHECK paid to Vicente Alegre but dishonored by BPI. Meanwhile, in response to Alegre's complaint with RTCMakati, Branch 132, CIFC filed a motion for leave of court to file a third-party complaint against BPI. BPI was impleaded by CIFC to enforce a right, for contribution and indemnity, with respect to Alegre's claim. CIFC asserted that the CHECK it issued in favor of Alegre was genuine, valid and sufficiently funded. On July 23, 1992, the trial court granted CIFC's motion. However, BPI moved to dismiss the third-party complaint on the ground of pendency of another action with RTC-Makati, Branch 147. Acting on the motion, the trial court dismissed the third-party complaint on November 4, 1992, after finding

Based on the records, the following are the pertinent facts of the case: Cebu International Finance Corporation (CIFC), a quasibanking institution, is engaged in money market operations. On April 25, 1991, private respondent, Vicente Alegre, invested with CIFC, five hundred thousand (P500,000.00) pesos, in cash. Petitioner issued a promissory note to mature on May 27, 1991. The note for five hundred sixteen thousand, two hundred thirty-eight pesos and sixty-seven centavos (P516,238.67) covered private respondent's placement plus interest at twenty and a half (20.5%) percent for thirty-two (32) days. On May 27, 1991, CIFC issued BPI Check No. 513397 (hereinafter the CHECK) for five hundred fourteen thousand, three hundred ninety pesos and ninety-four centavos (P514,390.94) in favor of the private respondent as proceeds of his matured investment plus interest. The CHECK was drawn from petitioner's current account number 0011-0803-59, maintained with the Bank of the Philippine Islands (BPI), main branch at Makati City.1wphi1.nt

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that the third party complaint filed by CIFC against BPI is similar to its ancillary claim against the bank, filed with RTCMakati Branch 147. Thereafter, during the hearing by RTC-Makati, Branch 132, held on May 27, and June 22, 1993, Vito Arieta, Bank Manager of BPI, testified that the bank, indeed, dishonored the CHECK, retained the original copy and forwarded only a certified true copy to RCBC. When Arieta was recalled on July 20, 1993, he testified that on July 16, 1993, BPI encashed and deducted the said amount from the account of CIFC, but the proceeds, as well as the CHECK remained in BPI's custody. The bank's move was in accordance with the Compromise Agreement 5 it entered with CIFC to end the litigation in RTC-Makati, Branch 147. The compromise agreement, which was submitted for the approval of the said court, provided that: 1. Defendant [BPI] shall pay to the plaintiff [CIFC] the amount of P1,724,364.58 plus P20,000 litigation expenses as full and final settlement of all of plaintiff's claims as contained in the Amended Complaint dated September 10, 1992. The aforementioned amount shall be credited to plaintiff's current account No. 0011-0803-59 maintained at defendant's Main Branch upon execution of this Compromise Agreement. 2. Thereupon, defendant shall debit the sum of P514,390.94 from the aforesaid current account representing payment/discharge of BPI Check No. 513397 payable to Vicente Alegre. 3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the alleged dishonor of BPI Check No. 513397, plaintiff cannot go after the defendant: otherwise stated, the defendant shall not be liable to the plaintiff. Plaintiff [CIFC] may however set-up the defense of payment/discharge stipulated in par. 2 above. 6 On July 27, 1993, BPI filed a separate collection suit 7 against Vicente Alegre with the RTC-Makati, Branch 62. The complaint alleged that Vicente Alegre connived with certain Lina A. Pena and Lita A. Anda and forged several checks of BPI's client, CIFC. The total amount of counterfeit checks was P1,724,364.58. BPI prevented the encashment of some checks amounting to two hundred ninety five thousand, seven hundred seventy-five pesos and seven centavos (P295,775.07). BPI admitted that the CHECK, payable to

Vicente Alegre for P514,390.94, was deducted from BPI's claim, hence, the balance of the loss incurred by BPI was nine hundred fourteen thousand, one hundred ninety-eight pesos and fifty-seven centavos (P914,198.57), plus costs of suit for twenty thousand (P20,000.00) pesos. The records are silent on the outcome of this case. On September 27, 1993, RTC-Makati, Branch 132, rendered judgment in favor of Vicente Alegre. CIFC appealed from the adverse decision of the trial court. The respondent court affirmed the decision of the trial court. Hence this appeal, 8 in which petitioner interposes the following assignments of errors: 1. The Honorable Court of Appeals erred in affirming the finding of the Honorable Trial Court holding that petitioner was not discharged from the liability of paying the value of the subject check to private respondent after BPI has debited the value thereof against petitioner's current account. 2. The Honorable Court of Appeals erred in applying the provisions of paragraph 2 of Article 1249 of the Civil Code in the instant case. The applicable law being the Negotiable Instruments Law. 3. The Honorable Court of Appeals erred in affirming the Honorable Trial Court's findings that the petitioner was guilty of negligence and delay in the performance of its obligation to the private respondent. 4. The Honorable Court of Appeals erred in affirming the Honorable Trial Court's decision ordering petitioner to pay legal interest and the cost of suit. 5. The Honorable Court of Appeals erred in affirming the Honorable Trial Court's dismissal of petitioner's third-party complaint against BPI. These issues may be synthesized into three:
1. WHETHER OR NOT ARTICLE 1249 OF THE NEW CIVIL CODE APPLIES IN THE PRESENT CASE; 2. WHETHER OR NOT "BPI CHECK NO. 513397" WAS VALIDLY DISCHARGED; and 3. WHETHER OR NOT THE DISMISSAL OF THE THIRD PARTY COMPLAINT OF PETITIONER AGAINST BPI BY REASON OF LIS PENDENS WAS PROPER?

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On the first issue, petitioner contends that the provisions of the Negotiable Instruments Law (NIL) are the pertinent laws to govern its money market transaction with private respondent, and not paragraph 2 of Article 1249 of the Civil Code. Petitioner stresses that it had already been discharged from the liability of paying the value of the CHECK due to the following circumstances: 1) There was "ACCEPTANCE" of the subject check by BPI, the drawee bank, as defined under the Negotiable Instruments Law, and therefore, BPI, the drawee bank, became primarily liable for the payment of the check, and consequently, the drawer, herein petitioner, was discharged from its liability thereon; 2) Moreover, BPI, the drawee bank, has not validly DISHONORED the subject check; and, 3) The act of BPI, the drawee bank of debiting/deducting the value of the check from petitioner's account amounted to and/or constituted a discharge of the drawer's (petitioner's) liability under the instrument/subject check. 9 Petitioner cites Section 137 of the Negotiable Instruments Law, which states: Liability of drawee retaining or destroying bill Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within twenty-four hours after such delivery or such other period as the holder may allow, to return the bill accepted or non-accepted to the Holder, he will be deemed to have accepted the same. Petitioner asserts that since BPI accepted the instrument, the bank became primarily liable for the payment of the CHECK. Consequently, when BPI offset the value of CHECK against the losses from the forged checks allegedly committed by the private respondent, the check was deemed paid. Art. 1249 of the New Civil Code deals with a mode of extinction of an obligation and expressly provides for the medium in the "payment of debts." It provides that: The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency, which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in abeyance. Considering the nature of a money market transaction, the above-quoted provision should be applied in the present controversy. As held in Perez vs. Court of Appeals, 10 a "money market is a market dealing in standardized shortterm credit instruments (involving large amounts) where lenders and borrowers do not deal directly with each other but through a middle man or dealer in open market. In a money market transaction, the investor is a lender who loans his money to a borrower through a middleman or dealer. 11 In the case at bar, the money market transaction between the petitioner and the private respondent is in the nature of a loan. The private respondent accepted the CHECK, instead of requiring payment in money. Yet, when he presented it to RCBC for encashment, as early as June 17, 1991, the same was dishonored by non-acceptance, with BPI's annotation: "Check (is) subject of an investigation." These facts were testified to by BPI's manager. Under these circumstances, and after the notice of dishonor, 12 the holder has an immediate right of recourse against the drawer, 13 and consequently could immediately file an action for the recovery of the value of the check. In a loan transaction, the obligation to pay a sum certain in money may be paid in money, which is the legal tender or, by the use of a check. A check is not a legal tender, and therefore cannot constitute valid tender of payment. In the case of Philippine Airlines, Inc. vs. Court of Appeals, 14 this Court held: Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment (citation omitted). A check, whether a manager's check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. Mere delivery of checks does not discharge the obligation under a judgment. The obligation is

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not extinguished and remains suspended until the payment by commercial document is actually realized (Art. 1249, Civil Code, par. 3.) 15 Turning now to the second issue, when the bank deducted the amount of the CHECK from CIFC's current account, this did not ipso facto operate as a discharge or payment of the instrument. Although the value of the CHECK was deducted from the funds of CIFC, it was not delivered to the payee, Vicente Alegre. Instead, BPI offset the amount against the losses it incurred from forgeries of CIFC checks, allegedly committed by Alegre. The confiscation of the value of the check was agreed upon by CIFC and BPI. The parties intended to amicably settle the collection suit filed by CIFC with the RTC-Makati, Branch 147, by entering into a compromise agreement, which reads: xxx xxx xxx 2. Thereupon, defendant shall debit the sum of P514,390.94 from the aforesaid current account representing payment/discharge of BPI Check No. 513397 payable to Vicente Alegre. 3. In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the alleged dishonor of BPI Check No. 513397, plaintiff cannot go after the defendant; otherwise stated, the defendant shall not be liable to the plaintiff. Plaintiff however (sic) set-up the defense of payment/discharge stipulated in par. 2above. 16 A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced. 17 It is an agreement between two or more persons who, for preventing or putting an end to a lawsuit, adjust their difficulties by mutual consent in the manner which they agree on, and which everyone of them prefers in the hope of gaining, balanced by the danger of losing. 18 The compromise agreement could not bind a party who did not sign the compromise agreement nor avail of its benefits. 19 Thus, the stipulations in the compromise agreement is unenforceable against Vicente Alegre, not a party thereto. His money could not be the subject of an agreement between CIFC and BPI. Although Alegre's money was in custody of the bank, the bank's possession of it was not in the concept of an owner. BPI cannot validly appropriate the money as its own. The codal admonition on this issue is clear:

Art. 1317 No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him. A Contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party. 20 BPI's confiscation of Alegre's money constitutes garnishment without the parties going through a valid proceeding in court. Garnishment is an attachment by means of which the plaintiff seeks to subject to his claim the property of the defendant in the hands of a third person or money owed to such third person or a garnishee to the defendant. 21 The garnishment procedure must be upon proper order of RTC-Makati, Branch 62, the court who had jurisdiction over the collection suit filed by BPI against Alegre. In effect, CIFC has not yet tendered a valid payment of its obligation to the private respondent. Tender of payment involves a positive and unconditional act by the obligor of offering legal tender currency as payment to the obligee for the former's obligation and demanding that the latter accept the same. 22 Tender of payment cannot be presumed by a mere inference from surrounding circumstances. With regard to the third issue, for litis pendentia to be a ground for the dismissal of an action, the following requisites must concur: (a) identity of parties or at least such as to represent the same interest in both actions; (b) identity of rights asserted and relief prayed for, the relief being founded on the same acts; and (c) the identity in the two cases should be such that the judgment which may be rendered in one would, regardless of which party is successful, amount to res judicata in the other. 23 The trial court's ruling as adopted by the respondent court states, thus: A perusal of the complaint in Civil Case No. 92-1940, entitled Cebu International Finance Corporation vs. Bank of the Philippine Islands now pending before Branch 147 of this Court and the Third Party Complaint in the instant case would readily show that the parties are not only identical

109

but also the cause of action being asserted, which is the recovery of the value of BPI Check No. 513397 is the same. In Civil Case No. 92-1940 and in the Third Party Complaint the rights asserted and relief prayed for, the reliefs being founded on the facts, are identical. xxx xxx xxx WHEREFORE, the motion to dismiss is granted and consequently, the Third Party Complaint is hereby ordered dismissed on ground of lis pendens. 24 We agree with the observation of the respondent court that, as between the third party claim filed by the petitioner against BPI in Civil Case No. 92-515 and petitioner's ancillary claim against the bank in Civil Case No. 92-1940, there is identity of parties as well as identity of rights asserted, and that any judgment that may be rendered in one case will amount to res judicata in another. The compromise agreement between CIFC and BPI, categorically provided that "In case plaintiff is adjudged liable to Vicente Alegre in Civil Case No. 92-515 arising from the alleged dishonor of BPI Check No. 513397, plaintiff (CIFC) cannot go after the defendant (BPI); otherwise stated, the defendant shall not be liable to the plaintiff." 25 Clearly, this stipulation expressed that CIFC had already abandoned any further claim against BPI with respect to the value of BPI Check No. 513397. To ask this Court to allow BPI to be a party in the case at bar, would amount to res judicata and would violate terms of the compromise agreement between CIFC and BPI. The general rule is that a compromise has upon the parties the effect and authority of res judicata, with respect to the matter definitely stated therein, or which by implication from its terms should be deemed to have been included therein. 26 This holds true even if the agreement has not been judicially approved. 27 WHEREFORE, the instant petition is hereby DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 44085 is AFFIRMED. Costs against petitioner.1wphi1.nt SO ORDERED. Mendoza and Buena, JJ., concur. Bellosillo, J., on official leave.
Footnotes 1 Rollo, pp. 46-52. 2 Court of Appeals Rollo, p. 65.

3 Vicente Alegre vs. Cebu International Finance, Corporation, Civil Case No. 92-515; Record, Regional Trial Court, pp. 112. 4 Cebu International Finance Corporation vs. Bank of the Philippine Islands, Civil Case No. 92-1940; Court of Appeals, Rollo pp. 67-77. 5 Rollo, pp. 71-72. 6 Id. at 71. 7 Id. at 100-103; Bank of the Philippine Island, vs. Vicente A. Alegre, Civil Case No. 93-2550. 8 Id. at 7-43. 9 Id. at 143. 10 127 SCRA 636 (1984). 11 Sesbreo vs. Court of Appeals, 240 SCRA 606, 614 (1995). 12 Negotiable Instruments Law, Section 89. 13 Id., Section 151. 14 181 SCRA 557 (1990). 15 Id. at 568. 16 Supra, note 5. 17 Del Rosario vs. Madayag, 247 SCRA 767, 770 (1995). 18 Id., citing David vs. Court of Appeals, 214 SCRA 644, 650 (1992), citing Rovero vs. Amparo, 91 Phil. 228, 235 (1952); Arcenas vs. Cinco, 74 SCRA 118, 123 (1976). 19 Jag and Haggar Jeans and Sportswear Corp. vs. NLRC, 241 SCRA 635, 642 (1995). 20 Civil Code of the Philippines, Article 1317. 21 Manila Remnant Co., Inc. vs. CA, 231 SCRA 281, 289 (1994). 22 Roman Catholic Bishop of Malolos, Inc. vs. Intermediate Appellate Court, 191 SCRA 411, 419 (1990). 23 Ramos vs. Peralta, 203 SCRA 412, 416-417 (1991); Yu vs. CA, 232 SCRA 594, at 598 (1994). 24 Court of Appeals Rollo, p. 61. 25 Supra, note 5. 26 Del Rosario vs. Madayag, 247 SCRA 767, 771 (1995); citing Nieves vs. Court of Appeals, 198 SCRA 63, 69 (1991); World Machine Enterprises vs. Intermediate Appellate Court, 192 SCRA 459, 465 (1990). 27 Id., 771; citing Mayuga vs. Court of Appeals, 154 SCRA 309 (1987) citing Meneses vs. De la Rosa, 77 Phil. 34 (1946); Vda. de Guilas vs. David, 23 SCRA 762 (1968); Cochingyan vs. Cloribel, 76 SCRA 361.

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THIRD DIVISION G.R. No. 168274, August 20, 2008 FAR EAST BANK & TRUST COMPANY, PETITIONER, vs. GOLD PALACE JEWELLERY CO., AS REPRESENTED BY JUDY L. YANG, JULIE YANG-GO AND KHO SOON HUAT, RESPONDENT. DECISION NACHURA, J.: For the review of the Court through a Rule 45 petition are the following issuances of the Court of Appeals (CA) in CAG.R. CV No. 71858: (1) the March 15, 2005 Decision [1] which reversed the trial court's ruling, and (2) the May 26, 2005 Resolution[2] which denied the motion for reconsideration of the said CA decision. The instant controversy traces its roots to a transaction consummated sometime in June 1998, when a foreigner, identified as Samuel Tagoe, purchased from the respondent Gold Palace Jewellery Co.'s (Gold Palace's) store at SM-North EDSA several pieces of jewelry valued at P258,000.00. [3] In payment of the same, he offered Foreign Draft No. M069670 issued by the United Overseas Bank (Malaysia) BHD Medan Pasar, Kuala Lumpur Branch (UOB), addressed to the Land Bank of the Philippines, Manila (LBP), and payable to the respondent company for P380,000.00.[4] Before receiving the draft, respondent Judy Yang, the assistant general manager of Gold Palace, inquired from petitioner Far East Bank & Trust Company's (Far East's) SM North EDSA Branch, its neighbor mall tenant, the nature of the draft. The teller informed her that the same was similar to a manager's check, but advised her not to release the pieces of jewelry until the draft had been cleared.[5] Following the bank's advice, Yang issued Cash Invoice No. 1609[6] to the foreigner, asked him to come back, and informed him that the pieces of jewelry would be released when the draft had already been cleared. [7] Respondent Julie Yang-Go, the manager of Gold Palace, consequently deposited the draft in the company's account with the aforementioned Far East branch on June 2, 1998.[8] When Far East, the collecting bank, presented the draft for clearing to LBP, the drawee bank, the latter cleared the same[9]--UOB's account with LBP was debited,[10] and Gold

Palace's account with Far East was credited with the amount stated in the draft.[11] The foreigner eventually returned to respondent's store on June 6, 1998 to claim the purchased goods. After ascertaining that the draft had been cleared, respondent Yang released the pieces of jewelry to Samuel Tagoe; and because the amount in the draft was more than the value of the goods purchased, she issued, as his change, Far East Check No. 1730881[12] for P122,000.00.[13] This check was later presented for encashment and was, in fact, paid by the said bank.[14] On June 26, 1998, or after around three weeks, LBP informed Far East that the amount in Foreign Draft No. M069670 had been materially altered from P300.00 to P380,000.00 and that it was returning the same. Attached to its official correspondence were Special Clearing Receipt No. 002593 and the duly notarized and consul-authenticated affidavit of a corporate officer of the drawer, UOB.[15] It is noted at this point that the material alteration was discovered by UOB after LBP had informed it that its funds were being depleted following the encashment of the subject draft.[16] Intending to debit the amount from respondent's account, Far East subsequently refunded the P380,000.00 earlier paid by LBP. Gold Palace, in the meantime, had already utilized portions of the amount. Thus, on July 20, 1998, as the outstanding balance of its account was already inadequate, Far East was able to debit only P168,053.36,[17] but this was done without a prior written notice to the account holder.[18] Far East only notified by phone the representatives of the respondent company.[19] On August 12, 1998, petitioner demanded from respondents the payment of P211,946.64 or the difference between the amount in the materially altered draft and the amount debited from the respondent company's account.[20] Because Gold Palace did not heed the demand, Far East consequently instituted Civil Case No. 99-296 for sum of money and damages before the Regional Trial Court (RTC), Branch 64 of Makati City.[21] In their Answer, respondents specifically denied the material allegations in the complaint and interposed as a defense that the complaint states no cause of action--the subject

111

foreign draft having been cleared and the respondent not being the party who made the material alteration. Respondents further counterclaimed for actual damages, moral and exemplary damages, and attorney's fees considering, among others, that the petitioner had confiscated without basis Gold Palace's balance in its account resulting in operational loss, and had maliciously imputed to the latter the act of alteration.[22] After trial on the merits, the RTC rendered its July 30, 2001 Decision[23] in favor of Far East, ordering Gold Palace to pay the former P211,946.64 as actual damages and P50,000.00 as attorney's fees.[24] The trial court ruled that, on the basis of its warranties as a general indorser, Gold Palace was liable to Far East.[25] On appeal, the CA, in the assailed March 15, 2005 Decision, [26] reversed the ruling of the trial court and awarded respondents' counterclaim. It ruled in the main that Far East failed to undergo the proceedings on the protest of the foreign draft or to notify Gold Palace of the draft's dishonor; thus, Far East could not charge Gold Palace on its secondary liability as an indorser.[27] The appellate court further ruled that the drawee bank had cleared the check, and its remedy should be against the party responsible for the alteration. Considering that, in this case, Gold Palace neither altered the draft nor knew of the alteration, it could not be held liable.[28] The dispositive portion of the CA decision reads: WHEREFORE, premises considered, the appeal is GRANTED; the assailed Decision dated 30 July 2001 of the Regional Trial Court of Makati City, Branch 64 is hereby REVERSED and SET ASIDE; the Complaint dated January 1999 is DISMISSED; and appellee Far East Bank and Trust Company is hereby ordered to pay appellant Gold Palace Jewellery Company the amount of Php168,053.36 for actual damages plus legal interest of 12% per annum from 20 July 1998, Php50,000.00 for exemplary damages, and Php50,000.00 for attorney's fees. Costs against appellee Far East Bank and Trust Company.[29] The appellate court, in the further challenged May 26, 2005 Resolution,[30] denied petitioner's Motion for Reconsideration,[31] which prompted the petitioner to institute before the Court the instant Petition for Review on Certiorari.[32] We deny the petition.

Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance.[33] This provision applies with equal force in case the drawee pays a bill without having previously accepted it. His actual payment of the amount in the check implies not only his assent to the order of the drawer and a recognition of his corresponding obligation to pay the aforementioned sum, but also, his clear compliance with that obligation.[34] Actual payment by the drawee is greater than his acceptance, which is merely a promise in writing to pay. The payment of a check includes its acceptance.[35] Unmistakable herein is the fact that the drawee bank cleared and paid the subject foreign draft and forwarded the amount thereof to the collecting bank. The latter then credited to Gold Palace's account the payment it received. Following the plain language of the law, the drawee, by the said payment, recognized and complied with its obligation to pay in accordance with the tenor of his acceptance. The tenor of the acceptance is determined by the terms of the bill as it is when the drawee accepts.[36] Stated simply, LBP was liable on its payment of the check according to the tenor of the check at the time of payment, which was the raised amount. Because of that engagement, LBP could no longer repudiate the payment it erroneously made to a due course holder. We note at this point that Gold Palace was not a participant in the alteration of the draft, was not negligent, and was a holder in due course--it received the draft complete and regular on its face, before it became overdue and without notice of any dishonor, in good faith and for value, and absent any knowledge of any infirmity in the instrument or defect in the title of the person negotiating it. [37] Having relied on the drawee bank's clearance and payment of the draft and not being negligent (it delivered the purchased jewelry only when the draft was cleared and paid), respondent is amply protected by the said Section 62. Commercial policy favors the protection of any one who, in due course, changes his position on the faith of the drawee bank's clearance and payment of a check or draft.[38] This construction and application of the law gives effect to the plain language of the NIL[39] and is in line with the sound principle that where one of two innocent parties must suffer

112

a loss, the law will leave the loss where it finds it.[40] It further reasserts the usefulness, stability and currency of negotiable paper without seriously endangering accepted banking practices. Indeed, banking institutions can readily protect themselves against liability on altered instruments either by qualifying their acceptance or certification, or by relying on forgery insurance and special paper which will make alterations obvious.[41] This is not to mention, but we state nevertheless for emphasis, that the drawee bank, in most cases, is in a better position, compared to the holder, to verify with the drawer the matters stated in the instrument. As we have observed in this case, were it not for LBP's communication with the drawer that its account in the Philippines was being depleted after the subject foreign draft had been encashed, then, the alteration would not have been discovered. What we cannot understand is why LBP, having the most convenient means to correspond with UOB, did not first verify the amount of the draft before it cleared and paid the same. Gold Palace, on the other hand, had no facility to ascertain with the drawer, UOB Malaysia, the true amount in the draft. It was left with no option but to rely on the representations of LBP that the draft was good. In arriving at this conclusion, the Court is not closing its eyes to the other view espoused in common law jurisdictions that a drawee bank, having paid to an innocent holder the amount of an uncertified, altered check in good faith and without negligence which contributed to the loss, could recover from the person to whom payment was made as for money paid by mistake.[42] However, given the foregoing discussion, we find no compelling reason to apply the principle to the instant case. The Court is also aware that under the Uniform Commercial Code in the United States of America, if an unaccepted draft is presented to a drawee for payment or acceptance and the drawee pays or accepts the draft, the person obtaining payment or acceptance, at the time of presentment, and a previous transferor of the draft, at the time of transfer, warrant to the drawee making payment or accepting the draft in good faith that the draft has not been altered.[43] Nonetheless, absent any similar provision in our law, we cannot extend the same preferential treatment to the paying bank. Thus, considering that, in this case, Gold Palace is protected by Section 62 of the NIL, its collecting agent, Far East,

should not have debited the money paid by the drawee bank from respondent company's account. When Gold Palace deposited the check with Far East, the latter, under the terms of the deposit and the provisions of the NIL, became an agent of the former for the collection of the amount in the draft.[44] The subsequent payment by the drawee bank and the collection of the amount by the collecting bank closed the transaction insofar as the drawee and the holder of the check or his agent are concerned, converted the check into a mere voucher,[45] and, as already discussed, foreclosed the recovery by the drawee of the amount paid. This closure of the transaction is a matter of course; otherwise, uncertainty in commercial transactions, delay and annoyance will arise if a bank at some future time will call on the payee for the return of the money paid to him on the check.[46] As the transaction in this case had been closed and the principal-agent relationship between the payee and the collecting bank had already ceased, the latter in returning the amount to the drawee bank was already acting on its own and should now be responsible for its own actions. Neither can petitioner be considered to have acted as the representative of the drawee bank when it debited respondent's account, because, as already explained, the drawee bank had no right to recover what it paid. Likewise, Far East cannot invoke the warranty of the payee/depositor who indorsed the instrument for collection to shift the burden it brought upon itself. This is precisely because the said indorsement is only for purposes of collection which, under Section 36 of the NIL, is a restrictive indorsement.[47] It did not in any way transfer the title of the instrument to the collecting bank. Far East did not own the draft, it merely presented it for payment. Considering that the warranties of a general indorser as provided in Section 66 of the NIL are based upon a transfer of title and are available only to holders in due course,[48] these warranties did not attach to the indorsement for deposit and collection made by Gold Palace to Far East. Without any legal right to do so, the collecting bank, therefore, could not debit respondent's account for the amount it refunded to the drawee bank. The foregoing considered, we affirm the ruling of the appellate court to the extent that Far East could not debit the account of Gold Palace, and for doing so, it must return what it had erroneously taken. Far East's remedy under the law is not against Gold Palace but against the drawee-bank

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or the person responsible for the alteration. That, however, is another issue which we do not find necessary to discuss in this case. However, we delete the exemplary damages awarded by the appellate court. Respondents have not shown that they are entitled to moral, temperate or compensatory damages. [49] Neither was petitioner impelled by malice or bad faith in debiting the account of the respondent company and in pursuing its cause.[50] On the contrary, petitioner was honestly convinced of the propriety of the debit. We also delete the award of attorney's fees for, in a plethora of cases, we have ruled that it is not a sound public policy to place a premium on the right to litigate. No damages can be charged to those who exercise such precious right in good faith, even if done erroneously.[51] WHEREFORE, premises considered, the March 15, 2005 Decision and the May 26, 2005 Resolution of the Court of Appeals in CA-G.R. CV No. 71858 are AFFIRMED WITH THE MODIFICATION that the award of exemplary damages and attorney's fees is DELETED. SO ORDERED. Ynares-Santiago, (Chairperson), Nazario, and Reyes, JJ., concur.
[1]

[19]

Id. at 9-10. Records, p. 14. Id. at 1-6. Id. at 33-34. Id. at 191-198. Id. at 198. The dispositive portion of the RTC decision reads:

[20]

[21]

[22]

[23]

[24]

WHEREFORE, in view of the foregoing, judgment is rendered against defendant Gold Palace Jewellery Co., to pay plaintiff Far East Bank and Trust Co., the following: The sum of P211,946.64, representing actual damages plus legal interest thereon from 26 June 1998, until the same is fully paid; P50,000.00 as attorney's fees; and Costs of suit.SO ORDERED.
[25]

Id. at 194-196. Supra note 1.

[26]

[27]

CA rollo, pp. 106-112. Id. at 112-116. Id. at 123. Supra note 2. CA rollo, pp. 127-142. Rollo, pp. 3-26. Section 62 of the NIL, which, in full, reads:

[28]

[29]

[30]

[31]

[32]

[33]

Austria-Martinez,

Chico-

SECTION 62. Liability of acceptor.--The acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance and admits: (a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee and his then capacity to indorse.
[34]

Penned by Associate Justice Celia C. Librea-Leagogo, with Associate Justices Andres B. Reyes, Jr. and Lucas P. Bersamin, concurring; CA rollo, pp. 78-126.
[2]

Id. at 203-205. TSN, December 6, 2000, pp. 8-10. Records, p. 121. TSN, December 6, 2000, pp. 9-10. Records, p. 161. TSN, December 6, 2000, p. 10. Records, pp. 121, 162. TSN, October 6, 1999, pp. 21-22, 36. TSN, February 23, 2000, p. 8. TSN, October 6, 1999, p. 22. Records, p. 159. TSN, December 6, 2000, pp. 13-14. Id. Records, pp. 124-127. TSN, February 23, 2000, pp. 8-10. Id. at 13; TSN, October 6, 1999, pp. 28-30. TSN, May, 10, 2000, pp. 17-19.

[3]

Philippine National Bank v. Court of Appeals, 134 Phil. 829, 833-835 (1968).

[4]

[35]

Kansas Bankers Surety Company v. Ford County State Bank, 184 Kan. 529, 534; 338 P.2d 309, 313 (1959).
[36]

[5]

[6]

Wells Fargo Bank & Union Trust Co. v. Bank of Italy, et al., 214 Cal. 156, 163; 4 P.2d 781, 784 (1931); citing Prof. Brannan in his work on Negotiable Instruments Law (4th Ed.) at page 567; Kansas Bankers Surety Company v. Ford County State Bank, supra.
[37]

[7]

Section 52 of the NIL reads:

[8]

[9]

SECTION 52. What constitutes a holder in due course.--A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. See Vicente R. de Ocampo & Co. v. Gatchalian, No. L-15126, November 30, 1961, 3 SCRA 596, in which the Court acknowledged the fact of negotiation of an instrument by an agent of the drawer to the payee.
[38]

[10]

[11]

[12]

[13]

[14]

[15]

[16]

[17]

[18]

Wells Fargo Bank & Union Trust Co. v. Bank of Italy, et al., supra note 36, at 165-166; see Aetna Casualty & Surety Co. v. Corpus Christi National Bank, 186 S.W.2d 840, 841-842 (1944); The National Park Bank of New York v. The Seaboard Bank, 69 Sickels 28, 114 N.Y. 28, 20 N.E. 632

114

(1889); Seaboard Surety Company v. First National City Bank of New York, 15 Misc.2d 816, 180 N.Y.S.2d 156 (1958).
[39]

Wells Fargo Bank & Union Trust Co. v. Bank of Italy, et al., supra note 36, at 165.

[40]

National City Bank of Chicago v. National Bank of the Republic of Chicago, 300 Ill. 103, 108; 132 N.E. 832, 833 (1921).
[41]

Wells Fargo Bank & Union Trust Co. v. Bank of Italy, et al., supra note 36.

[42]

Central National Bank v. F.W. Drosten Jewelry Co., 203 Mo.App. 646, 220 S.W. 511 (1920); Interstate Trust Co., et al. v. United States National Bank, 67 Colo. 6, 185 P. 260, 10 A.L.R. 705 (1919); National Park Bank of New York v. Eldred Bank, 90 Hun 285, 70 N.Y.St.Rep. 497, 35 N.Y.S. 752 (1895); Third National Bank of St. Louis v. Thomas Allen, 59 Mo. 310, 1875 WL 7732 (Mo.) (1875); The Marine National Bank v. The National City Bank, 10 Alb. L.J. 360, 59 N.Y. 67, 17 Am. Rep. 305 (1874); Espy v. Bank of Cincinnati, 85 U.S. 604, 18 Wall 604, 21 L. Ed. 947 (1874); Redington, et al. v. Woods, et al., 45 Cal. 406, 13 Am. Rep. 190 (1873).
[43]

UCC 3-417 (a) on presentment warranties. Jai-Alai Corporation v. Bank of the Philippine Islands, No. L-29432, August 6, 1975, 66 SCRA 29,

[44]

34.
[45]

Wells Fargo Bank & Union Trust Co. v. Bank of Italy, et al., supra note 36, at 164; Kansas Bankers Surety Company v. Ford County State Bank, supra note 35, at 536.
[46]

Citizens National Bank v. First National Bank, 347 So.2d 964, 968 (1977). Section 36 of the NIL reads:

[47]

SECTION 36. When indorsement restrictive.--An indorsement is restrictive which either: (a) Prohibits the further negotiation of the instrument; or (b) Constitutes the indorsee the agent of the indorser; or (c) Vests the title in the indorsee in trust for or to the use of some other persons. But the mere absence of words implying power to negotiate does not make an indorsement restrictive. (Italics supplied.)
[48]

Wells Fargo Bank & Union Trust Co. v. Bank of Italy, et al., supra note 36; Kansas Bankers Surety Company v. Ford County State Bank, supra note 35, at 535.
[49]

Civil Code, Art. 2234. ABS-CBN Broadcasting Corporation v. Court of Appeals, 361 Phil. 499, 531 (1999).

[50]

[51]

Republic v. Lorenzo Shipping Corp., G.R. No. 153563, February 7, 2005, 450 SCRA 550, 558; Pajuyo v. Court of Appeals, G.R. No. 146364, June 3, 2004, 430 SCRA 492, 524; Alonso v. Cebu Country Club, Inc., 426 Phil. 61, 88 (2002); Orosa v. Court of Appeals, 386 Phil. 94, 105 (2000); "J" Marketing Corporation v. Sia, Jr., 349 Phil. 513, 517 (1998).

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EN BANC G.R. No. L-18915 September 26, 1922 THE PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. BARTOLOME PICORNELL, ET AL., defendants.
JOAQUIN PARDO DE TAVERA, appellant. Recto, Casal & Ozaeta for appellant Picornell.

DECISION ROMUALDEZ, J.: In a decision rendered January 9, 1922, and amended by an order of February 18th next, the Court of First Instance of Manila sentenced the defendants to pay solidarily to the plaintiff bank of the sum of P28,790.72 with interest at the rate of 9 per centum per annum from May 3, 1921, and costs; and the defendant Bartolome Picornell, to pay said plaintiff the sum of P10,739.11 with interest at 9 per centum per annum, all as aforesaid, deducting the sum of P6,708.82 from such amounts to be paid be the defendants. This total sum which the defendants are required to pay represents the value of a bill of exchange drawn by Bartolome Picornell in favor of the National Bank, plaintiff, against the firm of Hyndman, Tavera & Ventura, now dissolved, its only successor being the defendant Joaquin Pardo de Tavera. The sum of P6,708.82, which the trial court ordered deducted from the value of the bill of exchange, is the proceeds received by the bank from the sale of a part of a certain quality of tobacco shipped by Picornell at Cebu to the Hyndman, Tavera & Ventura company at Manila, the price of which, together with his commission, was received by him from the branch of the plaintiff bank in Cebu, and in consideration whereof he drew the bill from the central office of said bank in Manila and against the said Hyndman, Tavera & Ventura company, the consignee of the tobacco. The P28,790.72, which the defendants are sentenced to pay solidarily to the plaintiff bank, constitutes the value of the tobacco at the date when the bill fell due, as appraised for the purpose. The reasoning of the trial court for fixing the respective responsibilities of the defendants is given in its decision and is as follows:

. . . The defendant Pardo de Tavera, successor to Hyndman, Tavera & Ventura, by his having accepted the bill and denied payment thereof, notwithstanding the existence of a consideration which is the real value of the tobacco, and the defendant Picornell by his having drawn such bill and received its value from the branch of the plaintiff bank in Cebu, became liable upon the same bill, the defendant Picornell to its full value, and the defendant Pardo de Tavera to the extent of the value of the tobacco. From this judgment the defendants appealed. Joaquin Pardo de Tavera alleged that the bill in question was without consideration and that judgment should not have been rendered against him. The appellant Picornell contended that it should have been taken into account that he merely acted as an agent of Hyndman, Tavera & Ventura in all these transactions; that the tobacco was not of inferior quality, as alleged by the said company; that the condition "D/P" attached to the transaction was not modified; that he had the right to complain because the bank consented to the said company taking possession of the tobacco before the payment of the bill; that the bank held the tobacco as a deposit; that the bank was not authorized to sell the tobacco, said sale not being allowed either by law or by the circumstances that he should not have been ordered to pay the value of the bill without proof that he was notified of its dishonor, as required by section 89 of the Negotiable Instruments Law. The appellee bank maintains that the appellants have no right to discuss issues of fact in this instance for not having complied with the requirements enumerated in paragraph (a) of Rule 16 of the Rules of the Courts of First Instance. The rule cited refers to special proceedings. Moreover, we believe, we believe that the necessary requirements in order that this court may pass upon questions of fact have been complied with by the appellants. The following facts are proved: That Bartolome Picornell, following instruction of Hyndman, Tavera & Ventura, bought in Cebu 1,735 bales of tobacco; that Picornell obtained from the branch of the National Bank in Cebu the sum of P39,529.83, the value of the tobacco, together with his commission of 1 real per quintal (according to stipulation

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Exhibit 4), having, in turn, drawn the following bill of exchange, Exhibit A:
No. 2-A. Cebu, 28 febrero, 1920. For P39,529.83 At treinta (30) days sight please pay this first of exchange (second unpaid) to the order of Philippine National Bank treinta y nueve mil quinientos veintinueve pesos con 83/100. Value received fmOiaE6. To Sres. HYNDMAN, TAVERA Y VENTURA Calle Soler 26 y 28. (Sgd.) B. PICORNELL

Manila. TABACO DEAR SIRS: Your letters of the 3d and 9th, and your telegram of the 5th, inst, received and the sample of tobacco sent through the captain of the boat Don Ildefonso. I wired to the seller asking him to come over and I hope he will do so at the first opportunity. It would be well that you should inform me of the exact number of bales deteriorated and useless, and if possible that said information should be furnished by the Bureau of Internal Revenue. Moreover, it would be well also that you should not sell any bale of said shipment until the matter is settled. Yours very truly, (Sgd.) B. PICORNELL

This instrument was delivered to the branch of the National Bank in Cebu, together with the invoice and bill of lading of the tobacco, which was shipped in the boat Don Ildefonso, on February 27, 1920, consigned to Hyndman, Tavera & Ventura at Manila. The invoice and bill of lading were delivered to the National Bank with the understanding that the bank should not delivered them to Hyndman, Tavera & Ventura except upon payment of the bill; which condition was expressed by the well-known formula "D/P" (documents for [against] payment). The central office of the National Bank in Manila received the bill and the aforesaid documents annexed thereto; and on March 3, 1920, presented the bill to Hyndman, Tavera & Ventura, who accepted it stating on the face thereof the following:
Accepted, 3d March, 1920. Due, 2d April, 1920. Hyndman, Tavera & Ventura, by (Sgd.) J. Pardo de Tavera, member of the firm.

Through these communications, therefore, Picornell learned that Hyndman, Tavera & Ventura had in their possession the tobacco aforementioned. In view of the question raised by the said company as to the quality of the aforesaid tobacco, more correspondence was exchange between the company and Picornell, who, upon the suggestion of the former, wrote on March 26, 1920, this letter:
Messrs. Philippine National Bank, Cebu. DEAR SIRS: I would be obliged to you if you would wire your central office at Manila to extend thirty days the time for payment of the bill for P39,529.83 against Messrs. Hyndman, Tavera & Ventura of Manila. Awaiting your favor, I remain, Yours very truly, (Sgd.) B. PICORNELL

The tobacco having arrived at Manila, the firm of Tambunting, owner of the ship Don Ildefonso, that brought the shipment, requested Hyndman, Tavera & Ventura to send for the goods, which was done by the company without the knowledge of the National Bank which retained and always had in its possession the invoice and bill of lading of the tobacco, until it presented them as evidence at the trial. Hyndman, Tavera & Ventura proceeded to the examination of the tobacco, which was deposited in their warehouses, and wrote and cable to Bartolome Picornell, notifying him that of the tobacco received, there was a certain portion which was no use and was damaged. To these communications, Picornell answered, sending the following letter:
Cebu, March 13, 1920. Messrs. HYNDMAN, TAVERA & VENTURA,

The bank granted this request of the defendants; wherefore Hyndman, Tavera & Ventura reaccepted the bill in the following terms:
Accepted for thirty days. Due May 2d, 1920. Hyndman, Tavera & Ventura, By (Sgd.) J Pardo de Tavera, member of the firm.

May 2, 1920, arrived and the bill was not paid. On the 4th of the same month, Hyndman, Tavera & Ventura sent a letter to the plaintiff bank as follows:
DEAR SIRS: We very much regret to have to inform you that we absolutely refuse to pay draft No. 2 for thirty-nine thousand five hundred and twentynine pesos and eighty-three cents (P39,529.83), referring to 1,871,235

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quintals of Leaf Tobacco Barili, owing to noncompliance of the contract by the drawer. We, therefore, beg to notify you that the said Lead Tobacco is at the disposal of your goodselves at our go-down No. 26-36 Calle Soler.

The bank protested the bill, tool possession of the tobacco, and had it appraised on the 12th of the same month, its value having been fixed at P28,790.72. That this valuation was just, reasonable and exact is not questioned by the parties. The bank brought this action, and about September, 1921, sold the tobacco, obtaining from the sale P6,708.82. This action is for the recovery of the value of the bill of exchange above-mentioned. The Hyndman, Tavera & Ventura company accepted it unconditionally, but did not pay it at its maturity; wherefore its responsibility, or that of its successor, J. Pardo de Tavera, to pay the same, is clear. (Sec. 62, Negotiable Instruments Law.) The question whether or not the tobacco was worth the value of the bill, does not concern the plaintiff bank. Such partial want of consideration, if it was, does not exist with respect to the bank which paid to Picornell the full value of said bill of exchange. The bank was a holder in due course, and was such for value full and complete. The Hyndman, Tavera & Ventura company cannot escape liability in view of section 28 of the Negotiable Instruments Law. . . . The drawee by acceptance becomes liable to the payee or his indorsee, and also to the drawer himself. But the drawer and acceptor are the immediate parties to the consideration, and if the acceptance be without consideration, the drawer cannot recover of the acceptor. The payee holds a different relation; he is a stranger to the transaction between the drawer and the acceptor, and is, therefore, in a legal sense a remote party. In a suit by him against the acceptor, the question as to the consideration between the drawer and the acceptor cannot be inquired into. The payee or holder gives value to the drawer, and if he is ignorant of the equities between the drawer and the acceptor, he is in the position on a bona fide indorsee. Hence, it is no defense to a suit against the acceptor of a draft which has been discounted, and upon which money has been advance by the plaintiff, that the draft was accepted or the accommodation of the drawer. . . . (3 R. C. L., pp. 1143, 1144, par, 358.)

As to Bartolome Picornell, he warranted, as drawer of the bill, that it would be accepted upon proper presentment and paid in due course, and as it was not paid, he became liable to the payment of its value to the holder thereof, which is the plaintiff bank. (Sec. 61, Negotiable Instruments Law.) The fact that Picornell was a commission agent of Hyndman, Tavera & Ventura, in the purchase of the tobacco, does not necessarily make him an agent of the company in its obligations arising from the drawing of the bill by him. His acts in negotiating the bill constitute a different contract from that made by his having purchased the tobacco on behalf of Hyndman, Tavera & Ventura. Furthermore, he cannot exempt himself from responsibility by the fact of his having been a mere agent of this company, because nothing to this effect was indicated or added to his signature on signing the bill. (Sec. 20, Negotiable Instruments Law.) The fact that the tobacco was or was not of inferior quality does not affect the responsibility of Picornell, because while it may an effect upon the contract between him and the firm of Hyndman, Tavera & Ventura, yet it cannot have upon the responsibility of both to the bank, upon the bill drawn and accepted as above stated. As to the instruction "D/P" appearing on the instrument, it was not violated by the bank, which, as above stated, kept possession of the invoice and the bill of lading of the tobacco. By virtue of this circumstance, the bank had the right to deal with that tobacco as a security in case of nonpayment of the bill, and this was admitted by Hyndman, Tavera & Ventura when, upon their refusal to pay the bill, they placed the tobacco at the disposal of the bank. Neither does the fact of Hyndman, Tavera & Ventura having been given possession of the tobacco before the payment of the bill affect the liability of the defendants to the bank thereon WOJw. The title of the bank to the tobacco in question by reason of the condition "D/P" was that a pledgee, and its possession after its delivery to it by Hyndman, Tavera & Ventura was of the same nature -- a discount security, which it was authorized to accept and retail. (Act No. 2938.) The appellants question the power of the bank to sell, as it did, the tobacco in question. Taking into account the circumstances of the case, we fold that the bank did not violate the law in making such sale without notice. We hold

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that it is one of those cases provided for by law (sec. 33, Act. No. 2938), wherein a previous notice of the sale is not indispensable. Besides, as to the price obtained in the sale, no question is made that it was the best obtainable. Concerning the notice to Picornell of the dishonor of the bill, it appears from Exhibit C, which is to protest for the nonpayment thereof, that a copy of such protest was sent by mail in good season addressed to Bartolome Picornell, the presumption, now conclusive, that the latter received it (secs. 105, 106, Negotiable Instruments Law), not having been rebutted, or at least, contradicted. Upon the non-payment of the bill by the drawee-acceptor, the bank had the right of recourse, which it exercised, against the drawer. (Sec. 84, Negotiable Instruments Law.) The drawee, the Hyndman, Tavera & Ventura company, or its successors, J. Pardo de Tavera, accepted the bill and is primarily liable for the value of the negotiable instrument, while the drawer, Bartolome Picornell, is secondarily liable. (3. R. C. L., pp. 1144, 1145.) However, no question has been raised about this aspect of the responsibility of the defendants. We are of the opinion that the appellants are liable to the National Bank for the value of the bill of exchange Exhibit A, deducting therefrom P6,708.82 the proceeds of the sale of the tobacco. But the bank, not having appealed from the judgment of the lower court, we cannot alter it in favor of said party, which, by its omission to appeal, has shown full conformity with the judgment rendered. For the foregoing, the judgment appealed from is affirmed, with costs against the defendants. So ordered. Araullo, C.J., Street, Malcolm, Avancea, Villamor, Ostrand and Johns, JJ., concur. .

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CHARTERED BANK OF INDIA VS. TULJARAM 51 O.G. 5211

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FIRST DIVISION G.R. No. 112392 February 29, 2000 BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. COURT OF APPEALS and BENJAMIN C. NAPIZA, respondents. YNARES-SANTIAGO, J.: This is a petition for review on certiorari of the Decision1 of the Court of Appeals in CA-G.R. CV No. 37392 affirming in toto that of the Regional Trial Court of Makati, Branch 139,2 which dismissed the complaint filed by petitioner Bank of the Philippine Islands against private respondent Benjamin C. Napiza for sum of money. On September 3, 1987, private respondent deposited in Foreign Currency Deposit Unit (FCDU) Savings Account No. 028-1873 which he maintained in petitioner bank's Buendia Avenue Extension Branch, Continental Bank Manager's Check No. 000147574 dated August 17, 1984, payable to "cash" in the amount of Two Thousand Five Hundred Dollars ($2,500.00) and duly endorsed by private respondent on its dorsal side.5 It appears that the check belonged to a certain Henry who went to the office of private respondent and requested him to deposit the check in his dollar account by way of accommodation and for the purpose of clearing the same. Private respondent acceded, and agreed to deliver to Chan a signed blank withdrawal slip, with the understanding that as soon as the check is cleared, both of them would go to the bank to withdraw the amount of the check upon private respondent's presentation to the bank of his passbook. Using the blank withdrawal slip given by private respondent to Chan, on October 23, 1984, one Ruben Gayon, Jr. was able to withdraw the amount of $2,541.67 from FCDU Savings Account No. 028-187. Notably, the withdrawal slip shows that the amount was payable to Ramon A. de Guzman and Agnes C. de Guzman and was duly initialed by the branch assistant manager, Teresita Lindo.6 On November 20, 1984, petitioner received communication from the Wells Fargo Bank International of New York that the said check deposited by private respondent was a counterfeit check7 because it was "not of the type or style of checks issued by Continental Bank International."8

Consequently, Mr. Ariel Reyes, the manager of petitioner's Buendia Avenue Extension Branch, instructed one of its employees, Benjamin D. Napiza IV, who is private respondent's son, to inform his father that the check bounced.9 Reyes himself sent a telegram to private respondent regarding the dishonor of the check. In turn, private respondent's son wrote to Reyes stating that the check been assigned "for encashment" to Ramon A. de Guzman and/or Agnes C. de Guzman after it shall have been cleared upon instruction of Chan. He also said that upon learning of the dishonor of the check, his father immediately tried to contact Chan but the latter was out of town.10 Private respondent's son undertook to return the amount of $2,500.00 to petitioner bank. On December 18, 1984, Reyes reminded private respondent of his son's promise and warned that should he fail to return that amount within seven (7) days, the matter would be referred to the bank's lawyers for appropriate action to protect the bank's interest.11 This was followed by a letter of the bank's lawyer dated April 8, 1985 demanding the return of the $2,500.00.12 In reply, private respondent wrote petitioner's counsel on April 20, 198513 stating that he deposited the check "for clearing purposes" only to accommodate Chan. He added: Further, please take notice that said check was deposited on September 3, 1984 and withdrawn on October 23, 1984, or a total period of fifty (50) days had elapsed at the time of withdrawal. Also, it may not be amiss to mention here that I merely signed an authority to withdraw said deposit subject to its clearing, the reason why the transaction is not reflected in the passbook of the account. Besides, I did not receive its proceeds as may be gleaned from the withdrawal slip under the captioned signature of recipient.1wphi1.nt If at all, my obligation on the transaction is moral in nature, which (sic) I have been and is (sic) still exerting utmost and maximum efforts to collect from Mr. Henry Chan who is directly liable under the circumstances. xxx xxx xxx On August 12, 1986, petitioner filed a complaint against private respondent, praying for the return of the amount of $2,500.00 or the prevailing peso equivalent plus legal interest from date of demand to date of full payment, a sum

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equivalent to 20% of the total amount due as attorney's fees, and litigation and/or costs of suit. Private respondent filed his answer, admitting that he indeed signed a "blank" withdrawal slip with the understanding that the amount deposited would be withdrawn only after the check in question has been cleared. He likewise alleged that he instructed the party to whom he issued the signed blank withdrawal slip to return it to him after the bank draft's clearance so that he could lend that party his passbook for the purpose of withdrawing the amount of $2,500.00. However, without his knowledge, said party was able to withdraw the amount of $2,541.67 from his dollar savings account through collusion with one of petitioner's employees. Private respondent added that he had "given the Plaintiff fifty one (51) days with which to clear the bank draft in question." Petitioner should have disallowed the withdrawal because his passbook was not presented. He claimed that petitioner had no one to blame except itself "for being grossly negligent;" in fact, it had allegedly admitted having paid the amount in the check "by mistake" . . . "if not altogether due to collusion and/or bad faith on the part of (its) employees." Charging petitioner with "apparent ignorance of routine bank procedures," by way of counterclaim, private respondent prayed for moral damages of P100,000.00, exemplary damages of P50,000.00 and attorney's fees of 30% of whatever amount that would be awarded to him plus an honorarium of P500.00 per appearance in court. Private respondent also filed a motion for admission of a third party complaint against Chan. He alleged that "thru strategem and/or manipulation," Chan was able to withdraw the amount of $2,500.00 even without private respondent's passbook. Thus, private respondent prayed that third party defendant Chan be made to refund to him the amount withdrawn and to pay attorney's fees of P5,000.00 plus P300.00 honorarium per appearance. Petitioner filed a comment on the motion for leave of court to admit the third party complaint, whenever it asserted that per paragraph 2 of the Rules and Regulations governing BPI savings accounts, private respondent alone was liable "for the value of the credit given on account of the draft or check deposited." It contended that private respondent was estopped from disclaiming liability because he himself authorized the withdrawal of the amount by signing the

withdrawal slip. Petitioner prayed for the denial of the said motion so as not to unduly delay the disposition of the main case asserting that private respondent's claim could be ventilated in another case. Private respondent replied that for the parties to obtain complete relief and to avoid multiplicity of suits, the motion to admit third party complaint should be granted. Meanwhile, the trial court issued orders on August 25, 1987 and October 28, 1987 directing private respondent to actively participate in locating Chan. After private respondent failed to comply, the trial court, on May 18, 1988, dismissed the third party complaint without prejudice. On November 4, 1991, a decision was rendered dismissing the complaint. The lower court held that petitioner could not hold private respondent liable based on the check's face value alone. To so hold him liable "would render inutile the requirement of "clearance" from the drawee bank before the value of a particular foreign check or draft can be credited to the account of a depositor making such deposit." The lower court further held that "it was incumbent upon the petitioner to credit the value of the check in question to the account of the private respondent only upon receipt of the notice of final payment and should not have authorized the withdrawal from the latter's account of the value or proceeds of the check." Having admitted that it committed a "mistake" in not waiting for the clearance of the check before authorizing the withdrawal of its value or proceeds, petitioner should suffer the resultant loss. On appeal, the Court of Appeals affirmed the lower court's decision. The appellate court held that petitioner committed "clears gross negligence" in allowing Ruben Gayon, Jr. to withdraw the money without presenting private respondent's passbook and, before the check was cleared and in crediting the amount indicated therein in private respondent's account. It stressed that the mere deposit of a check in private respondent's account did not mean that the check was already private respondent's property. The check still had to be cleared and its proceeds can only be withdrawn upon presentation of a passbook in accordance with the bank's rules and regulations. Furthermore, petitioner's contention that private respondent warranted the check's genuineness by endorsing it is untenable for it would render useless the clearance requirement. Likewise, the requirement of presentation of a passbook to ascertain

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the propriety of the accounting reflected would be a meaningless exercise. After all, these requirements are designed to protect the bank from deception or fraud. The Court of Appeals cited the case of Roman Catholic Bishop of Malolos, Inc. v. IAC,14 where this Court stated that a personal check is not legal tender or money, and held that the check deposited in this case must be cleared before its value could be properly transferred to private respondent's account. Without filing a motion for the reconsideration of the Court of Appeals' Decision, petitioner filed this petition for review on certiorari, raising the following issues: 1. WHETHER OR NOT RESPONDENT NAPIZA IS LIABLE UNDER HIS WARRANTIES AS A GENERAL INDORSER. 2. WHETHER OR NOT A CONTRACT OF AGENCY WAS CREATED BETWEEN RESPONDENT NAPIZA AND RUBEN GAYON. 3. WHETHER OR NOT PETITIONER WAS GROSSLY NEGLIGENT IN ALLOWING THE WITHDRAWAL. Petitioner claims that private respondent, having affixed his signature at the dorsal side of the check, should be liable for the amount stated therein in accordance with the following provision of the Negotiable Instruments Law (Act No. 2031): Sec. 66. Liability of general indorser. Every indorser who indorses without qualification, warrants to all subsequent holders in due course (a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and (b) That the instrument is at the time of his indorsement, valid and subsisting. And, in addition, he engages that on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. Sec. 65, on the other hand, provides for the following warranties of a person negotiating an instrument by delivery or by qualified indorsement: (a) that the instrument is genuine and in all respects what it purports to be; (b) that

he has a good title to it, and (c) that all prior parties had capacity to contract.15 In People v. Maniego,16 this Court described the liabilities of an indorser as follows: Appellant's contention that as mere indorser, she may not be liable on account of the dishonor of the checks indorsed by her, is likewise untenable. Under the law, the holder or last indorsee of a negotiable instrument has the right "to enforce payment of the instrument for the full amount thereof against all parties liable thereon. Among the "parties liable thereon." Is an indorser of the instrument, i.e., "a person placing his signature upon an instrument otherwise than as a maker, drawer or acceptor * * unless he clearly indicated by appropriate words his intention to be bound in some other capacity." Such an indorser "who indorses without qualification," inter alia "engages that on due presentment, * * (the instrument) shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or any subsequent indorser who may be compelled to pay it." Maniego may also be deemed an "accommodation party" in the light of the facts, i.e., a person "who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value thereof, and for the purpose of lending his name to some other person." As such, she is under the law "liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew * * (her) to be only an accommodation party," although she has the right, after paying the holder, to obtain reimbursement from the party accommodated, "since the relation between them is in effect that of principal and surety, the accommodation party being the surety. It is thus clear that ordinarily private respondent may be held liable as an indorser of the check or even as an accommodation party.17 However, to hold private respondent liable for the amount of the check he deposited by the strict application of the law and without considering the attending circumstances in the case would result in an injustice and in the erosion of the public trust in the banking system. The interest of justice thus demands looking into the events that led to the encashment of the check. Petitioner asserts that by signing the withdrawal slip, private respondent "presented the opportunity for the withdrawal of

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the amount in question." Petitioner relied "on the genuine signature on the withdrawal slip, the personality of private respondent's son and the lapse of more than fifty (50) days from date of deposit of the Continental Bank draft, without the same being returned yet."18 We hold, however, that the propriety of the withdrawal should be gauged by compliance with the rules thereon that both petitioner bank and its depositors are duty-bound to observe. In the passbook that petitioner issued to private respondent, the following rules on withdrawal of deposits appear: 4. Withdrawals must be made by the depositor personally but in some exceptional circumstances, the Bank may allow withdrawal by another upon the depositor's written authority duly authenticated; and neither a deposit nor a withdrawal will be permitted except upon the presentation of the depositor's savings passbook, in which the amount deposited withdrawn shall be entered only by the Bank. 5. Withdrawals may be made by draft, mail or telegraphic transfer in currency of the account at the request of the depositor in writing on the withdrawal slip or by authenticated cable. Such request must indicate the name of the payee/s, amount and the place where the funds are to be paid. Any stamp, transmission and other charges related to such withdrawals shall be for the account of the depositor and shall be paid by him/her upon demand. Withdrawals may also be made in the form of travellers checks and in pesos. Withdrawals in the form of notes/bills are allowed subject however, to their (availability). 6. Deposits shall not be subject to withdrawal by check, and may be withdrawal only in the manner above provided, upon presentation of the depositor's savings passbook and with the withdrawal form supplied by the Bank at the counter.19 Under these rules, to be able to withdraw from the savings account deposit under the Philippine foreign currency deposit system, two requisites must be presented to petitioner bank by the person withdrawing an amount: (a) a duly filled-up withdrawal slip, and (b) the depositor's passbook. Private respondent admits he signed a blank withdrawal slip ostensibly in violation of Rule No. 6 requiring that the request for withdrawal must name the payee, the amount to be withdrawn and the place where such withdrawal should be made. That the withdrawal slip was in

fact a blank one with only private respondent's two signatures affixed on the proper spaces is buttressed by petitioner's allegation in the instant petition that had private respondent indicated therein the person authorized to receive the money, then Ruben Gayon, Jr. could not have withdrawn any amount. Petitioner contends that "(I)n failing to do so (i.e., naming his authorized agent), he practically authorized any possessor thereof to write any amount and to collect the same."20 Such contention would have been valid if not for the fact that the withdrawal slip itself indicates a special instruction that the amount is payable to "Ramon A. de Guzman &/or Agnes C. de Guzman." Such being the case, petitioner's personnel should have been duly warned that Gayon, who was also employed in petitioner's Buendia Ave. Extension branch,21 was not the proper payee of the proceeds of the check. Otherwise, either Ramon or Agnes de Guzman should have issued another authority to Gayon for such withdrawal. Of course, at the dorsal side of the withdrawal slip is an "authority to withdraw" naming Gayon the person who can withdraw the amount indicated in the check. Private respondent does not deny having signed such authority. However, considering petitioner's clear admission that the withdrawal slip was a blank one except for private respondent's signature, the unavoidable conclusion is that the typewritten name of "Ruben C. Gayon, Jr." was intercalated and thereafter it was signed by Gayon or whoever was allowed by petitioner to withdraw the amount. Under these facts, there could not have been a principalagent relationship between private respondent and Gayon so as to render the former liable for the amount withdrawn. Moreover, the withdrawal slip contains a boxed warning that states: "This receipt must be signed and presented with the corresponding foreign currency savings passbook by the depositor in person. For withdrawals thru a representative, depositor should accomplish the authority at the back." The requirement of presentation of the passbook when withdrawing an amount cannot be given mere lip service even though the person making the withdrawal is authorized by the depositor to do so. This is clear from Rule No. 6 set out by petitioner so that, for the protection of the bank's interest and as a reminder to the depositor, the withdrawal shall be entered in the depositor's passbook. The fact that private respondent's passbook was not presented during the withdrawal is evidenced by the entries therein showing that

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the last transaction that he made with the bank was on September 3, 1984, the date he deposited the controversial check in the amount of $2,500.00.22 In allowing the withdrawal, petitioner likewise overlooked another rule that is printed in the passbook. Thus: 2. All deposits will be received as current funds and will be repaid in the same manner; provided, however, that deposits of drafts, checks, money orders, etc. will be accented as subject to collection only and credited to the account only upon receipt of the notice of final payment. Collection charges by the Bank's foreign correspondent in effecting such collection shall be for the account of the depositor. If the account has sufficient balance, the collection shall be debited by the Bank against the account. If, for any reason, the proceeds of the deposited checks, drafts, money orders, etc., cannot be collected or if the Bank is required to return such proceeds, the provisional entry therefor made by the Bank in the savings passbook and its records shall be deemed automatically cancelled regardless of the time that has elapsed, and whether or not the defective items can be returned to the depositor; and the Bank is hereby authorized to execute immediately the necessary corrections, amendments or changes in its record, as well as on the savings passbook at the first opportunity to reflect such cancellation. (Emphasis and underlining supplied.) As correctly held by the Court of Appeals, in depositing the check in his name, private respondent did not become the outright owner of the amount stated therein. Under the above rule, by depositing the check with petitioner, private respondent was, in a way, merely designating petitioner 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.23 As such, after receiving the deposit, under its own rules, petitioner shall credit the amount in private respondent's 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. Again, this is in accordance with ordinary banking practices and with this Court's pronouncement that "the collecting bank or last endorser generally suffers the loss because 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."24 The rule finds more meaning in this case where the check involved is drawn on a foreign bank and therefore collection is more difficult than when the drawee bank is a local one even though the check in question is a manager's check.25 In Banco Atlantico v. Auditor General,26 Banco Atlantico, a commercial bank in Madrid, Spain, paid the amounts represented in three (3) checks to Virginia Boncan, the finance officer of the Philippine Embassy in Madrid. The bank did so without previously clearing the checks with the drawee bank, the Philippine National Bank in New York, on account of the "special treatment" that Boncan received from the personnel of Banco Atlantico's foreign department. The Court held that the encashment of the checks without prior clearance is "contrary to normal or ordinary banking practice specially so where the drawee bank is a foreign bank and the amounts involved were large." Accordingly, the Court approved the Auditor General's denial of Banco Atlantico's claim for payment of the value of the checks that was withdrawn by Boncan. Said ruling brings to light the fact that the banking business is affected with public interest. By the nature of its functions, a bank is under obligation to treat the accounts of its depositors "with meticulous care, always having in mind the fiduciary nature of their relationship."27 As such, in dealing with its depositors, a bank should exercise its functions not only with the diligence of a good father of a family but it should do so with the highest degree of care.28 In the case at bar, petitioner, in allowing the withdrawal of private respondent's deposit, failed to exercise the diligence of a good father of a family. In total disregard of its own rules, petitioner's personnel negligently handled private respondent's account to petitioner's detriment. As this Court once said on this matter: Negligence is the omission to do something which a reasonable man, guided by those considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of something which a prudent and reasonable man would do. The seventy-eight (78)-year-old, yet still relevant, case of Picart v. Smith, provides that test by which to determine the existence of negligence in a particular case which may be stated as follows: Did the defendant in doing

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the alleged negligent act use that reasonable care and caution which an ordinarily prudent person would have used in the same situation? If not, then he is guilty of negligence. The law here in effect adopts the standard supposed to be supplied by the imaginary conduct of the discreet paterfamilias of the Roman law. The existence of negligence in a given case is not determined by reference to the personal judgment of the actor in the situation before him. The law considers what would be reckless, blameworthy, or negligent in the man of ordinary intelligence and prudence and determines liability by that.29 Petitioner violated its own rules by allowing the withdrawal of an amount that is definitely over and above the aggregate amount of private respondent's dollar deposits that had yet to be cleared. The bank's ledger on private respondent's account shows that before he deposited $2,500.00, private respondent had a balance of only $750.00.30 Upon private respondent's deposit of $2,500.00 on September 3, 1984, that amount was credited in his ledger as a deposit resulting in the corresponding total balance of $3,250.00.31 On September 10, 1984, the amount of $600.00 and the additional charges of $10.00 were indicated therein as withdrawn thereby leaving a balance $2,640.00. On September 30, 1984, an interest of $11.59 was reflected in the ledger and on October 23, 1984, the amount of $2,541.67 was entered as withdrawn with a balance of $109.92.32 On November 19, 1984 the word "hold" was written beside the balance of $109.92.33 That must have been the time when Reyes, petitioner's branch manager, was informed unofficially of the fact that the check deposited was a counterfeit, but petitioner's Buendia Ave. Extension Branch received a copy of the communication thereon from Wells Fargo Bank International in New York the following day, November 20, 1984. 34 According to Reyes, Wells Fargo Bank International handled the clearing of checks drawn against U.S. banks that were deposited with petitioner.35 From these facts on record, it is at once apparent that petitioner's personnel allowed the withdrawal of an amount bigger than the original deposit of $750.00 and the value of the check deposited in the amount of $2,500.00 although they had not yet received notice from the clearing bank in the United States on whether or not the check was funded. Reyes' contention that after the lapse of the 35-day period the amount of a deposited check could be withdrawn even

in the absence of a clearance thereon, otherwise it could take a long time before a depositor could make a withdrawal,36 is untenable. Said practice amounts to a disregard of the clearance requirement of the banking system. While it is true that private respondent's having signed a blank withdrawal slip set in motion the events that resulted in the withdrawal and encashment of the counterfeit check, the negligence of petitioner's personnel was the proximate cause of the loss that petitioner sustained. Proximate cause, which is determined by a mixed consideration of logic, common sense, policy and precedent, is "that cause, which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred." 37 The proximate cause of the withdrawal and eventual loss of the amount of $2,500.00 on petitioner's part was its personnel's negligence in allowing such withdrawal in disregard of its own rules and the clearing requirement in the banking system. In so doing, petitioner assumed the risk of incurring a loss on account of a forged or counterfeit foreign check and hence, it should suffer the resulting damage.1wphi1.nt WHEREFORE, the petition for review on certiorari is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 37392 is AFFIRMED. SO ORDERED. Davide, Jr., C.J., Puno, Kapunan and Pardo, JJ., concur.
Footnotes
1

Penned by Associate Justice Jainal D. Rasul and concurred in by Associate Justices Gloria C. Paras and Ramon Mabutas, Jr.
2

The decision of the RTC was penned by Assisting Judge Jose R. Bautista per Administrative Order No. 109-91 dated October 3, 1991.
3

Exh. B. Exh. C. Exh. C-1. TSN, September 14, 1989, p. 16. Exh. E. Exh. E-1. Exh. F. Ibid. Exh. H. Exh. I.

10

11

12

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13

Exh. 3. G.R. No. 72110, 191 SCRA 411 (1990). Sec. 65, Negotiable Instruments Law. L-30910, 148 SCRA 30, 35 (1987).

SECOND DIVISION G.R. No. 156294 November 29, 2006 MELVA THERESA ALVIAR GONZALES, Petitioner, vs. RIZAL COMMERCIAL BANKING CORPORATION, Respondent. DECISION GARCIA, J.: An action for a sum of money originating from the Regional Trial Court (RTC) of Makati City, Branch 61, thereat docketed as Civil Case No. 88-1502, was decided in favor of therein plaintiff, now respondent Rizal Commercial Banking Corporation (RCBC). On appeal to the Court of Appeals (CA) in CA-G.R. CV No. 48596, that court, in a decision 1 dated August 30, 2002, affirmed the RTC minus the award of attorneys fees. Upon the instance of herein petitioner Melva Theresa Alviar Gonzales, the case is now before this Court via this petition for review on certiorari, based on the following undisputed facts as unanimously found by the RTC and the CA, which the latter summarized as follows: Gonzales was an employee of Rizal Commercial Banking Corporation (or RCBC) as New Accounts Clerk in the Retail Banking Department at its Head Office. A foreign check in the amount of $7,500 was drawn by Dr. Don Zapanta of the Ade Medical Group with address at 569 Western Avenue, Los Angeles, California, against the drawee bank Wilshire Center Bank, N.A., of Los Angeles, California, U.S.A., and payable to Gonzales mother, defendant Eva Alviar (or Alviar). Alviar then endorsed this check. Since RCBC gives special accommodations to its employees to receive the checks value without awaiting the clearing period, Gonzales presented the foreign check to Olivia Gomez, the RCBCs Head of Retail Banking. After examining this, Olivia Gomez requested Gonzales to endorse it which she did. Olivia Gomez then acquiesced to the early encashment of the check and signed the check but indicated thereon her authority of "up to P17,500.00 only". Afterwards, Olivia Gomez directed Gonzales to present the check to RCBC employee Carlos Ramos and procure his signature. After inspecting the check, Carlos Ramos also signed it with an "ok" annotation. After getting the said signatures Gonzales presented the check to Rolando

14

15

16

17

In Town Savings and Loan Bank, Inc. v. Court of Appeals, G.R. No. 106011, 223 SCRA 459 (1993), the Court held that the accommodation parties to a promissory note are liable for the amount of the loan notwithstanding that they were not the actual beneficiaries of such loan as they merely signed the promissory note in order that the party accommodated could be granted the full amount of the loan.
18

Petition, p. 7. Exh. G or 1. Petition, p. 6. TSN, September 5, 1989, p. 20. Exh. 2-a.

19

20

21

22

23

Philippine Airlines, Inc. v. Court of Appeals, L-49188, 181 SCRA 557, 568 (1990) citing Sec. 189 of the Negotiable Instruments Law; Art. 1249, Civil Code; Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44 and 21 R.C.L. 60, 61.
24

Associated Bank v. Court of Appeals, 322 Phil. 677, 699-700 citing Bank of the Philippines Islands v. Court of Appeals, G.R. No. 102383, 216 SCRA 51, 63 (1992), Banco de Oro v. Equitable Banking Corporation, G.R. 74917, 157 SCRA 188 (1988) and Great Eastern Life Insurance Co. v. Hongkong and Shanghai Banking Corporation, 43 Phil. 678.
25

A manager's check is like a cashier's check which, in the commercial world, is regarded substantially to be as good as the money it represents (Tan v. Court of Appeals, G.R. No. 108555, 239 SCRA 310, 322 (1944).
26

L-33549, 81 SCRA 335 (1978).

27

Citytrust Banking Corporation v. Intermediate Appellate Court, G.R. No. 84281 SCRA 559, 564 (1994) citing Simex International (Manila), Inc. v. Court of Appeals, G.R. No. 88013, 183 SCRA 360 (1990).
28

Philippine Bank of Commerce v. Court of Appeals, 336 Phil. 667, 681 (1997) citing Metropolitan Bank and Trust Company v. Court of Appeals, G.R. No. 112576, 237 SCRA 761, 767 (1994) and Bank of the Philippine Islands v. Court of Appeals, G.R. No. 102383, 216 SCRA 51 (1992).
29

Ibid., at p. 676. Exh. A. Exh. A-1. Exh. A-2. Exh. A-3. Exh. E. Affidavit of Reyes, p. 3; Record, p. 111. TSN, September 21, 1989, p. 21. Philippine Bank of Commerce v. Court of Appeals, supra, at p. 679.

30

31

32

33

34

35

36

37

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Zornosa, Supervisor of the Remittance section of the Foreign Department of the RCBC Head Office, who after scrutinizing the entries and signatures therein authorized its encashment. Gonzales then received its peso equivalent of P155,270.85. RCBC then tried to collect the amount of the check with the drawee bank by the latter through its correspondent bank, the First Interstate Bank of California, on two occasions dishonored the check because of "END. IRREG" or irregular indorsement. Insisting, RCBC again sent the check to the drawee bank, but this time the check was returned due to "account closed". Unable to collect, RCBC demanded from Gonzales the payment of the peso equivalent of the check that she received. Gonzales settled the matter by agreeing that payment be made thru salary deduction. This temporary arrangement for salary deductions was communicated by Gonzales to RCBC through a letter dated November 27, 1987 xxx xxx xxx xxx The deductions was implemented starting October 1987. On March 7, 1988 RCBC sent a demand letter to Alviar for the payment of her obligation but this fell on deaf ears as RCBC did not receive any response from Alviar. Taking further action to collect, RCBC then conveyed the matter to its counsel and on June 16, 1988, a letter was sent to Gonzales reminding her of her liability as an indorser of the subject check and that for her to avoid litigation she has to fulfill her commitment to settle her obligation as assured in her said letter. On July 1988 Gonzales resigned from RCBC. What had been deducted from her salary was only P12,822.20 covering ten months. It was against the foregoing factual backdrop that RCBC filed a complaint for a sum of money against Eva Alviar, Melva Theresa Alviar-Gonzales and the latters husband Gino Gonzales. The spouses Gonzales filed an Answer with Counterclaim praying for the dismissal of the complaint as well as payment of P10,822.20 as actual damages, P20,000.00 as moral damages, P20,000.00 as exemplary damages, and P20,000.00 as attorneys fees and litigation expenses. Defendant Eva Alviar, on the other hand, was declared in default for having filed her Answer out of time. After trial, the RTC, in its three-page decision, the three defendants liable as follows:
2

WHEREFORE, premises above considered and plaintiff having established its case against the defendants as above stated, judgment is hereby rendered for plaintiff and as against defendant EVA. P. ALVIAR as principal debtor and defendants MELVA THERESA ALVIAR GONZLAES as guarantor as follows: 1. To pay plaintiff the amount of P142,648.65 (P155,270.85 less the amount of P12,622.20, as salary deduction of [Gonzales]), representing the outstanding obligation of the defendants with interest of 12% per annum starting February 1987 until fully paid; 2. To pay the amount of P40,000.00 as and for attorneys fees; and to 3. Pay the costs of this suit. SO ORDERED. On appeal, the CA, except for the award of attorneys fees, affirmed the RTC judgment. Hence, this recourse by the petitioner on her submission that the CA erred XXX IN FINDING [PETITIONER], AN ACCOMMODATION PARTY TO A CHECK SUBSEQUENTLY ENDORSED PARTIALLY, LIABLE TO RCBC AS GUARANTOR; XXX IN FINDING THAT THE SIGNATURE OF GOMEZ, AN RCBC EMPLOYEE, DOES NOT CONSTITUTE AS AN ENDORSEMENT BUT ONLY AN INTER-BANK APPROVAL OF SIGNATURE NECESSARY FOR THE ENCASHMENT OF THE CHECK; XXX IN NOT FINDING RCBC LIABLE ON THE COUNTERCLAIMS OF [THE PETITIONER]. The recourse is impressed with merit. The dollar-check 3 in question in the amount of $7,500.00 drawn by Don Zapanta of Ade Medical Group (U.S.A.) against a Los Angeles, California bank, Wilshire Center Bank N.A., was dishonored because of "End. Irregular," i.e., an irregular endorsement. While the foreign drawee bank did not specifically state which among the four signatures found on the dorsal portion of the check made the check irregularly endorsed, it is absolutely undeniable that only the signature of Olivia Gomez, an RCBC employee, was a qualified endorsement because of the phrase "up to P17,500.00 only." There can be no other acceptable

held two of

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explanation for the dishonor of the foreign check than this signature of Olivia Gomez with the phrase "up to P17,500.00 only" accompanying it. This Court definitely agrees with the petitioner that the foreign drawee bank would not have dishonored the check had it not been for this signature of Gomez with the same phrase written by her. The foreign drawee bank, Wilshire Center Bank N.A., refused to pay the bearer of this dollar-check drawn by Don Zapanta because of the defect introduced by RCBC, through its employee, Olivia Gomez. It is, therefore, a useless piece of paper if returned in that state to its original payee, Eva Alviar. There is no doubt in the mind of the Court that a subsequent party which caused the defect in the instrument cannot have any recourse against any of the prior endorsers in good faith. Eva Alviars and the petitioners liability to subsequent holders of the foreign check is governed by the Negotiable Instruments Law as follows: Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification, warrants to all subsequent holders in due course; (a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and (b) That the instrument is, at the time of his indorsement, valid and subsisting; And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. The matters and things mentioned in subdivisions (a), (b) and (c) of Section 65 are the following: (a) That the instrument is genuine and in all respects what it purports to be; (b) That he has a good title to it; (c) That all prior parties had capacity to contract; Under Section 66, the warranties for which Alviar and Gonzales are liable as general endorsers in favor of subsequent endorsers extend only to the state of the instrument at the time of their endorsements, specifically, that the instrument is genuine and in all respects what it

purports to be; that they have good title thereto; that all prior parties had capacity to contract; and that the instrument, at the time of their endorsements, is valid and subsisting. This provision, however, cannot be used by the party which introduced a defect on the instrument, such as respondent RCBC in this case, which qualifiedly endorsed the same, to hold prior endorsers liable on the instrument because it results in the absurd situation whereby a subsequent party may render an instrument useless and inutile and let innocent parties bear the loss while he himself gets away scot-free. It cannot be over-stressed that had it not been for the qualified endorsement ("up to P17,500.00 only") of Olivia Gomez, who is the employee of RCBC, there would have been no reason for the dishonor of the check, and full payment by drawee bank therefor would have taken place as a matter of course. Section 66 of the Negotiable Instruments Law which further states that the general endorser additionally engages that, on due presentment, the instrument shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent endorser who may be compelled to pay it, must be read in the light of the rule in equity requiring that those who come to court should come with clean hands. The holder or subsequent endorser who tries to claim under the instrument which had been dishonored for "irregular endorsement" must not be the irregular endorser himself who gave cause for the dishonor. Otherwise, a clear injustice results when any subsequent party to the instrument may simply make the instrument defective and later claim from prior endorsers who have no knowledge or participation in causing or introducing said defect to the instrument, which thereby caused its dishonor. Courts in this jurisdiction are not only courts of law but also of equity, and therefore cannot unqualifiedly apply a provision of law so as to cause clear injustice which the framers of the law could not have intended to so deliberately cause. In Carceller v. Court of Appeals, 4 this Court had occasion to stress: Courts of law, being also courts of equity, may not countenance such grossly unfair results without doing violence to its solemn obligation to administer fair and equal justice for all.

129

RCBC, which caused the dishonor of the check upon presentment to the drawee bank, through the qualified endorsement of its employee, Olivia Gomez, cannot hold prior endorsers, Alviar and Gonzales in this case, liable on the instrument. Moreover, it is a well-established principle in law that as between two parties, he who, by his acts, caused the loss shall bear the same. 5 RCBC, in this instance, should therefore bear the loss. Relative to the petitioners counterclaim against RCBC for the amount of P12,822.20 which it admittedly deducted from petitioners salary, the Court must order the return thereof to the petitioner, with legal interest of 12% per annum, notwithstanding the petitioners apparent acquiescence to such an arrangement. It must be noted that petitioner is not any ordinary client or depositor with whom RCBC had this isolated transaction. Petitioner was a rankand-file employee of RCBC, being a new accounts clerk thereat. It is easy to understand how a vulnerable Gonzales, who is financially dependent upon RCBC, would rather bite the bullet, so to speak, and expectedly opt for salary deduction rather than lose her job and her entire salary altogether. In this sense, we cannot take petitioners apparent acquiescence to the salary deduction as being an entirely free and voluntary act on her part. Additionally, under the obtaining facts and circumstances surrounding the present complaint for collection of sum of money by RCBC against its employee, which may be deemed tantamount to harassment, and the fact that RCBC itself was the one, acting through its employee, Olivia Gomez, which gave reason for the dishonor of the dollar-check in question, RCBC may likewise be held liable for moral and exemplary damages and attorneys fees by way of damages, in the amount of P20,000.00 for each. WHEREFORE, the assailed CA Decision dated August 30, 2002 is REVERSED and SET ASIDE and the Complaint in this case DISMISSED for lack of merit. Petitioners counterclaim is GRANTED, ordering the respondent RCBC to reimburse petitioner the amount P12,822.20, with legal interest computed from the time of salary deduction up to actual payment, and to pay petitioner the total amount of P60,000.00 as moral and exemplary damages, and attorneys fees. Costs against the respondent.

SO ORDERED.
Footnotes
1

Penned by Associate Justice Roberto A. Barrios, with Associate Justices Bienvenido L. Reyes and Edgardo F. Sundiam, concurring; Rollo, pp. 29-38.
2

Id. at 130-132. Exhibits "J" and "J-1"; Id. at 48. 362 Phil. 332 (1999). Valderama v. Macalde, G.R. No. 165005, September 16, 2005, 470 SCRA 168.

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FIRST DIVISION G.R. No. 132403 September 28, 2007 HI-CEMENT CORPORATION, Petitioner, -versusINSULAR BANK OF ASIA AND AMERICA (later PHILIPPINE COMMERCIAL INTERNATIONAL BANK and now, EQUITABLE-PCI BANK), Respondent. x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ---x G.R. No. 132419 E.T. HENRY September 28, 2007 & CO. and SPOUSES ENRIQUE TAN and LILIA TAN, Petitioners, -versusINSULAR BANK OF ASIA AND AMERICA (later PHILIPPINE COMMERCIAL INTERNATIONAL BANK and now, EQUITABLE-PCI BANK), Respondent. x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ---x DECISION CORONA, J.: At bar are consolidated petitions assailing the decision of the Court of Appeals (CA) dated January 21, 1998 in CA-G.R. CV No. 31600 entitled Insular Bank of Asia and America [now Philippine Commercial International Bank/(PCIB)] v. E.T. Henry & Co., et al.[1] The antecedent facts follow. Petitioners Enrique Tan and Lilia Tan (spouses Tan) were the controlling stockholders of E.T. Henry & Co., Inc. (E.T. Henry), a company engaged in the business of processing and distributing bunker fuel.[2] Among E.T. Henry's customers were petitioner Hi-Cement Corporation (HiCement),[3] Riverside Mills Corporation (Riverside) and Kanebo Cosmetics Philippines, Inc. (Kanebo). For their purchases, these corporations issued postdated checks to E.T. Henry.

Sometime in 1979, respondent Insular Bank of Asia and America (later PCIB and now Equitable PCI-Bank) granted E.T. Henry a credit facility known as Purchase of Short Term Receivables. Through this arrangement, E.T. Henry was able to encash, with pre-deducted interest, the postdated checks of its clients. In other words, E.T. Henry and respondent were into re-discounting of checks. For every transaction, respondent required E.T. Henry to execute a promissory note and a deed of assignment bearing the conformity of the client to the re-discounting. [4] From 1979 to 1981, E.T. Henry was able to re-discount its clients' checks (with deeds of assignment) with respondent. However, in February 1981, 20 checks[5] of Hi-Cement (which were crossed and which bore the restriction deposit to payees account only) were dishonored. So were the checks of Riverside and Kanebo.[6] Respondent filed a complaint for sum of money[7] in the then Court of First Instance of Rizal[8] against E.T. Henry, the spouses Tan, Hi-Cement (including its general manager[9] and its treasurer [10] as signatories of the postdated crossed checks), Riverside and Kanebo.[11] In its complaint, respondent claimed that, due to the dishonor of the checks, it suffered actual damages equivalent to their value, exclusive of accrued and accruing interests, charges and penalties such as attorneys fees and expenses of litigation, as follows: 1. Riverside Mills Corporation P115,312.50 2. Kanebo Cosmetics Philippines, Inc. 3. Hi-Cement Corporation 5,811,750.00 10,000,000.00

Respondent also sought to collect from E.T. Henry and the spouses Tan other loan obligations (amounting to P1,661,266.51 and P4,900,805, respectively) as deficiencies resulting from the foreclosure of the real estate mortgage on E.T. Henry's property in Sucat, Paraaque.[12] Hi-Cement filed its answer alleging, among others, that: (1) its general manager and treasurer were not authorized to issue the postdated crossed checks in E.T. Henry's favor; (2) the deed of assignment purportedly executed by Hi-Cement assigning them to respondent only bore the conformity of its

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treasurer and (3) respondent was not a holder in due course as it should not have discounted them for being crossed checks.[13] In their answer (with counterclaim against respondent and cross-claims against Hi-Cement, Riverside and Kanebo),[14] E.T. Henry and the spouses Tan claimed that: (1) the drawers of the postdated checks failed to honor them due to the adverse economic conditions prevailing at the time respondent presented them for payment; (2) the extrajudicial sale of the mortgaged Sucat property was void due to gross inadequacy of the bid price[15] and (3) their loans were subjected to a usurious interest rate of 21% p.a. For their part, Riverside and Kanebo sought the dismissal of the case against them, arguing that they were not privy to the re-discounting arrangement between respondent and E.T. Henry. On June 30, 1989, the trial court rendered a decision which read: WHEREFORE, in view of the foregoing, and as a consequence of the preponderance of evidence, this Court hereby renders judgment in favor of [respondent] and against [E.T. Henry, spouses Tan, Hi-Cement, Riverside and Kanebo], to wit: 1. Ordering [E.T. Henry, spouses Tan, Hi-Cement, Riverside and Kanebo], jointly and severally, to pay [respondent] damages represented by the face value of the postdated checks as follows: (a) Riverside Mills Corporation P115,312.50 (b) Kanebo Cosmetics Philippines, Inc. (c) Hi-Cement Corporation 5,811,750.00 10,000,000.00

4. Ordering [E.T. Henry, spouses Tan, Hi-Cement, Riverside and Kanebo] to pay [respondent] [a]ttorneys fees and expenses of litigation in the amount of P200,000.00 and pay the cost of this suit.[16] SO ORDERED.[17] Only petitioners appealed the decision to the CA which affirmed it in toto. Hence, these petitions. In G.R. No. 132403, petitioner Hi-Cement disclaims liability for the postdated crossed checks because (1) it did not authorize their issuance; (2) respondent was not a holder in due course and (3) there was no basis for the lower courts holding that it was solidarily liable for the face value of Riversides and Kanebos checks.[18] In G.R. No. 132419, on the other hand, E.T. Henry and the spouses Tan essentially contend that the lower courts erred in: (1) applying the doctrine of piercing the veil of the corporate entity to make the spouses Tan solidarily liable with E.T. Henry; (2) not ruling on their cross-claims and counterclaims, and (3) not declaring the foreclosure of E.T. Henry's Sucat property as void.[19] (A) G.R. 132403 As a rule, an appeal by certiorari under Rule 45 of the Rules of Court is limited to review of errors of law.[20] The factual findings of the trial court, specially when affirmed by the appellate court, are generally binding on us unless there was a misapprehension of facts or when the inference drawn from the facts was manifestly mistaken.[21] This case falls within the exception. AUTHORITY OF HI-CEMENTS GENERAL MANAGER AND TREASURER TO ISSUE THE POSTDATED CROSSED CHECKS Both the trial court and the CA concluded that Hi-Cement authorized its general manager and treasurer to issue the subject postdated crossed checks. They both held that HiCement was already estopped from denying such authority since it never objected to the signatories' issuance of all previous checks to E.T. Henry which the latter, in turn, was able to re-discount with respondent. We agree with the lower courts that both the general manager and treasurer of Hi-Cement were authorized to issue the subjects checks. However, notwithstanding such

plus interests, services, charges and penalties until fully paid; 2. Ordering [E.T. Henry] and/or [spouses Tan] to pay to [respondent] the sum of P4,900,805.00 plus accrued interests, charges, penalties until fully paid; 3. Ordering [E.T. Henry and spouses Tan] to pay [respondent] the sum of P1,661,266.51 plus interests, charges, and penalties until fully paid;

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fact, respondent could not be considered a holder in due course. RESPONDENT COURSE BANK NOT A HOLDER IN DUE

The Negotiable Instruments Law (NIL), specifically Section 191,[22] provides: Holder means the payee or indorsee of a bill or a note, or the person who is in possession of it, or the bearer thereof. On the other hand, Section 52[23] states: A holder in due course is a holder who has taken the instrument under the following conditions: (a) it is complete and regular on its face; (b) he became the holder of it before it was overdue, and without notice that it has previously been dishonored, if such was the fact; (c) he took it in good faith and for value and (d) 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. Absent any of the elements set forth in Section 52, the holder is not a holder in due course. In the case at bar, the last two requirements were not met. In Bataan Cigar and Cigarette Factory, Inc. (BCCF) v. CA,[24] we held that the holder of crossed checks was not a holder in due course. There, the drawer (BCCF) issued postdated crossed checks in favor of one of its suppliers (George King) who promised to deliver bales of tobacco leaf but failed. George King, however, sold the checks on discount to State Investment House, Inc. (SIHI) and upon the latters presentment to the drawee bank, BCCF ordered a stop payment. Thereafter, SIHI filed a collection case against it. In ruling that SIHI was not a holder in due course, we explained: In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a check should have the following effects: (a) the check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once to one who has an account with a bank [and]; (c) the act of crossing the checks serves as warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course.

Likewise, in Atrium Management Corporation v. CA,[25] where E.T. Henry, Hi-Cement and its treasurer[26] again engaged in a legal scuffle over four postdated crossed checks, we held that Atrium (with which the checks were rediscounted) was not a holder in due course. In that case, E.T. Henry was the payee of four Hi-Cement postdated checks which it endorsed to Atrium. When the latter presented the crossed checks to the drawee bank, HiCement stopped payment.[27] We held that Atrium was not a holder in due course: In the instant case, the checks were crossed and specifically indorsed for deposit to payees account only. From the beginning, Atrium was aware of the fact that the checks were all for deposit only to payees account, meaning E.T. Henry. Clearly, then, Atrium could not be considered a holder in due course. In the case at bar, respondent's claim that it acted in good faith when it accepted and discounted Hi-Cements postdated crossed checks from E.T. Henry (as payee therein) fails to convince us. Good faith becomes inconsequential amidst proof of respondent's grossly negligent conduct in dealing with the subject checks. Respondent was all too aware that subject checks were crossed and bore restrictions that they were for deposit to payee's account only; hence, they could not be further negotiated to it. The records likewise reveal that respondent completely disregarded a telling sign of irregularity in the re-discounting of the checks when the general manager did not acquiesce to it as only the treasurer's signature appeared on the deed of assignment. As a banking institution, it behooved respondent to act with extraordinary diligence in every transaction.[28] Its business is impressed with public interest, thus, it was not expected to be careless and negligent, specially so where the checks it dealt with were crossed. In Bataan Cigar and Cigarette Factory, Inc., [29] we ruled: It is then settled that crossing of checks should put the holder on inquiry and upon him devolves the duty to ascertain the indorsers title to the check or the nature of his possession. Failing in this respect, the holder is declared guilty of gross negligence amounting to legal absence of good faithand as such[,] the consensus of authority is to the effect that the

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holder of the check is not a holder in due course. (emphasis supplied) The next query is whether Hi-Cement can still be made liable for the checks. We answer in the negative. In State Investment House, Inc. (SIHI) v. Intermediate Appellate Court,[30] SIHI re-discounted crossed checks and was declared not a holder in due course. As a result, when it presented the checks for deposit, we deemed that its presentment to the drawee bank was not proper, hence, the liability did not attach to the drawer of the checks. We ruled that: The three subject checks in the case at bar had been crossedwhich could only mean that the drawer had intended the same for deposit only by the rightful person, i.e., the payee named therein. Apparently, it was not the payee who presented the same for payment and therefore, there was no proper presentment, and the liability did not attach to the drawer. Thus, in the absence of due presentment, the drawer did not become liable. [31] Our resolution in the foregoing case was reiterated in Atrium Management Corporation v. CA,[32] where we affirmed the CA ruling that the drawer of the postdated crossed checks was not liable to the holder who was deemed not a holder in due course. We note, however, that in the two aforementioned cases, we made it clear that the NIL does not absolutely bar a holder who is not a holder in due course from recovering on the checks. In both, we ruled that it may recover from the party who indorsed/encashed the checks if the latter has no valid excuse for refusing payment. Here, there was no doubt that it was E.T. Henry that re-discounted Hi-Cement's checks and received their value from respondent. Since E.T. Henry had no justification to refuse payment, it should pay respondent. SOLIDARY LIABILITY OF HI-CEMENT FOR THE FACE VALUE OF RIVERSIDE'S AND KANEBO'S CHECKS Hi-Cement could not also be made solidarily liable with Riverside and Kanebo for the face value of their checks. HiCement had nothing to do with the checks of these two corporations. However, although the language of the trial court decision's dispositive portion seemed confusing, a

reading of the decision in its entirety reveals that the fallo was for each corporation to be liable solidarily with E.T. Henry and/or the spouses Tan for the respective values of their checks. Furthermore, solidary liability cannot be presumed but must be established by law or contract. Neither is present here. Articles 1207 and 1208 of the Civil Code provide: Art. 1207. The concurrence of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the presentation. There is solidary liability only when the obligation expressly so states, or when the obligation requires solidarity. (emphasis supplied) Art. 1208. If from the law, or the nature of the wording of the obligations to which the preceding article refers to the contrary does not appear, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors or debtors, the credits or debts being considered distinct from one another, subject to the Rules governing the multiplicity of suits. At any rate, the issue has become moot in view of our ruling that Hi-Cement is not liable for the checks. (B) G.R. No. 132419 DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY In their petition, E.T. Henry and the spouses Tan argue that the lower courts erred in applying the piercing the veil of corporate entity doctrine to their case. They claim that both the trial and appellate courts failed to cite the reasons why the doctrine was relevant to them. We agree with petitioners E.T. Henry and the spouses Tan in this respect. If any general rule can be laid down, it is that the corporation will be looked upon as a legal entity until sufficient reasons to the contrary appear. [33] It is only when the fiction or notion of legal entity is used to defeat public convenience, justify wrong, perpetuate fraud or defend crime that the law will shred the corporate legal veil

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and regard it as a mere association of persons.[34] This is referred to as the doctrine of piercing the veil of corporate entity. After a careful study of the records, we hold that E.T. Henry's corporate veil should not have been pierced at all. First, the trial court failed to provide a clear ground why the doctrine was used. It merely stated that it agreed with respondents arguments but did not explain why the doctrine was relevant to petitioner E.T. Henry's and the spouses Tans case. On the other hand, the CA held: It appears that spouses Tan are controlling stockholders of E.T. Henry & Co., Inc. as well as its authorized signatories. The business of the corporation was conducted solely for the benefit of the spouses Tan who colluded with [Hi-Cement] in defrauding [respondent]. As the lower court cited[I]t is a settled law in this and other jurisdictions that when the corporation is a mere alter ego of a person, same being true when the corporation is controlled, and its affairs are so conducted to make it merely an instrumentality, agency or conduit of another.[35] Similarly, the CA left a gaping hole by failing to provide the basis for its ruling that E.T. Henry and the spouses Tan defrauded respondent. It did not also state what act constituted the fraud. Fraud is an allegation of fact that demands clear and convincing evidence.[36] It is never presumed.[37] Second, the mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.[38] For this ground to stand in this case, there must be proof that the spouses Tan: (1) had control or complete domination of E.T. Henrys finances and that the latter had no separate existence with respect to the act complained of; (2) used such control to commit fraud or wrong and (3) the control was the proximate cause of the loss or injury complained of by respondent.[39] The records of this case do not show that these elements were present. INADEQUACY OF THE BID FORECLOSURE PROCEEDING PRICE TO ANNUL

that the mere inadequacy of the price obtained at the [s]heriffs sale, unless shocking to the conscience, (was) not sufficient to set aside the sale if there (was) no showing that, in the event of a regular sale, a better price (could) be obtained.[40] Furthermore, in the absence of any irregularity in the foreclosure proceeding or proof that it was carried out without strict observance of the procedure, we will continue to assume its regularity and strike down any attempt to vitiate it. In this case, E.T. Henry and the spouses Tan made no mention of any anomaly to support the nullification of the foreclosure sale but merely alleged a disparity in the bid price and the propertys fair market value. COUNTERCLAIMS AND CROSS-CLAIMS Lastly, E.T. Henry and the spouses Tan call this Court's attention to the alleged failure of the lower court to pass upon their counterclaim against respondent or cross-claims against Hi-Cement, Riverside and Kanebo. They ask us now to hold these parties liable on the basis of said claims. We decline to do so. First, E.T. Henry and the spouses Tan failed to implead HiCement, Riverside and Kanebo as parties in the case at bar. Under Rule 3 of the Rules of Court, every action, including a counterclaim (or a cross-claim), must be prosecuted or defended in the name of the real party in interest.[41] The term defendant may refer to the original defending party, the defendant in a counterclaim, the cross-defendant or the third (fourth, etc.) party defendant.[42] Hence, for this technical lapse, we are constrained not to pass on E.T. Henry's and the spouses Tan's cross-claims. Second, E.T. Henry and the spouses Tan filed the counterclaim against respondent on the basis of an alleged void foreclosure proceeding on E.T. Henry's Sucat property due to an inadequate bid price. It is no longer necessary to delve into this matter in view of our finding that the mere inadequacy of the bid price on the property did not automatically render the foreclosure sale irregular or void. Incidentally, the petition in G.R. No. 132419 posed no contest on the lower courts ruling on E.T. Henrys and the spouses Tans solidary liability with Riverside and Kanebo vis-a-vis their checks.[43] To be consistent, however, with our dictum on the separate personality of E.T. Henry and the spouses Tan, the solidarity liability arising from the checks

With respect to the allegation that foreclosure was void due to the inadequacy of the bid price, we agree with the CA

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of Riverside and Kanebo shall only be enforced against E.T. Henry. WHEREFORE, the assailed decision of the Court of Appeals in CA-G.R. CV No. 31600 is hereby AFFIRMED with MODIFICATION. Accordingly, petitioner Hi-Cement Corporation is discharged from any liability. Only petitioner E.T. Henry & Co. is ORDERED to pay respondent Insular Bank of Asia and America (later Philippine Commercial International Bank and now Equitable PCI-Bank) the following: 1. P10,000,000 representing the value of HiCement's checks it received from respondent plus accrued interests, charges and penalties until fully paid, and 2. the loans for P1,661,266.51 and P4,900,805 plus accrued interests, charges and penalties until fully paid. Let the records of this case be remanded to the trial court for the proper computation of E.T. Henry's, Riverside's and Kanebo's liabilities for the checks, attorney's fees and costs of litigation. Costs against petitioners E.T. Henry and the spouses Enrique and Lilia Tan. SO ORDERED.
[1] Penned by Justice B.A. Adelfuin-de la Cruz (retired) with the concurrence of Justices Alicia Austria-Martinez (now Supreme Court Justice) and Roberto A. Barrios (deceased), Fifteenth Division of the Court of Appeals. Rollo (G.R. No. 132403), pp. 42-45. [2] The spouses Tan and E.T. Henry are the petitioners in G.R. No. 132419. [3] Hi-Cement is the petitioner in G.R. No. 132403. [4] Respondents Comment, rollo (G.R. No. 132403), p. 74. [5] For the total amount of P10 million. [6] Riverside's check was worth P115,312.50 and Kanebo's 19 checks amounted to P5,811,750. [7] With application for a writ of preliminary attachment. [8] Now Regional Trial Court (RTC). [9] Antonio de las Alas. [10] Lourdes Meer de Leon. [11] The complaint also impleaded Philip Tanchi and Edward Lee as signatories of Riverside and Kanebo. [12] E.T. Henry obtained loans (on separate dates) from respondent. The payment of these loans was secured by two real estate mortgages on E.T. Henry's Sucat, Paraaque property which were enforced by respondent after the latter failed to pay the loans. [13] Under the Negotiable Instruments Law, particularly Section 52 thereof, a holder in due course is a holder who has taken the instrument under the following conditions: (a) it is complete and regular on its face; (b) he became the holder of it before it was overdue, and without notice that it has previously been dishonored, if such was the fact; (c) he took it in good faith and for value and (d) 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. Under Section 191 of the same law, a holder is the payee or indorsee of a bill or a note, or the person who is in possession of either. [14] E.T. Henry filed the counterclaim against respondent to nullify the foreclosure sale and cross-claims against Hi-Cement, Riverside and Kanebo for the value of their dishonored checks. [15] E.T. Henry and spouses Tan claimed that the Sucat property was worth P23 million during the foreclosure sale but was awarded to respondent as the highest bidder for only P10 million. [16] Decided by Judge Jainal D. Rasul. Rollo (G.R. No. 132419), pp. 38-A to 42. [17] Rollo (G.R. No. 132419), p. 42. The trial court previously dropped the charges against de las Alas and de Leon on findings that they merely acted in a representative capacity.

[18] Rollo (G.R. No. 132403), p. 22. [19] Id. (G.R. No. 132419), p. 23. [20] Usero v. CA, G.R. No. 152115, 26 January 2005, 449 SCRA 352. [21] Casol v. Purefoods Corporation, G.R. No. 166550, 22 September 2005, 470 SCRA 585. [22] Supra at note 13. [23] Id. [24] G.R. No. 93048, 3 March 1994, 230 SCRA 643. [25] The full title of the case was Atrium Management Corporation v. CA, E.T. Henry and Co., Lourdes Victoria M. De Leon, Rafael De Leon and Hi-Cement Corporation. G.R. No. 109491, 28 February 2001, 353 SCRA 23, consolidated with G.R. No. 121794, Lourdes de Leon v. CA and HiCement Corporation. [26] Lourdes Meer de Leon. [27] Hi-Cement stopped payment claiming the checks were issued without its authority. In this case, Hi-Cement's treasurer (de Leon) was found to have been negligent when she signed the confirmation letter (deed of assignment) for the re-discounting of the crossed checks issued in favor of E.T. Henry. According to the Court, she was aware that the checks were strictly indorsed for deposit only to the payee's account and not to be further negotiated. [28] Solidbank Corporation v. Spouses Tan, G.R. No. 167346, 2 April 2007. [29] Supra at note 24. [30] G.R. No. 72764, 13 July 1989, 175 SCRA 310. [31] Id., pp. 316-317. [32] Supra at note 25. [33] Francisco v. Mejia, G.R. No. 141617, 14 August 2001, 362 SCRA 738. [34] Id. [35] Supra at note 1. [36] Cathay Pacific Airways, Ltd. v. Sps. Vazquez, 447 Phil. 306 (2003); Maestrado v. CA, 384 Phil. 418 (2000); Loyola v. CA, 383 Phil. 171 (2000). [37] Cathay Pacific Airways, Ltd. v. Sps. Vasquez, supra. [38] Francisco v. Mejia, supra. See also Pabalan v. NLRC, G.R. No. 89879, 20 April 1990, 184 SCRA 495; Traders Royal Bank v. CA, 336 Phil. 15 (1997). [39] Manila Hotel Corp. v. NLRC, 397 Phil. 1 (2000). [40] Supra at note 1. See also Ponce de Leon v. Rehabilitation Finance Corporation, No. L24571, 18 December 1970, 36 SCRA 289. [41] Rule 3, Section 2. See also Tankiko v. Cezar, 362 Phil. 184 (1999). [42] Rule 3, Section 1. [43] Since Riverside and Kanebo did not appeal the trial courts decision, it is deemed final and executory to them.

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FIRST ACCEPTANCE & INVESTMENT CORPORATION VS. DIMAYUGA 11 CAR (2S) 114; 64 O.G. 5975

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SECOND DIVISION G.R. No. 130570 May 19, 1998 SPOUSES GIL AND NOELLI GARDOSE, petitioners, vs. REYNALDO S. TARROZA, respondent. DECISION PUNO, J.: This is a petition for review on certiorari assailing the Decision of the Court of Appeals dated April 29, 1997 and its Resolution dated September 10, 1997 in CA-G.R. CV No. 45046. On September 20, 1989, private respondent filed a complaint for a sum of money with preliminary attachment against the petitioners, spouses Gil and Noelli Gardose, and a certain Cecilia "Baby" Cacnio. The case was docketed as Civil Case No. Q-89-3500 and raffled to Branch 92 of the RTC of Quezon City, presided by then Judge Pacita Canizares-Nye. On February 7, 1990, private respondent was allowed to summon by publication the petitioners who were abroad. On August 28, 1990, the complaint against the petitioners was dismissed for failure of the private respondent to have the summons published in a newspaper of general circulation within a reasonable time, amounting to failure to prosecute. The case against Cacnio was also later dismissed for failure of private respondent to file a pre-trial brief. The orders of dismissal became final and executory. On February 13, 1991, private respondent filed a new complaint for a sum of money against the petitioners. The case was raffled to Branch 78 of the RTC of Quezon City and docketed as Civil Case No. Q-91-7959. The complaint contained the same allegations as the complaint in Civil Case No. Q-89-3500 except that it excluded Baby Cacnio as defendant. On April 25, 1991, petitioners filed their Answer with Counterclaim. They invoked the principle of res judicata. They also alleged that Noelli Gardose issued the checks in question merely to guarantee the loans of Cacnio. Petitioners moved to dismiss the complaint on the ground of res judicata but failed. The case was set for hearing on the merits.

It appears that petitioners' counsel failed to appear in the hearing of March 31, 1992. The trial court allowed private respondent to present his evidence ex-parte but reset the continuation of the case to May 26, 1992 for crossexamination of the witness. The petitioners challenged the action of the trial court via a petition for certiorari but the challenge was dismissed by this Court on April 27, 1992. The May 26, 1992 hearing for cross-examination of witness was reset to September 10, 1992 on motion of the petitioners. Again, petitioners failed to appear on September 10, 1992. The trial court considered petitioners' right of cross-examination waived and allowed private respondent to make a formal offer of his evidence. Still, the case was reset to October 15, 1992 to receive petitioners' evidence. Through a new counsel, petitioners again moved for a reconsideration of the order denying their motion for dismissal on the ground of res judicata. They also insisted that they be allowed to cross-examine the private respondent. In the hearing of October 15, 1992, the trial court denied the reiterated motion to dismiss. It reinstated petitioners' right to cross-examine but their new counsel refused to exercise the right during said hearing. It then ordered petitioners to present their evidence but said counsel sought a resetting of the case as he has yet to familiarize himself with its facts. The trial court ruled that petitioners have waived their right to cross-examine and right to present evidence. The case was deemed submitted for decision. Petitioners' motion for reconsideration was denied on March 15, 1993. They went to the Court of Appeals on certiorari, injunction and prohibition.[1] Their petition was denied on May 31, 1993. On January 11, 1994, the trial court rendered its Decision in favor of the private respondent. It ordered: "WHEREFORE, judgment is rendered ordering defendants to pay plaintiff the following: 1. P70,000.00 plus interest thereon at 12% per annum from the date of the filing of the complaint until fully paid; 2. P50,000.00 plus interest thereon at 12% per annum from the date of the filing of the complaint until fully paid;

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3. P200,000.00 plus interest thereon at 12% per annum from the date of the filing of the complaint until fully paid; 4. 5. P50,000.00 as and for attorney's fees; and Cost of suit."

Philippines, having jurisdiction to pronounce the judgment or order, may be as follows: "xxx xxx xxx "(b) In other cases, the judgment or order is, with respect to the matter directly adjudged or as to any other matter that could have been raised in relation thereto, conclusive between the parties and their successors in interest by title subsequent to the commencement of the action or special proceeding, litigating for the same thing and under the same title and in the same capacity; "(c) In any other litigation between the same parties or their successors in interest, that only is deemed to have been adjudged in a former judgment which appears upon its face to have been so adjudged, or which was actually and necessarily included therein or necessary thereto." The rule in Section 49 (b) is known as "bar by former judgment" while the rule embodied in paragraph (c) of the same section is known as "conclusiveness of judgment". There are four (4) requisites which must concur in order for res judicata as a "bar by former judgment" to attach, viz: (1) the former judgment must be final; (2) it must have been rendered by a court having jurisdiction over the subject matter and the parties; (3) it must be a judgment or order on the merits; and (4) there must be between the first and second action identity of parties, identity of subject matter and identity of causes of action. The Court of Appeals correctly ruled that petitioners cannot rely on the principle of bar by former judgment. Civil Case No. Q-89-3500 was dismissed for the continuing failure of private respondent to effect service of summons by publication on the petitioners. In other words, the dismissal was made before the trial court acquired jurisdiction over the petitioners. In Republic Planters Bank vs. Molina,[4] we held: "xxx xxx xxx "The questioned orders of the trial court in Civil Case No. 129829 supporting private respondent's motion to dismiss on the ground of res judicata are without cogent basis. We sustain petitioner's claim that respondent trial judge acted without or in excess of jurisdiction when he issued said orders because he thereby traversed the constitutional precept that `no person shall be deprived of property

Petitioners again appealed to the Court of Appeals.[2] On April 29, 1997, the appellate court affirmed the decision of the trial court.[3] Petitioners' motion for reconsideration was denied on September 10, 1997. Petitioners now contend:
I The Court of Appeals gravely erred in not holding that the dismissal in the first case for failure to prosecute and for lack of interest had the effect of an adjudication on the merits and operates as res judicata to the second case. II The Court of Appeals gravely erred in not holding that the filing of the second case after dismissal of the first case for failure to prosecute and lack of interest constitutes forum shopping. III The Court of Appeals seriously erred in holding that since petitioners failed to include forum shopping as one of the grounds in their omnibus motion, they cannot now raise the said issue on appeal. IV The Court of Appeals gravely erred in holding that the petitioners were not denied procedural due process and they were not denied of their right to cross-examine private respondent and present their evidence. V The Court of Appeals gravely erred in considering petitioner Noelli Gardose as an accommodation party primarily and unconditionally liable to the private respondent for the three dishonored checks. VI The Court of Appeals gravely erred in awarding 12% interest on petitioners' alleged obligation to the private respondent as well as attorney's fees.

The petition is unmeritorious. Firstly, the principle of res judicata cannot be invoked. The principle is enunciated in Section 49 (b) and (c) of Rule 39, viz: "Sec. 49. Effects of judgments. -- The effect of a judgment or final order rendered by a court or judge of the

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without due process of law' and that jurisdiction is vitally essential for any order or adjudication to be binding. Justice cannot be sacrificed for technicality. Originally, the action for collection of the loan, evidenced by a promissory note, was only for P100,000.00 but petitioner claims that as of March 5, 1981, the obligation was already P429,219.74. It is a cardinal rule that no one must be allowed to enrich himself at the expense of another without just cause. "In the very order of dismissal of Civil Case No. 116028, the trial court admitted that it did not acquire jurisdiction over the persons of private respondents and yet, it held that it was of no moment as to the dismissal of the case. We disagree. For the court to have authority to dispose of the case on the merits, it must acquire jurisdiction over the subject matter and the parties. If it did not acquire jurisdiction over the private respondents as parties to Civil Case No. 116028, it cannot render any binding decision, favorable or adverse to them, or dismiss the case with prejudice which, in effect, is an adjudication on the merits. The controverted orders in Civil Case No. 116028 disregarded the fundamental principles of remedial law and the meaning and the effect of jurisdiction. A judgment, to be considered res judicata, must be binding, and must be rendered by a court of competent jurisdiction. Otherwise, the judgment is a nullity. "The order of dismissal in Civil Case No. 116028 does not have the effect of an adjudication on the merits of the case because the court that rendered the same did not have the requisite jurisdiction over the persons of the defendants therein. This being so, it cannot be the basis of res judicata and it cannot be a bar to a lawful claim. If at all, such a dismissal may be considered as one without prejudice." Secondly, petitioners' charge of forum shopping is baseless. To start with, petitioners did not raise the issue in the trial court. Moreover, Revised Circular No. 28-91, the anti-forum shopping rule, took effect on January 1, 1992, and it initially applied only to the Court of Appeals. Administrative Circular No. 04-94, which extended the application of the rule to trial courts and administrative agencies, took effect only on April 1, 1994. The second case against petitioners, Civil Case No. Q-91-7959, was filed on February 13, 1991 or before the effectivity of the rules on forum shopping on trial courts.

Thirdly, petitioners cannot claim denial of due process. The essence of due process is a fair opportunity to be heard. Petitioners were given all the opportunities to cross-examine the private respondent and to present their evidence. They failed to make use of these opportunities either through negligence or unpreparedness of their counsel. The right of private respondent to speedy justice is just as valuable as the right of petitioners to due process. Fourthly, petitioner Noelli's defense that she was merely an accommodation party was rightly rejected by the Court of Appeals which ruled: "xxx xxx xxx "Appellants persistently insist that when appellant Noelli Gardose issued the three (3) checks to appellee she merely acted as a guarantor and therefore should not be held primarily liable to appellee. "We disagree, the mere fact that appellant Noelli Gardose issued the three (3) checks to appellee make her liable to the latter without the need for the appellee to first go after Cecilia Cacnio because the relationship between an accommodation party and the party accommodated is in effect one of principal and surety (Coneda, Jr. vs. Court of Appeals, 181 SCRA 673; Prudencio vs. Court of Appeals, 143 SCRA 7). In the recent case of Town Savings & Loan Bank, Inc. vs. Court of Appeals, 223 SCRA 459, the Supreme Court held: An accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value therefor and for the purpose of lending his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of the taking of the instrument knew him to be only an accommodation party is in effect a surety for the latter. He lends his name to enable the accommodated party to obtain credit or to raise money. He receives no part of the consideration for the instrument but assumes liability to the other parties thereto because he wants to accommodate another (The Phil. Bank of Commerce vs. Aruego, 102 SCRA 530, 539, 540). "From the foregoing pronouncement of the Supreme Court, it is clear that appellant Noelli Gardose as an accommodation party is primarily and unconditionally liable to appellee for the three (3) checks that were dishonored by

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the drawee bank. Hence, the lower court did not err in ordering appellants to pay appellee the amount of THREE HUNDRED TWENTY THOUSAND P(320,000.00) PESOS with interest at 12% per annum counted from the filing of the complaint. Under Section 151 of the Negotiable Instruments Law, when a bill is dishonored by non-acceptance, an immediate right of recourse against the drawers and indorsers accrues to the holder (Travel On, Inc. vs. Court of Appeals, G.R. No. L-56169, June 26, 1992). The drawer of a negotiable instrument engages that, on due presentment, the instrument will be accepted or paid, or both, and if dishonored, he will pay the amount thereof to the holder. x x x" Lastly, petitioners cannot assert that the award of 12% interest and attorney's fees to private respondent is not justified. The Court of Appeals correctly affirmed the trial court's monetary award to private respondent, viz: "x x x The lower court was likewise correct in ordering appellants to pay interest at the legal rate of 12% per annum counted from the filing of the complaint. This is in accordance with Article 2209 of the Civil Code which provides that if the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, should be the payment of the interest agreed upon, and in the absence of stipulation, the legal rate of interest which is now 12 percent per annum. (National Power Corporation vs. Agnar, G.R. No. 60225-26, May 8, 1992). The trial court was likewise correct in granting attorney's fees in the amount of P50,000.00. As found by the court a quo, appellants acted in gross evident bad faith in refusing to pay appellee's just and demandable claim (Reyes v. Zubirri, 208 SCRA 561; Maersk Line vs. Court of Appeals, 222 SCRA 108)." IN VIEW WHEREOF, the petition is dismissed. Costs against the petitioners. SO ORDERED. Regalado, (Chairman), Melo, Mendoza, and Martinez, JJ., concur.
[1] CA-G.R. SP No. 30871. [2] CA-G.R. CV No. 45046. [3] Penned by Associate Justice Demetrio G. Demetria and concurred in by Associate Justices Jainal D. Rasul and Godardo A. Jacinto.

[4] 166 SCRA 39.

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EN BANC G.R. No. L-19051 April 4, 1923 ASIAN BANKING CORPORATION, plaintiff-appellee, vs. JUAN JAVIER, limited copartnership, defendantappellant.
Jose Valera Calderon for appellant. J. A. Wolfson for appellee.

connection with this assignment of error that the liability of the defendant never arose. Section 89 of the Negotiable Instruments Law (Act No. 2031) provides that, when a negotiable instrument is dishonored for non-acceptance or non-payment, notice thereof must be given to the drawer and each of the indorsers, and those who are not notified shall be discharged from liability, except where this act provides otherwise. According to this, the indorsers are not liable unless they are notified that the document was dishonored. Then, under the general principle of the law of procedure, it will be incumbent upon the plaintiff, who seeks to enforce the defendant's liability upon these checks as indorser, to establish said liability by proving that notice was given to the defendant within the time, and in the manner, required by the law that the checks in question had been dishonored. If these facts are not proven, the plaintiff has not sufficiently established the defendant's liability. There is no proof in the record tending to show that plaintiff gave any notice whatsoever to the defendant that the checks in question had been dishonored, and there it has not established its cause of action. For the foregoing, the judgment appealed from is reversed and the defendant is absolved from the complaint without special pronouncement as to costs. So ordered. Araullo, C. J., Street, Malcolm, and Ostrand., concur. Mr. Justice Johns voted for reversal, but he was absent at the time of the promulgation of the decision and his signature therefore does not appear signed to the opinion of the court. (Sgd.) MANUEL ARAULLO Chief Justice Romualdez, J., took no part

AVANCEA, J.: On May 10, 1920, Salvador B. Chaves drew a check on the Philippine National Bank for P11,000 in favor of La Insular, a concern doing business in this city. This check was indorsed by the limited partners of La Insular, and then deposited by Salvador B. Chaves in his current account with the plaintiff, Asia Banking Corporation. The deposit was made on July 14, 1920. On June 25, 1920, Salvador B. Chaves drew another check for P18,785.30 on the Philippine National Bank, in favor of the aforesaid La Insular. This check was also indorsed by the limited partners of La Insular, and was likewise deposited by Salvador B. Chaves in his current account with the plaintiff, Asia Banking Corporation, on July 6, 1920. The amount represented by both checks was used by Salvador B. Chaves after they were deposited in the plaintiff bank, by drawing checks on the plaintiff. Subsequently these checks were presented by the plaintiff to the Philippine National Bank for payment, but the latter refused to pay on the ground that the drawer, Salvador B. Chaves, had no funds therein. The plaintiff now brings this action against the defendant, as indorser, for the payment of the value of both checks. The lower court sentenced the defendant to pay the plaintiff P11,000, upon the check of May 10, 1920, with interest thereon at 9 per cent per annum from July 10, 1920, and P18,778.34 on the check of June 25, 1920, with interest thereon at 9 per cent per annum from August 5, 1920. From this judgment the defendant appealed. One of the contentions of the appellant in support of this appeal is, that at all events its liability as indorser of the checks in question was extinguished. We may say in

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FIRST DIVISION G.R. No. 101163 January 11, 1993

STATE INVESTMENT HOUSE, INC., petitioner, vs. COURT OF APPEALS and NORA B. MOULIC, respondents.
Escober, Alon & Associates for petitioner. Martin D. Pantaleon for private respondents.

STATE did serve such notice on MOULIC period it would be of no consequence as have been presented for payment. The never effected; the checks, therefore, purpose as security for the jewelry. We are not persuaded.

within the reglementary the checks should never sale of the jewelry was ceased to serve their

BELLOSILLO, J.: The liability to a holder in due course of the drawer of checks issued to another merely as security, and the right of a real estate mortgagee after extrajudicial foreclosure to recover the balance of the obligation, are the issues in this Petition for Review of the Decision of respondent Court of Appeals. Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of jewelry to be sold on commission, two (2) post-dated Equitable Banking Corporation checks in the amount of Fifty Thousand Pesos (P50,000.00) each, one dated 30 August 1979 and the other, 30 September 1979. Thereafter, the payee negotiated the checks to petitioner State Investment House. Inc. (STATE). MOULIC failed to sell the pieces of jewelry, so she returned them to the payee before maturity of the checks. The checks, however, could no longer be retrieved as they had already been negotiated. Consequently, before their maturity dates, MOULIC withdrew her funds from the drawee bank. Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20 December 1979, STATE allegedly notified MOULIC of the dishonor of the checks and requested that it be paid in cash instead, although MOULIC avers that no such notice was given her. On 6 October 1983, STATE sued to recover the value of the checks plus attorney's fees and expenses of litigation. In her Answer, MOULIC contends that she incurred no obligation on the checks because the jewelry was never sold and the checks were negotiated without her knowledge and consent. She also instituted a Third-Party Complaint against Corazon Victoriano, who later assumed full responsibility for the checks. On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party Complaint, and ordered STATE to pay MOULIC P3,000.00 for attorney's fees. STATE elevated the order of dismissal to the Court of Appeals, but the appellate court affirmed the trial court on the ground that the Notice of Dishonor to MOULIC was made beyond the period prescribed by the Negotiable Instruments Law and that even if

The negotiability of the checks is not in dispute. Indubitably, they were negotiable. After all, at the pre-trial, the parties agreed to limit the issue to whether or not STATE was a holder of the checks in due course. 1 In this regard, Sec. 52 of the Negotiable Instruments Law provides Sec. 52. What constitutes a holder in due course. A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it was previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable instrument is a holder in due course. 2 Consequently, the burden of proving that STATE is not a holder in due course lies in the person who disputes the presumption. In this regard, MOULIC failed. The evidence clearly shows that: (a) on their faces the post-dated checks were complete and regular: (b) petitioner bought these checks from the payee, Corazon Victoriano, before their due dates; 3 (c) petitioner took these checks in good faith and for value, albeit at a discounted price; and, (d) petitioner was never informed nor made aware that these checks were merely issued to payee as security and not for value. Consequently, STATE is indeed a holder in due course. As such, it holds the instruments free from any defect of title of prior parties, and from defenses available to prior parties among themselves; STATE may, therefore, enforce full payment of the checks. 4 MOULIC cannot set up against STATE the defense that there was failure or absence of consideration. MOULIC can only invoke this defense against STATE if it was privy to the purpose for which they were issued and therefore is not a holder in due course. That the post-dated checks were merely issued as security is not a ground for the discharge of the instrument as against a holder in due course. For the only grounds are those outlined in Sec. 119 of the Negotiable Instruments Law:

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Sec. 119. Instrument; how discharged. A negotiable instrument is discharged: (a) By payment in due course by or on behalf of the principal debtor; (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other act which will discharge a simple contract for the payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right. Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the discharge of the instrument. But, the intentional cancellation contemplated under paragraph (c) is that cancellation effected by destroying the instrument either by tearing it up, 5 burning it, 6 or writing the word "cancelled" on the instrument. The act of destroying the instrument must also be made by the holder of the instrument intentionally. Since MOULIC failed to get back possession of the post-dated checks, the intentional cancellation of the said checks is altogether impossible. On the other hand, the acts which will discharge a simple contract for the payment of money under paragraph (d) are determined by other existing legislations since Sec. 119 does not specify what these acts are, e.g., Art. 1231 of the Civil Code 7 which enumerates the modes of extinguishing obligations. Again, none of the modes outlined therein is applicable in the instant case as Sec. 119 contemplates of a situation where the holder of the instrument is the creditor while its drawer is the debtor. In the present action, the payee, Corazon Victoriano, was no longer MOULIC's creditor at the time the jewelry was returned. Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the mere expediency of withdrawing her funds from the drawee bank. She is thus liable as she has no legal basis to excuse herself from liability on her checks to a holder in due course. Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment. The need for such notice is not absolute; there are exceptions under Sec. 114 of the Negotiable Instruments Law: Sec. 114. When notice need not be given to drawer. Notice of dishonor is not required to be given to the drawer in the following cases: (a) Where the drawer and the drawee are the same person; (b) When the drawee is a fictitious person or a person not having capacity to contract; (c) When the drawer is the person to whom the instrument is presented for payment: (d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; (e) Where the drawer had countermanded payment. Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks when she returned the jewelry. She simply

withdrew her funds from her drawee bank and transferred them to another to protect herself. After withdrawing her funds, she could not have expected her checks to be honored. In other words, she was responsible for the dishonor of her checks, hence, there was no need to serve her Notice of Dishonor, which is simply bringing to the knowledge of the drawer or indorser of the instrument, either verbally or by writing, the fact that a specified instrument, upon proper proceedings taken, has not been accepted or has not been paid, and that the party notified is expected to pay it. 8 In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating, not hindering or hampering transactions in commercial paper. Thus, the said statute should not be tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a single case. 9 The drawing and negotiation of a check have certain effects aside from the transfer of title or the incurring of liability in regard to the instrument by the transferor. The holder who takes the negotiated paper makes a contract with the parties on the face of the instrument. There is an implied representation that funds or credit are available for the payment of the instrument in the bank upon which it is drawn. 10 Consequently, the withdrawal of the money from the drawee bank to avoid liability on the checks cannot prejudice the rights of holders in due course. In the instant case, such withdrawal renders the drawer, Nora B. Moulic, liable to STATE, a holder in due course of the checks. Under the facts of this case, STATE could not expect payment as MOULIC left no funds with the drawee bank to meet her obligation on the checks, 11 so that Notice of Dishonor would be futile. The Court of Appeals also held that allowing recovery on the checks would constitute unjust enrichment on the part of STATE Investment House, Inc. This is error. The record shows that Mr. Romelito Caoili, an Account Assistant, testified that the obligation of Corazon Victoriano and her husband at the time their property mortgaged to STATE was extrajudicially foreclosed amounted to P1.9 million; the bid price at public auction was only P1 million. 12 Thus, the value of the property foreclosed was not even enough to pay the debt in full. Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of mortgage, the mortgagee is entitled to claim the deficiency from the debtor. 13 The step thus taken by the mortgagee-bank in resorting to an extra-judicial foreclosure was merely to find a proceeding for the sale of the property and its action cannot be taken to mean a waiver of its right to demand payment for the whole debt. 14 For, while Act 3135, as amended, does not discuss the mortgagee's right to recover such deficiency, it does not contain any provision either, expressly or impliedly, prohibiting recovery. In this jurisdiction, when the legislature

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intends to foreclose the right of a creditor to sue for any deficiency resulting from foreclosure of a security given to guarantee an obligation, it so expressly provides. For instance, with respect to pledges, Art. 2115 of the Civil Code 15 does not allow the creditor to recover the deficiency from the sale of the thing pledged. Likewise, in the case of a chattel mortgage, or a thing sold on installment basis, in the event of foreclosure, the vendor "shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary will be void". 16 It is clear then that in the absence of a similar provision in Act No. 3135, as amended, it cannot be concluded that the creditor loses his right recognized by the Rules of Court to take action for the recovery of any unpaid balance on the principal obligation simply because he has chosen to extrajudicially foreclose the real estate mortgage pursuant to a Special Power of Attorney given him by the mortgagor in the contract of mortgage. 17 The filing of the Complaint and the Third-Party Complaint to enforce the checks against MOULIC and the VICTORIANO spouses, respectively, is just another means of recovering the unpaid balance of the debt of the VICTORIANOs. In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in due course, STATE, without prejudice to any action for recompense she may pursue against the VICTORIANOs as Third-Party Defendants who had already been declared as in default. WHEREFORE, the petition is GRANTED. The decision appealed from is REVERSED and a new one entered declaring private respondent NORA B. MOULIC liable to petitioner STATE INVESTMENT HOUSE, INC., for the value of EBC Checks Nos. 30089658 and 30089660 in the total amount of P100,000.00, P3,000.00 as attorney's fees, and the costs of suit, without prejudice to any action for recompense she may pursue against the VICTORIANOs as Third-Party Defendants. Costs against private respondent. SO ORDERED. Cruz and Grio-Aquino, JJ., concur. Padilla, J., took no part.

5 Montgomery v. Schwald, 177 Mo App 75, 166 SW 831; Wilkins v. Shaglund, 127 Neb 589, 256 NW 31. 6 See Henson v. Henson, 268 SW 378. 7 Art. 1231. Obligations are extinguished: (1) By payment or performance; (2) By the loss of the thing due; (3) By the condonation or remission of the debt; (4) By the confusion or merger of the rights of creditor and debtor; (5) By compensation; (6) By novation . . . . . 8 Martin v. Browns, 75 Ala 442. 9 Reinhart v. Lucas, 118 W Va 466, 190 SE 772. 10 11 Am Jur 589. 11 See Agbayani, Commercial Laws of the Philippines, Vol. 1, 1984 Ed., citing Ellenbogen v. State Bank, 197 NY Supp 278. 12 TSN, 25 April 1985, pp. 16-17. 13 Philippine 6 SCRA 1029. Bank of Commerce v. de Vera, No. L-18816, 29 December 1962;

14 Medina v. Philippine National Bank, 56 Phil 651. 15. Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. . . . If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary. 16 Art. 1484 [3] of the Civil Code. 17 See Note 14.

# Footnotes 1 Rollo, pp. 13-14. 2 State Investment House, Inc. v. Court of Appeals, G.R. No. 72764, 13 July 1989; 175 SCRA 310. 3 Per Deeds of Sale of 2 July 1979 and 25 July 1979, respectively; Rollo, p. 13. 4 Salas v. Court of Appeals, G.R. No. 76788, 22 January 1990; 181 SCRA 296.

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EN BANC G.R. No. L-2861 February 26, 1951 ENRIQUE P. MONTINOLA, plaintiff-appellant, vs. THE PHILIPPINE NATIONAL BANK, ET AL., defendantsappellees.
Quijano, Rosete and Lucena for appellant. Second Assistant Corporate Counsel Hilarion U. Jarencio for appellee Philippine National Bank. Office of the Solicitor General Felix Bautista Angelo and Solicitor Augusto M. Luciano for appellee Provincial Treasurer of Misamis Oriental.

MONTEMAYOR, J.: In August, 1947, Enrique P. Montinola filed a complaint in the Court of First Instance of Manila against the Philippine National Bank and the Provincial Treasurer of Misamis Oriental to collect the sum of P100,000, the amount of Check No. 1382 issued on May 2, 1942 by the Provincial Treasurer of Misamis Oriental to Mariano V. Ramos and supposedly indorsed to Montinola. After hearing, the court rendered a decision dismissing the complaint with costs against plaintiff-appellant. Montinola has appealed from that decision directly to this Court inasmuch as the amount in controversy exceeds P50,000. There is no dispute as to the following facts. In April and May, 1942, Ubaldo D. Laya was the Provincial Treasurer of Misamis Oriental. As such Provincial Treasurer he was ex officio agent of the Philippine National Bank branch in the province. Mariano V. Ramos worked under him as assistant agent in the bank branch aforementioned. In April of that year 1942, the currency being used in Mindanao, particularly Misamis Oriental and Lanao which had not yet been occupied by the Japanese invading forces, was the emergency currency which had been issued since January, 1942 by the Mindanao Emergency Currency Board by authority of the late President Quezon. About April 26, 1942, thru the recommendation of Provincial Treasurer Laya, his assistant agent M. V. Ramos was inducted into the United States Armed Forces in the Far East (USAFFE) as disbursing officer of an army division. As such disbursing officer, M. V. Ramos on April 30, 1942, went to the neighboring Province Lanao to procure a cash advance in the amount of P800,000 for the use of the USAFFE in Cagayan de Misamis. Pedro Encarnacion, Provincial Treasurer of Lanao did not have that amount in cash. So, he gave Ramos P300,000 in emergency notes and a check for

P500,000. On May 2, 1942 Ramos went to the office of Provincial Treasurer Laya at Misamis Oriental to encash the check for P500,000 which he had received from the Provincial Treasurer of Lanao. Laya did not have enough cash to cover the check so he gave Ramos P400,000 in emergency notes and a check No. 1382 for P100,000 drawn on the Philippine National Bank. According to Laya he had previously deposited P500,000 emergency notes in the Philippine National Bank branch in Cebu and he expected to have the check issued by him cashed in Cebu against said deposit. Ramos had no opportunity to cash the check because in the evening of the same day the check was issued to him, the Japanese forces entered the capital of Misamis Oriental, and on June 10, 1942, the USAFFE forces to which he was attached surrendered. Ramos was made a prisoner of war until February 12, 1943, after which, he was released and he resumed his status as a civilian. About the last days of December, 1944 or the first days of January, 1945, M. V. Ramos allegedly indorsed this check No. 1382 to Enrique P. Montinola. The circumstances and conditions under which the negotiation or transfer was made are in controversy. According to Montinola's version, sometime in June, 1944, Ramos, needing money with which to buy foodstuffs and medicine, offered to sell him the check; to be sure that it was genuine and negotiable, Montinola, accompanied by his agents and by Ramos himself, went to see President Carmona of the Philippine National Bank in Manila about said check; that after examining it President Carmona told him that it was negotiable but that he should not let the Japanese catch him with it because possession of the same would indicate that he was still waiting for the return of the Americans to the Philippines; that he and Ramos finally agreed to the sale of the check for P850,000 Japanese military notes, payable in installments; that of this amount, P450,000 was paid to Ramos in Japanese military notes in five installments, and the balance of P400,000 was paid in kind, namely, four bottles of sulphatia sole, each bottle containing 1,000 tablets, and each tablet valued at P100; that upon payment of the full price, M. V. Ramos duly indorsed the check to him. This indorsement which now appears on the back of the document is described in detail by trial court as follows:

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The endorsement now appearing at the back of the check (see Exhibit A-1) may be described as follows: The woods, "pay to the order of" in rubber stamp and in violet color are placed about one inch from the top. This is followed by the words "Enrique P. Montinola" in typewriting which is approximately 5/8 an inch below the stamped words "pay to the order of". Below "Enrique P. Montinola", in typewriting are words and figures also in typewriting, "517 Isabel Street" and about /8 of an inch therefrom, the edges of the check appear to have been burned, but there are words stamped apparently in rubber stamp which, according to Montinola, are a facsimile of the signature of Ramos. There is a signature which apparently reads "M. V. Ramos" also in green ink but made in handwriting." To the above description we may add that the name of M. V. Ramos is hand printed in green ink, under the signature. According to Montinola, he asked Ramos to hand print it because Ramos' signature was not clear. Ramos in his turn told the court that the agreement between himself and Montinola regarding the transfer of the check was that he was selling only P30,000 of the check and for this reason, at the back of the document he wrote in longhand the following: Pay to the order of Enrique P. Montinola P30,000 only. The balance to be deposited in the Philippine National Bank to the credit of M. V. Ramos. Ramos further said that in exchange for this assignment of P30,000 Montinola would pay him P90,000 in Japanese military notes but that Montinola gave him only two checks of P20,000 and P25,000, leaving a balance unpaid of P45,000. In this he was corroborated by Atty. Simeon Ramos Jr. who told the court that the agreement between Ramos and Montinola was that the latter, for the sale to him of P30,000 of the check, was to pay Ramos P90,000 in Japanese military notes; that when the first check for P20,000 was issued by Montinola, he (Simeon) prepared a document evidencing said payment of P20,000; that when the second check for P25,000 was issued by Montinola, he (Simeon) prepared another document with two copies, one for Montinola and the other for Ramos, both signed by Montinola and M. V. Ramos, evidencing said payment, with the understanding that the balance of P45,000 would be paid in a few days.

The indorsement or writing described by M. V. Ramos which had been written by him at the back of the check, Exhibit A, does not now appear at the back of said check. What appears thereon is the indosement testified to by Montinola and described by the trial court as reproduced above. Before going into a discussion of the merits of the version given by Ramos and Montinola as to the indorsement or writing at the back of the check, it is well to give a further description of it as we shall later. When Montinola filed his complaint in 1947 he stated therein that the check had been lost, and so in lieu thereof he filed a supposed photostic copy. However, at the trial, he presented the check itself and had its face marked Exhibit A and the back thereof Exhibit A-1. But the check is badly mutilated, bottled, torn and partly burned, and its condition can best be appreciated by seeing it. Roughly, it may be stated that looking at the face of the check (Exhibit A) we see that the left third portion of the paper has been cut off perpendicularly and severed from the remaining 2/3 portion; a triangular portion of the upper right hand corner of said remaining 2/3 portion has been similarly cut off and severed, and to keep and attach this triangular portion and the rectangular /3 portion to the rest of the document, the entire check is pasted on both sides with cellophane; the edges of the severed portions as well as of the remaining major portion, where cut bear traces of burning and searing; there is a big blot with indelible ink about the right middle portion, which seems to have penetrated to the back of the check (Exhibit A-1), which back bears a larger smear right under the blot, but not black and sharp as the blot itself; finally, all this tearing, burning, blotting and smearing and pasting of the check renders it difficult if not impossible to read some of the words and figures on the check. In explanation of the mutilation of the check Montinola told the court that several months after indorsing and delivering the check to him, Ramos demanded the return of the check to him, threatening Montinola with bodily harm, even death by himself or his guerrilla forces if he did not return said check, and that in order to justify the non-delivery of the document and to discourage Ramos from getting it back, he (Montinola) had to resort to the mutilation of the document. As to what was really written at the back of the check which Montinola claims to be a full indorsement of the check, we agree with trial court that the original writing of Ramos on

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the back of the check was to the effect that he was assigning only P30,000 of the value of the document and that he was instructing the bank to deposit to his credit the balance. This writing was in some mysterious way obliterated, and in its place was placed the present indorsement appearing thereon. Said present indorsement occupies a good portion of the back of the check. It has already been described in detail. As to how said present indorsement came to be written, the circumstances surrounding its preparation, the supposed participation of M. V. Ramos in it and the writing originally appearing on the reverse side of the check, Exhibit A-1, we quote with approval what the trial court presided over by Judge Conrado V. Sanchez, in its well-prepared decision, says on these points: The allegedly indorsement: "Pay to the order of Enrique P. Montinola the amount of P30,000 only. The balance to be deposited to the credit of M. V. Ramos", signed by M. V. Ramos-according to the latter-does not now appear at the back of the check. A different indorsement, as aforesaid, now appears. Had Montinola really paid in full the sum of P850,000 in Japanese Military Notes as consideration for the check? The following observations are in point: (a) According to plaintiff's witness Gregorio A. Cortado, the oval line in violet, enclosing "P." of the words "Enrique P. Montinola" and the line in the form of cane handle crossing the word "street" in the words and figures "517 Isabel Street" in the endorsement Exhibit A-1 "unusual" to him, and that as far as he could remember this writing did not appear on the instrument and he had no knowledge as to how it happened to be there. Obviously Cortado had no recollection as to how such marks ever were stamped at the back of the check. (b) Again Cortado, speaking of the endorsement as it now appears at the back of the check (Exh. A-1) stated that Ramos typewrote these words outside of the premises of Montinola, that is, a nearby house. Montinola, on the other hand, testified that Ramos typewrote the words "Enrique P. Montinola 517 Isabel Street", in his own house. Speaking of the rubber stamp used at the back of the check and which produced the words "pay to the order of", Cortado stated that when

he (Cortado), Atadero, Montinola and Ramos returned in group to the house of Montinola, the rubber stamp was already in the house of Montinola, and it was on the table of the upper floor of the house, together with the stamp pad used to stamp the same. Montinola, on the other hand, testified that Ramos carried in his pocket the said rubber stamp as well as the ink pad, and stamped it in his house. The unusually big space occupied by the indorsement on the back of the check and the discrepancies in the versions of Montinola and his witness Cortado just noted, create doubts as to whether or not really Ramos made the indorsement as it now appears at the back of Exhibit A. One thing difficult to understand is why Ramos should go into the laborious task of placing the rubber stamp "Pay to the order of" and afterwards move to the typewriter and write the words "Enrique P. Montinola" "and "517 Isabel Street", and finally sign his name too far below the main indorsement. (c) Another circumstances which bears heavily upon the claim of plaintiff Montinola that he acquired the full value of the check and paid the full consideration therefor is the present condition of said check. It is now so unclean and discolored; it is pasted in cellophane, bottled with ink on both sides torn three parts, and with portions thereof burned-all done by plaintiff, the alleged owner thereof. The acts done by the very plaintiff on a document so important and valuable to him, and which according to him involves his life savings, approximate intentional cancellation. The only reason advanced by plaintiff as to why tore check, burned the torn edges and bottled out the registration at the back, is found in the following: That Ramos came to his house, armed with a revolver, threatened his life and demanded from him the return of the check; that when he informed Ramos that he did not have it in the house, but in some deposit outside thereof and that Ramos promised to return the next day; that the same night he tore the check into three parts, burned the sides with a parrafin candle to show traces of burning; and that upon the return of Ramos the next day he showed the two parts of the check, the triangle on the right upper part and the torn piece on the left part, and upon seeing the condition thereof

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Ramos did not bother to get the check back. He also said that he placed the blots in indelible ink to prevent Ramos if he would be forced to surrender the middle part of the check from seeing that it was registered in the General Auditing Office. Conceding at the moment these facts to be true, the question is: Why should Montinola be afraid of Ramos? Montinola claims that Ramos went there about April, 1945, that is, during liberation. If he believed he was standing by his rights, he could have very well sought police protection or transferred to some place where Ramos could not bother him. And then, really Ramos did not have anything more to do with this check for the reason that Montinola had obtained in full the amount thereof, there could not be any reason why Ramos should have threatened Montinola as stated by the latter. Under the circumstances, the most logical conclusion is that Ramos wanted the check at all costs because Montinola did not acquire the check to such an extent that it borders on intentional cancellation thereof (see Sections 119-123 Negotiable Instruments Law) there is room to believe that Montinola did not have so much investments in that check as to adopted an "what do I care?" attitude. And there is the circumstance of the alleged loss of the check. At the time of the filing of the complaint the check was allegedly lost, so much so that a photostatic copy thereof was merely attached to the complaint (see paragraph 7 of the complaint). Yet, during the trial the original check Exhibit A was produced in court. But a comparison between the photostatic copy and the original check reveals discrepancies between the two. The condition of the check as it was produced is such that it was partially burned, partially blotted, badly mutilated, discolored and pasted with cellophane. What is worse is that Montinola's excuse as to how it was lost, that it was mixed up with household effects is not plausible, considering the fact that it involves his life savings, and that before the alleged loss, he took extreme pains and precautions to save the check from the possible ravages of the war, had it photographed, registered said check with the General Auditing Office and he knew that Ramos, since liberation, was hot after the possession of that check.

(d) It seems that Montinola was not so sure as to what he had testified to in reference to the consideration he paid for the check. In court he testified that he paid P450,000 in cash from June to December 1944, and P400,000 worth of sulphatiazole in January 1945 to complete the alleged consideration of P850,000. When Montinola testified this way in court, obviously he overlooked a letter he wrote to the provincial treasurer of Cagayan, Oriental Misamis, dated May 1, 1947, Exhibit 3 the record. In that letter Exhibit 3, Montinola told Provincial Treasurer Elizalde of Misamis Oriental that "Ramos endorsed it (referring to check) to me for goods in kind, medicine, etc., received by him for the use of the guerrillas." In said letter Exhibit 3, Montinola did not mention the cash that he paid for the check. From the foregoing the court concludes that plaintiff Montinola came into the possession of the check in question about the end of December 1944 by reason of the fact that M. V. Ramos sold to him P30,000 of the face value thereof in consideration of the sum of P90,000 Japanese money, of which only one-half or P45,000 (in Japanese money) was actually paid by said plaintiff to Ramos. (R. on A., pp. 31-33; Brief of Appellee, pp. 14-20.) At the beginning of this decision, we stated that as Provincial Treasurer of Misamis Oriental, Ubaldo D. Laya was ex officio agent of the Philippine National Bank branch in that province. On the face of the check (Exh. A) we now find the words in parenthesis "Agent, Phil. National Bank" under the signature of Laya, purportedly showing that he issued the check as agent of the Philippine National Bank. It this is true, then the bank is not only drawee but also a drawer of the check, and Montinola evidently is trying to hold the Philippine National Bank liable in that capacity of drawer, because as drawee alone, inasmuch as the bank has not yet accepted or certified the check, it may yet avoid payment. Laya, testifying in court, stated that he issued the check only as Provincial Treasurer, and that the words in parenthesis "Agent, Phil. National Bank" now appearing under his signature did not appear on the check when he issued the same. In this he was corroborated by the payee M. V. Ramos who equally assured the court that when he received the check and then delivered it to Montinola, those words did not appear under the signature of Ubaldo D. Laya.

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We again quote with approval the pertinent portion of the trial court's decision: The question is reduced to whether or not the words, "Agent, Phil. National Bank" were added after Laya had issued the check. In a straightforward manner and without vacillation Laya positively testified that the check Exhibit A was issued by him in his capacity as Provincial Treasurer of Misamis Oriental and that the words "Agent, Phil. National Bank" which now appear on the check Exhibit A were not typewritten below his signature when he signed the said check and delivered the same to Ramos. Laya assured the court that there could not be any mistake as to this. For, according to Laya, when he issued check in his capacity as agent of the Misamis Oriental agency of the Philippine National Bank the said check must be countersigned by the cashier of the said agency not by the provincial auditor. He also testified that the said check was issued by him in his capacity as provincial treasurer of Misamis Oriental and that is why the same was countersigned by Provincial Auditor Flores. The Provincial Auditor at that time had no connection in any capacity with the Misamis Oriental agency of the Philippine National Bank. Plaintiff Montinola on the other hand testified that when he received the check Exhibit A it already bore the words "Agent, Phil. National Bank" below the signature of Laya and the printed words "Provincial Treasurer". After considering the testimony of the one and the other, the court finds that the preponderance of the evidence supports Laya's testimony. In the first place, his testimony was corroborated by the payee M. V. Ramos. But what renders more probable the testimony of Laya and Ramos is the fact that the money for which the check was issued was expressly for the use of the USAFFE of which Ramos was then disbursing officer, so much so that upon the delivery of the P400,000 in emergency notes and the P100,000 check to Ramos, Laya credited his depository accounts as provincial treasurer with the corresponding credit entry. In the normal course of events the check could not have been issued by the bank, and this is borne by the fact that the signature of Laya was countersigned by the provincial auditor, not the bank cashier. And then, too there is the circumstance that this check was issued by the provincial treasurer of Lanao to Ramos who

requisitioned the said funds in his capacity as disbursing officer of the USAFFE. The check, Exhibit A is not what we may term in business parlance, "certified check" or "cashier's check." Besides, at the time the check was issued, Laya already knew that Cebu and Manila were already occupied. He could not have therefore issued the check-as a bank employee-payable at the central office of the Philippine National Bank. Upon the foregoing circumstances the court concludes that the words "Agent, Phil. National Bank' below the signature of Ubaldo D. Laya and the printed words "Provincial Treasurer" were added in the check after the same was issued by the Provincial Treasurer of Misamis Oriental. From all the foregoing, we may safely conclude as we do that the words "Agent, Phil. National Bank" now appearing on the face of the check (Exh. A) were added or placed in the instrument after it was issued by Provincial Treasurer Laya to M. V. Ramos. There is no reason known to us why Provincial Treasurer Laya should issue the check (Exh. A) as agent of the Philippine National Bank. Said check for P100,000 was issued to complete the payment of the other check for P500,000 issued by the Provincial Treasurer of Lanao to Ramos, as part of the advance funds for the USAFFE in Cagayan de Misamis. The balance of P400,000 in cash was paid to Ramos by Laya from the funds, not of the bank but of the Provincial Treasury. Said USAFFE were being financed not by the Bank but by the Government and, presumably, one of the reasons for the issuance of the emergency notes in Mindanao was for this purpose. As already stated, according to Provincial Treasurer Laya, upon receiving a relatively considerable amount of these emergency notes for his office, he deposited P500,000 of said currency in the Philippine National Bank branch in Cebu, and that in issuing the check (Exh. A), he expected to have it cashed at said Cebu bank branch against his deposit of P500,000. The logical conclusion, therefore, is that the check was issued by Laya only as Provincial Treasurer and as an official of the Government which was under obligation to provide the USAFFE with advance funds, and not by the Philippine National Bank which has no such obligation. The very Annex C, made part of plaintiff's complaint, and later introduced in

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evidence for him as Exhibit E states that Laya issued the check "in his capacity as Provincial Treasurer of Misamis Oriental", obviously, not as agent of the Bank. Now, did M. V. Ramos add or place those words below the signature of Laya before transferring the check to Montinola? Let us bear in mind that Ramos before his induction into the USAFFE had been working as assistant of Treasurer Laya as ex-officio agent of the Misamis Oriental branch of the Philippine National Bank. Naturally, Ramos must have known the procedure followed there as to the issuance of checks, namely, that when a check is issued by the Provincial Treasurer as such, it is countersigned by the Provincial Auditor as was done on the check (Exhibit A), but that if the Provincial Treasurer issues a check as agent of the Philippine National Bank, the check is countersigned not by the Provincial Auditor who has nothing to do with the bank, but by the bank cashier, which was not done in this case. It is not likely, therefore, that Ramos had made the insertion of the words "Agent, Phil. National Bank" after he received the check, because he should have realized that following the practice already described, the check having been issued by Laya as Provincial Treasurer, and not as agent of the bank, and since the check bears the countersignature not of the Bank cashier of the Provincial Auditor, the addition of the words "Agent, Phil. National Bank" could not change the status and responsibility of the bank. It is therefore more logical to believe and to find that the addition of those words was made after the check had been transferred by Ramos to Montinola. Moreover, there are other facts and circumstances involved in the case which support this view. Referring to the mimeographed record on appeal filed by the plaintiff-appellant, we find that in transcribing and copying the check, particularly the face of it (Exhibit A) in the complaint, the words "Agent, Phil. National Bank" now appearing on the face of the check under the signature of the Provincial Treasurer, is missing. Unless the plaintiff in making this copy or transcription in the complaint committed a serious omission which is decisive as far as the bank is concerned, the inference is, that at the time the complaint was filed, said phrase did not appear on the face of the check. That probably was the reason why the bank in its motion to dismiss dated September 2, 1947, contended that if the check in question had been issued by the provincial treasurer in his capacity as agent of the Philippine National Bank, said treasurer

would have placed below his signature the words "Agent of the Philippine National Bank". The plaintiff because of the alleged loss of the check, allegedly attached to the complaint a photostatic copy of said check and marked it as Annex A. But in transcribing and copying said Annex A in his complaint, the phrase "Agent, Phil. National Bank" does not appear under the signature of the provincial treasurer. We tried to verify this discrepancy by going over the original records of the Court of First Instance so as to compare the copy of Annex A in the complaint, with the original Annex A, the photostatic copy, but said original Annex A appears to be missing from the record. How it disappeared is not explained. Of course, now we have in the list of exhibit a photostatic copy marked Annex A and Exhibit B, but according to the manifestation of counsel for the plaintiff dated October 15, 1948, said photostatic copy now marked Annex A and Exhibit B was submitted on October 15, 1948, in compliance with the verbal order of the trial court. It is therefore evident that the Annex A now available is not the same original Annex A attached to the complaint in 1947. There is one other circumstance, important and worth nothing. If Annex A also marked Exhibit B is the photostatic copy of the original check No. 1382 particularly the face thereof (Exhibit A), then said photostatic copy should be a faithful and accurate reproduction of the check, particularly of the phrase "Agent, Phil. National Bank" now appearing under the signature of the Provincial Treasurer on the face of the original check (Exhibit A). But a minute examination of and comparison between Annex A, the photostatic copy also marked Exhibit B and the face of the check, Exhibit A, especially with the aid of a handlens, show notable differences and discrepancies. For instance, on Exhibit A, the letter A of the word "Agent" is toward the right of the tail of the beginning letter of the signature of Ubaldo D. Laya; this same letter "A" however in Exhibit B is directly under said tail. The letter "N" of the word "National" on Exhibit A is underneath the space between "Provincial" and "Treasurer"; but the same letter "N" is directly under the letter "I" of the word "Provincial" in Exhibit B. The first letter "a" of the word "National" is under "T" of the word "Treasurer" in Exhibit A; but the same letter "a" in Exhibit "B" is just below the space between the words "Provincial" and "Treasurer".

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The letter "k" of the word "Bank" in Exhibit A is after the green perpendicular border line near the lower right hand corner of the edge of the check (Exh. A); this same letter "k" however, on Exhibit B is on the very border line itself or even before said border line. The closing parenthesis ")" on Exhibit A is a little far from the perpendicular green border line and appears to be double instead of one single line; this same ")" on Exhibit B appears in a single line and is relatively nearer to the border line. There are other notable discrepancies between the check Annex A and the photostatic copy, Exhibit B, as regards the relative position of the phrase "Agent, Phil. National Bank", with the title Provincial Treasurer, giving ground to the doubt that Exhibit B is a photostatic copy of the check (Exhibit A). We then have the following facts. Exhibit A was issued by Laya in his capacity as Provincial Treasurer of Misamis Oriental as drawer on the Philippine National Bank as drawee. Ramos sold P30,000 of the check to Enrique P. Montinola for P90,000 Japanese military notes, of which only P45,000 was paid by Montinola. The writing made by Ramos at the back of the check was an instruction to the bank to pay P30,000 to Montinola and to deposit the balance to his (Ramos) credit. This writing was obliterated and in its place we now have the supposed indorsement appearing on the back of the check (Exh. A-1). At the time of the transfer of this check (Exh. A) to Montinola about the last days of December, 1944, or the first days of January, 1945, the check which, being a negotiable instrument, was payable on demand, was long overdue by about 2 years. It may therefore be considered, even then, a stable check. Of course, Montinola claims that about June, 1944 when Ramos supposedly approached him for the purpose of negotiating the check, he (Montinola) consulted President Carmona of the Philippine National Bank who assured him that the check was good and negotiable. However, President Carmona on the witness stand flatly denied Montinola's claim and assured the court that the first time that he saw Montinola was after the Philippine National Bank, of which he was President, reopened, after liberation, around August or September, 1945, and that when shown the check he told Montinola that it was stale. M. V. Ramos also told the court that it is not

true that he ever went with Montinola to see President Carmona about the check in 1944. On the basis of the facts above related there are several reasons why the complaint of Montinola cannot prosper. The insertion of the words "Agent, Phil. National Bank" which converts the bank from a mere drawee to a drawer and therefore changes its liability, constitutes a material alteration of the instrument without the consent of the parties liable thereon, and so discharges the instrument. (Section 124 of the Negotiable Instruments Law). The check was not legally negotiated within the meaning of the Negotiable Instruments Law. Section 32 of the same law provides that "the indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, . . . (as in this case) does not operate as a negotiation of the instrument." Montinola may therefore not be regarded as an indorsee. At most he may be regarded as a mere assignee of the P30,000 sold to him by Ramos, in which case, as such assignee, he is subject to all defenses available to the drawer Provincial Treasurer of Misamis Oriental and against Ramos. Neither can Montinola be considered as a holder in due course because section 52 of said law defines a holder in due course as a holder who has taken the instrument under certain conditions, one of which is that he became the holder before it was overdue. When Montinola received the check, it was long overdue. And, Montinola is not even a holder because section 191 of the same law defines holder as the payee or indorsee of a bill or note and Montinola is not a payee. Neither is he an indorsee for as already stated, at most he can be considered only as assignee. Neither could it be said that he took it in good faith. As already stated, he has not paid the full amount of P90,000 for which Ramos sold him P30,000 of the value of the check. In the second place, as was stated by the trial court in its decision, Montinola speculated on the check and took a chance on its being paid after the war. Montinola must have known that at the time the check was issued in May, 1942, the money circulating in Mindanao and the Visayas was only the emergency notes and that the check was intended to be payable in that currency. Also, he should have known that a check for such a large amount of P100,000 could not have been issued to Ramos in his private capacity but rather in his capacity as disbursing officer of the USAFFE, and that at the time that Ramos sold

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a part of the check to him, Ramos was no longer connected with the USAFFE but already a civilian who needed the money only for himself and his family. As already stated, as a mere assignee Montinola is subject to all the defenses available against assignor Ramos. And, Ramos had he retained the check may not now collect its value because it had been issued to him as disbursing officer. As observed by the trial court, the check was issued to M. V. Ramos not as a person but M. V. Ramos as the disbursing officer of the USAFFE. Therefore, he had no right to indorse it personally to plaintiff. It was negotiated in breach of trust, hence he transferred nothing to the plaintiff. In view of all the foregoing, finding no reversible error in the decision appealed from, the same is hereby affirmed with costs. In the prayer for relief contained at the end of the brief for the Philippine National Bank dated September 27, 1949, we find this prayer: It is also respectfully prayed that this Honorable Court refer the check, Exhibit A, to the City Fiscal's Office for appropriate criminal action against the plaintiffappellant if the facts so warrant. Subsequently, in a petition signed by plaintiff-appellant Enrique P. Montinola dated February 27, 1950, he asked this Court to allow him to withdraw the original check (Exh. A) for him to keep, expressing his willingness to submit it to the court whenever needed for examination and verification. The bank on March 2, 1950 opposed the said petition on the ground that inasmuch as the appellant's cause of action in this case is based on the said check, it is absolutely necessary for the court to examine the original in order to see the actual alterations supposedly made thereon, and that should this Court grant the prayer contained in the bank's brief that the check be later referred to the city fiscal for appropriate action, said check may no longer be available if the appellant is allowed to withdraw said document. In view of said opposition this Court resolution of March 6, 1950, denied said petition for withdrawal. Acting upon the petition contained in the bank's brief already mentioned, once the decision becomes final, let the Clerk of Court transmit to the city fiscal the check (Exh. A) together with all pertinent papers and documents in this case, for any action he may deem proper in the premises.

Moran, C.J., Paras, Feria, Pablo, Bengzon, Padilla, Tuazon, Reyes and Bautista Angelo, JJ., concur.

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FIRST DIVISION G.R. No. 116181 April 17, 1996 PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS and CARMELO H. FLORES, respondents. KAPUNAN, J.: This is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court assailing the decision and resolution of the respondent Court of Appeals in CA-G.R. CV No. 38281 dated 31 January 1994 and 5 July 1994, respectively, which affirmed the decision of the Regional Trial Court in Civil Case No. Q-89-4033 declaring Philippine National Bank liable to Carmelo H. Flores for damages. The facts of the case are as follows: On 11 July 1989, private respondent Carmelo H. Flores (Flores) purchased from petitioner at its Manila Pavilion Hotel unit, two (2) manager's checks worth P500,000.00 each, paying a total of P1,000,040.00, including the service charge. 1 A receipt for said amount was issued by the petitioner. 2 On 12 July 1989, Flores presented these checks at the Baguio Hyatt Casino unit of petitioner. Petitioner refused to encash the checks but after a lengthy discussion, it agreed to encash one (1) of the checks. 3 However, it deferred the payment of the other check until after Flores agreed that it be broken down to five (5) manager's checks of P100,000.00 each. Furthermore, petitioner refused to encash one of the five checks until after it is cleared by the Manila Pavilion Hotel unit. 4 Having no other option, Flores agreed to such an arrangement. However, upon his return to Manila, he made representations to petitioner through its Malate Branch so that the check may be encashed but to no avail. 5 Flores, thereafter, wrote a letter to his counsel informing the latter of the aforementioned events. 6 A Formal Demand was made by private respondent's counsel but petitioner persisted in its refusal to honor the check. 7 Left with no other choice, Flores filed a case with the Regional Trial Court of Quezon City, Branch 100, docketed as Civil Case No. Q-89- 4033. 8

In its Answer with Compulsory Counterclaim, petitioner insisted that only P900,000.00 and P40.00 bank charges were actually paid by Flores when he purchased the two (2) manager's checks worth P1,000,000.00. It alleged that due to Flores' "demanding attitude and temper," petitioner's money counter, Rowena Montes, who, at that time was still new at her job, made an error in good faith in issuing the receipt for P1,000,040.00. 9 The actuations of Flores allegedly distracted the personnel manning the unit. 10 After trial, the court rendered its decision on 5 May 1992, the dispositive portion of which states: WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the defendant Philippine National Bank as follows: a) ordering the defendant to pay plaintiff the sum of P100,000.00 representing the amount of the check dishonored with interest thereon at the legal rate per annum from November 16, 1989 until fully paid; b) ordering defendant to pay plaintiff for embarrassment caused him the amount P1,000,000.00 as moral damages; the of

c) ordering defendant to pay plaintiff the amount of P1,000,000.00 as exemplary damages brought about by the malevolent and malicious acts of the former; d) ordering defendant to pay plaintiff the sum of P50,000.00 as attorney's fees; and e) ordering defendant to pay the costs of the suit. SO ORDERED.
11

Petitioner interposed an appeal with the respondent court, docketed as CA-G.R. CV No. 38281 assigning the following errors, to wit: I THE TRIAL COURT ERRED IN HOLDING ON THE BASIS OF THE RECEIPT MARKED EXH. "A" THAT IN PURCHASING THE TWO MANAGER'S CHECKS ON JULY 11, 1989, APPELLEE FLORES PAID PNB P1,000,000.40 DESPITE (1) THAT THE SAID RECEIPT DOES NOT SHOW, OR AFFORD THE BEST PROOF OF THE CORRECT AMOUNT PAID BY FLORES TO PNB AND (2) THAT AS SHOWN BY PREPONDERANT AND CONCLUSIVE EVIDENCE,

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APPELLEE PAID PNB P900,040 ONLY IN ONE MANAGER'S CHECK AND MONETARY BILLS. II THE TRIAL COURT ERRED IN AWARDING FLORES P1 MILLION MORAL DAMAGES, P1 MILLION EXEMPLARY DAMAGES, AND P500,000 (sic) ATTORNEY'S FEES DESPITE (1) THAT PNB'S REFUSAL TO ENCASH THE P100,000 MANAGER'S CHECK (EXH. "B") WAS JUSTIFIED, AS FLORES WAS NEVER ENTITLED TO THE MONEY; (2) THAT THERE IS ABJECT ABSENCE OF EVIDENCE THAT PNB ACTED FRAUDULENTLY OR MALICIOUSLY, EVEN AS GOOD FAITH IS PRESUMED; AND (3) THAT FLORES' ALLEGED EMBARRASSMENT FOR HIS FAILURE TO PURCHASE A HOUSE AND LOT DUE TO PNB'S REFUSAL TO ENCASH THE WHOLE P1 MILLION 1S UNFOUNDED. 12 On 31 January 1994, the Court of Appeals rendered the questioned decision, the dispositive portion of which reads: WHEREFORE, the appealed decision of the lower court in Civil Case No. Q-89-4033 is hereby AFFIRMED by the Court. Costs against defendant-appellant. SO ORDERED.
13

WHETHER OR NOT THE AWARD FOR P1 MILLION MORAL DAMAGES, P1 MILLION EXEMPLARY DAMAGES, AND P50,000 ATTORNEY'S FEES, AS COMPARED TO THE ACTUAL CLAIM OF P100,000 IS DISPROPORTIONATE AND UNCONSCIONABLE. 15 We shall deal with the first and second issues raised by petitioner together as they are interrelated. Petitioner concedes that it issued the subject receipt for P1,000,040.00 to Flores; yet, in the same breath, it immediately counters that said receipt is not the best evidence to prove how much money Flores actually paid for the purchase of petitioner's manager's checks. Further, petitioner insists that the issue in the instant case is not the contents of the subject receipt but the exact amount of money Flores paid to PNB, an inquiry which, petitioner avers, allows the presentation of evidence aliunde. Petitioner's contentions are unmeritorious. A "receipt" is defined as: A written and signed acknowledgment that money has been paid or goods have been delivered. A receipt is merely presumptive evidence and is not conclusive. A written acknowledgment that money or a thing of value has been received. Since a receipt is a mere acknowledgment of payment, it may be subject to explanation or contradiction. A receipt may be used as evidence against one just as any other declaration or admission. A simple receipt not under seal is presumptive evidence only and may be rebutted or explained by other evidence of mistake in giving it, or of non-payment or of the circumstances under which it was given. 16 (Emphasis ours.) Although a receipt is not conclusive evidence, in the case at bench, an exhaustive review of the records fails to disclose any other evidence sufficient and strong enough to overturn the acknowledgment embodied in petitioner's own receipt (as to the amount of money it actually received). Petitioner contends that it offered in court evidence of the particulars or the actual denominations of the money it received from Flores in exchange for its managerial checks. However, aside from the self-serving testimonies of

A motion for reconsideration was filed but it was likewise denied in a resolution dated 5 July 1994, 14 thus, the present action with petitioner raising the following issues, to wit: I WHETHER OR NOT THE CA ERRED IN LAW IN HOLDING THAT, THE BEST EVIDENCE TO SHOW WHETHER MR. FLORES PAID THE PNB CASINO UNIT P900,040 OR P1,000,040 IN PURCHASING THE TWO MANAGER'S CHECKS EACH WORTH P500,000 IS THE RECEIPT FOR P1,000,040. II WHETHER OR NOT PNB CAN PRESENT COMPETENT AND RELEVANT EVIDENCE TO SUPPORT ITS ALLEGATION IN THE ANSWER THAT MR. FLORES ACTUALLY PAID P900,040 AND NOT P1,000,040 FOR THE SUBJECT MANAGER'S CHECKS. III

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petitioner's witnesses, we fail to discover any such evidence in the records. In the words of the trial court: After having thoroughly evaluated the evidences (sic) on record, the Court finds and so believes that plaintiff indeed paid defendant the amount of P1,000,040.00 when he purchased the two (2) manager's checks worth (sic) P1,000,000.00. This is clearly manifested from the receipt issued by the defendant wherein it explicitly admits that the amount stated therein is what plaintiff actually paid. While the defendant does not dispute the receipt it issued to the plaintiff, it endeavored to prove that the actual amount involved in the entire transaction is only P900,000.00 that is P450,000.00 manager's check and P450,000.00 cash by submitting in evidence, the application forms filled up by the plaintiff, Exhibits "1, 2, 3 and 4". As may be readily seen, these application forms relied upon by the defendant have no probative value for they do not yield any direct proof of payment. Besides defendant even failed to adduce concrete evidence showing that these forms which were crumpled and retrieved from the waste basket were made the basis of the approval of the purchased (sic) made. At any rate, the Court finds such pieces of evidence not only unconvincing but also self-defeating in the light of the receipt, the accuracy, correctness and due execution of which was indubitably established. It is a cardinal rule in the law on evidence that the best proof of payment is the receipt. 17 (Emphasis ours.) In Monfort v. Aguinaldo, 18 the receipts of payment, although not exclusive, were deemed to be the best evidence. Thus: That the best evidence for proving payment is by the evidence of receipts showing the same is also admitted. What respondents claim is that there is no rule which provides that payment can only be proved by receipts. While receipts are deemed to be the best evidence, they are not exclusive. Other evidence may be presented in lieu thereof if they are not available, as in case of loss, destruction or disappearance. The fact of payment may be established not only by documentary evidence, but also by parol evidence (48 C.J. 727; Greenleaf, Law of Evidence, Vol. II, p. 486; Jones on Evidence [1913] Vol. II, p. 193), specially in civil cases where preponderance of evidence is the rule. Here

respondents presented documentary as well as oral evidence which the Court of Appeals found to be sufficient, and this finding is final. In the instant case, petitioner's contention that Flores paid P900,000.00 only instead of P1,000,000.00 (exclusive of bank charges) in the following denominations: a manager's check worth P450,000.00; P430,000.00 in P100.00 bills; and P20,000.00 in P500.00 bills, was based solely on the testimonies of petitioner's bank employees the very ones involved in the fiasco, 19 and not on any other independent evidence. Hence, having failed to adduce sufficient rebuttal evidence, petitioner is bound by the contents of the receipt it issued to Flores. The subject receipt remains to be the primary or best evidence or "that which affords the greatest certainty of the fact in question. 20 On the issue of damages, we concur with the findings of the trial court and the Court of Appeals, respectively: Since there is no doubt as to the fact that the plaintiff purchased from the defendant bank two (2) manager's check worth P500,000.00 each as this was evidenced by an official receipt (Exhibit "A"), then, following the above jurisprudential ruling, the existence of the manager's check (sic) created as (sic) fiduciary relationship between the defendant bank and the plaintiff and therefore any breach thereof must be borne by the negligent party. In this case, the money counter who, among her other duties, is in charge of counting the money received from a client purchasing a manager's check did not perform her duty with diligence and due care. This may be gathered from her testimony that she did not wait for the counting machine to finish counting the money for the plaintiff is a VIP client and he was in a hurry as he was tapping the window (p. 37, T.S.N., August 28, 1990). Equally negligent is Reynaldo Castor for not doing anything when he noticed that their money counters who entertained the plaintiff were rattled. From these unfolded facts, the so-called honest mistake pleaded is therefore misplaced and perforced, defendant must suffer the consequences of its own negligent acts. The records further show that plaintiff is a prominent businessman, licensed and engaged in the real estate business, buying and selling houses and lots under the business name and style CMS Commercial. He is at the

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same time a consultant of Dizon-Esguerra Real Estate Company. Defendant treated him as a valued and VIP client. Because of the bank's refusal to encash the entire one million face amount of his manager's checks, he was so embarrassed for he was not able to purchase a house and lot in Monterroza Subdivision, Baguio City. Significantly, the foregoing undisputed facts made even more untenable defendant's implicit supposition that the subject manager's checks were not intended for the purchase of a house or for any business transaction but for gambling. Finally, since plaintiff was compelled to litigate to protect its interest due to the non-compliance of defendant's obligation, he is therefore entitled to attorney's fees (par. 5, article 2208, Civil Code of the Philippines). 21 xxx xxx xxx Appellee Flores narrated his woes to the lower court when appellant bank refused to honor his Manager's Checks worth P1 Million because of the alleged shortage in appellee's payment to the effect that he had to go back and forth the bank to encash said checks (pp. 1618, t.s.n., July 2, 1990), and that he lost a deal of (sic) a house for sale in Baguio City worth P1 Million as he could not produce said amount withheld by the appellant bank (p. 22, Id.,) Appellee Flores further testified as to the effect of the incident on his integrity as a businessman as follows: Yes, my integrity and dependability as a businessman is highly doubted in Baguio because of the PNB refusal to honor the two (2) manager's checks inspite of them issuing me the receipt. So, whenever I make a deal in house and they would now even doubt whether I have the money to buy the house that I am buying, it greatly affected my integrity as a businessman in Baguio. (p. 25, t.s.n., Id.) In the case of Makabali v. C.A., 157 SCRA 253, the Supreme Court reiterated the doctrine on the grant of moral and exemplary damages, as follows: To begin with, there is no hard and fast rule in the determination of what would be a fair amount of

moral damages, since each case must be governed by its own peculiar circumstances. Article 2217 of the Civil Code recognizes that moral damages which include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation and similar injury, are incapable of pecuniary estimation. As to exemplary damages, Article 2229 of the Civil Code provides that such damages may be imposed by way of example or correction for the public good. While exemplary damages cannot be recovered as a matter of right, they need not be proved, although plaintiff must show that he is entitled to moral, temperate or compensatory damages before the court may consider the question of whether or not exemplary damages should be awarded. 22 However, we give consideration to petitioner's allegation that the award of P1,000,000.00 moral damages and P1,000,000.00 exemplary damages in addition to Flores' actual claim of P100,000.00 is "inordinately disproportionate and unconscionable." 23 Under the circumstances obtaining in the case at bench, we rule that the award of moral and exemplary damages is patently excessive and should be reduced to a reasonable amount. We take into consideration the following factors: First, Flores' contention that he lost the opportunity to purchase a house and lot in Baguio City due to petitioner's gross negligence is based solely on his own testimony and a mere general statement at that. The broker he named during his cross-examination on 10 July 1990, a Mr. Nick Buendia was not even presented to confirm the aforementioned allegation:
xxx xxx xxx Q. You also stated that this amount was intended for the purchase of the real estate property in Baguio, is that right? A. Yes. Q. Can you tell this Honorable Court where is this specific property located in Baguio? A. It is located in Monterosa Subdivision. Q. Can you tell us the number of the street?

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A. It is within the Monterosa. Q. Can you identify the name of the person with whom you transacted? A. Your Honor, I have the papers and during the next hearing I will bring it. ATTY. D. VALDEZ: Is that meant, Your Honor that we are continuing the cross examination on the next hearing considering that he will show a certain document. Q. Can you not reveal to us the name of the person with whom you transacted? A. As I have said I could not be guessing because it was coursed through another broker. And, this broker usually did not tell you who is the owner. Q. What I am asking you is the person whom you transacted and not necessarily the owner? We are supposed to know, Your Honor. COURT: The name of the broker. A. The name of the broker, Your Honor is Nick Buendia. Q. Do you know what subsequently happened if there was anything happened to that property that was being sold? A. It was sold. Q. To someone else? A. Yes. Q. At the time you were purchasing the manager's checks for one (1M) million you intended this as a payment for the property? A. Yes.
24

and scandalously excessive "so as to indicate that it was the result of passion, prejudice or corruption on the part of the trial court" (Gellada v. Warner Barnes & Co., Inc., 57 O.G. [4] 7347, 7358; Sadie v. Bachrach Motors Co., Inc., 57 O.G. [4] 636 and Adone v. Bachrach Motor Co., Inc., 57 O.G. 656). But in more recent cases where the awards of moral and exemplary damages are far too excessive compared to the actual losses sustained by the aggrieved party, this Court ruled that they should be reduced to more reasonable amounts. . . . . (Emphasis ours.) In other words, the moral damages awarded must be commensurate with the loss or injury suffered. Similarly, we have consistently declared that: Moral damages though incapable of pecuniary estimations, are in the category of an award designed to compensate the claimant for actual injury suffered and not to impose a penalty on the wrongdoer (San Andres v. Court of Appeals, 116 SCRA 85 [1982] cited in Prudenciado v. Alliance Transport System, Inc. supra). 26 We, likewise, take this opportunity to stress that: . . . [M]oral damages are emphatically not intended to enrich a complainant at the expense of the defendant. They are awarded only to enable the injured party to obtain means, diversion or amusements that will serve to obviate the moral suffering he has undergone, by reason of the defendant's culpable action. Its award is aimed at the restoration, within the limits of the possible, of the spiritual status quo ante, and it must be proportional to the suffering inflicted. 27 (Emphasis ours.) It is because of the foregoing reasons that we have had to constantly remind the courts to desist from awarding excessive damages disproportionate to the peculiar circumstances of the case. "Judicial discretion granted to the courts in the assessment of damages must always be exercised with balanced restraint and measured objectivity."
28

xxx xxx xxx

Second, the award of moral damages in the amount of P1,000,000.00 is obviously not proportionate to the actual losses of P100,000.00 sustained by Flores. In RCPI v. Rodriguez, 25 we ruled thus: . . . . Nevertheless, we find the award of P100,000.00 as moral damages in favor of respondent Rodriguez excessive and unconscionable. In the case of Prudenciado v. Alliance Transport System, Inc. (148 SCRA 440 [1987]) we said: ". . . [I]t is undisputed that the trial courts are given discretion to determine the amount of moral damages (Alcantara v. Surro, 93 Phil. 472) and that the Court of Appeals can only modify or change the amount awarded when they are palpably

Finally, we find petitioner's act of issuing the manager's checks and corresponding receipt before payment thereof was completely counted reckless and grossly negligent. It is

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an appalling breach of bank procedures and must never be repeated. In Bautista v. Mangaldan Rural Bank, Inc., thus:.
29

In all other respects, the assailed decision is hereby AFFIRMED. SO ORDERED. Padilla, Bellosillo, Vitug and Hermosisima, Jr., JJ., concur.
Footnotes 1 TSN, 2 July 1990, p. 5. 2 Annex "A," Original Records, p. 5. 3 TSN, 2 July 1990, p. 15. 4 Id., at 16. 5 Id., at 18-20. 6 Id., at 21; Annex "D," Original Records, p. 8. 7 Id., at 23. 8 Original Records, pp. 1-4. 9 Id., at 22-30. 10 TSN, 28 August 1990, p. 18. 11 Original Records, pp. 172-175. 12 Rollo, pp. 37-38. 13 CA Decision, Rollo, pp. 35-45. 14 Rollo, p. 47. 15 Memorandum of Petitioner, pp. 6-7. 16 Sibal, Jose Agaton R., Philippine Legal Encyclopedia, 1986, pp. 829-830. 17 Original Records, p. 173. 18 G.R. No. L-4104, 2 May 1952. 19 TSN, 28 August 1990, p. 29; TSN, 13 May 1991, p. 7. 20 Francisco, Ricardo, J., Evidence, Rules of Court in the Philippines, Rules 128-134, 1993 Edition, p. 2. 21 Original Records, pp. 174-75. 22 Rollo, pp. 42-43. 23 Rollo, p. 8. 24 TSN, 10 July 1990, pp. 10-11. 25 182 SCRA 899 (1990); see also De Leon v. CA, 165 SCRA 166 (1988). 26 De Leon v. CA, 165 SCRA 166 (1988). The same rule was reiterated in Simex International (Manila), Inc. v. CA, 183 SCRA 360 (1990) and Bautista v. Mangaldan Rural Bank, Inc., 230 SCRA 16 (1994). 27 Visayan Sawmill Co., Inc. v. CA, 219 SCRA 378 (1993); see also PAL v. CA, 226 SCRA 423 (1993); De Leon v. CA, supra; RCPI v. Rodriguez, supra. 28 Visayan Sawmill Co., Inc. v. CA, supra, citing Inhelder Corp. v. CA, 122 SCRA 576 (1983). 29 230 SCRA 16 (1994). 30 Mecenas v. Court of Appeals, 180 SCRA 83 (1989). 31 Rollo, pp. 44-45.

we stated,

The banking system has become an indispensable institution in the modern world and plays a vital role in the economic life of every civilized society. Whether as mere passive entities for the safe-keeping and saving of money or as active instruments of business and commerce, banks have attained an unbiquitous presence among the people, who have come to regard them with respect and even gratitude and, most of all, confidence. (Simex International [Manila], Inc. vs. Court of Appeals, G.R. No. 88013, March 19, 1990, 183 SCRA 360). However, the award of P1,000,000.00 exemplary damages is also far too excessive and should likewise be reduced to an equitable level. Exemplary damages are imposed not to enrich one party or impoverish another but to serve as a deterrent against or as a negative incentive to curb socially deleterious actions. 30 Therefore, based on the foregoing discussion, the award of moral damages is reduced to P100,000.00 and the exemplary damages is likewise reduced to P25,000.00. We see no reason to disturb the award of attorney's fees in the amount of P50,000.00. We concur with the findings of the Court of Appeals on this matter: As for the award of attorney's fees, We find the same in order considering that "defendant acted in gross and evident bad faith in refusing to satisfy the plaintiffs plainly valid, just and demandable claim" (Art. 2208 [5], New Civil Code), and it is just and equitable to award plaintiff-appellee his attorney's fees (Art. 2208 [11], id.).
31

WHEREFORE, premises considered, the assailed decision is hereby MODIFIED as follows: 1. The award of moral damages P1,000,000.00 to P100,000.00; and is reduced from

2. The award of exemplary damages is reduced from P1,000,000.00 to P25,000.00.

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Republic of the Philippines SUPREME COURT Manila G.R. Nos. L-25836-37 January 31, 1981 THE PHILIPPINE BANK OF COMMERCE, plaintiff-appellee, vs. JOSE M. ARUEGO, defendant-appellant. FERNANDEZ, J.: The defendant, Jose M. Aruego, appealed to the Court of Appeals from the order of the Court of First Instance of Manila, Branch XIII, in Civil Case No. 42066 denying his motion to set aside the order declaring him in default, 1 and from the order of said court in the same case denying his motion to set aside the judgment rendered after he was declared in default. 2 These two appeals of the defendant were docketed as CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R, respectively. Upon motion of the defendant on July 25, 1960, 3 he was allowed by the Court of Appeals to file one consolidated record on appeal of CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R. 4 In a resolution promulgated on March 1, 1966, the Court of Appeals, First Division, certified the consolidated appeal to the Supreme Court on the ground that only questions of law are involved. 5 On December 1, 1959, the Philippine Bank of Commerce instituted against Jose M. Aruego Civil Case No. 42066 for the recovery of the total sum of about P35,000.00 with daily interest thereon from November 17, 1959 until fully paid and commission equivalent to 3/8% for every thirty (30) days or fraction thereof plus attorney's fees equivalent to 10% of the total amount due and costs. 6 The complaint filed by the Philippine Bank of Commerce contains twenty-two (22) causes of action referring to twenty-two (22) transactions entered into by the said Bank and Aruego on different dates covering the period from August 28, 1950 to March 14, 1951. 7 The sum sought to be recovered represents the cost of the printing of "World Current Events," a periodical published by the defendant. To facilitate the payment of the printing the defendant obtained a credit accommodation from the plaintiff. Thus,

for every printing of the "World Current Events," the printer, Encal Press and Photo Engraving, collected the cost of printing by drawing a draft against the plaintiff, said draft being sent later to the defendant for acceptance. As an added security for the payment of the amounts advanced to Encal Press and Photo-Engraving, the plaintiff bank also required defendant Aruego to execute a trust receipt in favor of said bank wherein said defendant undertook to hold in trust for plaintiff the periodicals and to sell the same with the promise to turn over to the plaintiff the proceeds of the sale of said publication to answer for the payment of all obligations arising from the draft. 8 Aruego received a copy of the complaint together with the summons on December 2, 1959. 9 On December 14, 1959 defendant filed an urgent motion for extension of time to plead, and set the hearing on December 16, 1959. 10 At the hearing, the court denied defendant's motion for extension. Whereupon, the defendant filed a motion to dismiss the complaint on December 17, 1959 on the ground that the complaint states no cause of action because: a) When the various bills of exchange were presented to the defendant as drawee for acceptance, the amounts thereof had already been paid by the plaintiff to the drawer (Encal Press and Photo Engraving), without knowledge or consent of the defendant drawee. b) In the case of a bill of exchange, like those involved in the case at bar, the defendant drawee is an accommodating party only for the drawer (Encal Press and Photo-Engraving) and win be liable in the event that the accommodating party (drawer) fails to pay its obligation to the plaintiff. 11 The complaint was dismissed in an order dated December 22, 1959, copy of which was received by the defendant on December 24, 1959. 12 On January 13, 1960, the plaintiff filed a motion for reconsideration. 13 On March 7, 1960, acting upon the motion for reconsideration filed by the plaintiff, the trial court set aside its order dismissing the complaint and set the case for hearing on March 15, 1960 at 8:00 in the morning. 14 A copy of the order setting aside the order of dismissal was received by the defendant on March 11, 1960 at 5:00 o'clock in the afternoon according to the affidavit of the deputy sheriff of Manila, Mamerto de la Cruz. On the following day, March 12, 1960, the defendant filed a motion

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to postpone the trial of the case on the ground that there having been no answer as yet, the issues had not yet been joined. 15 On the same date, the defendant filed his answer to the complaint interposing the following defenses: That he signed the document upon which the plaintiff sues in his capacity as President of the Philippine Education Foundation; that his liability is only secondary; and that he believed that he was signing only as an accommodation party. 16 On March 15, 1960, the plaintiff filed an ex parte motion to declare the defendant in default on the ground that the defendant should have filed his answer on March 11, 1960. He contends that by filing his answer on March 12, 1960, defendant was one day late. 17 On March 19, 1960 the trial court declared the defendant in default. 18 The defendant learned of the order declaring him in default on March 21, 1960. On March 22, 1960 the defendant filed a motion to set aside the order of default alleging that although the order of the court dated March 7, 1960 was received on March 11, 1960 at 5:00 in the afternoon, it could not have been reasonably expected of the defendant to file his answer on the last day of the reglementary period, March 11, 1960, within office hours, especially because the order of the court dated March 7, 1960 was brought to the attention of counsel only in the early hours of March 12, 1960. The defendant also alleged that he has a good and substantial defense. Attached to the motion are the affidavits of deputy sheriff Mamerto de la Cruz that he served the order of the court dated March 7, 1960 on March 11, 1960, at 5:00 o'clock in the afternoon and the affidavit of the defendant Aruego that he has a good and substantial defense. 19 The trial court denied the defendant's motion on March 25, 1960. 20 On May 6, 1960, the trial court rendered judgment sentencing the defendant to pay to the plaintiff the sum of P35,444.35 representing the total amount of his obligation to the said plaintiff under the twenty-two (22) causes of action alleged in the complaint as of November 15, 1957 and the sum of P10,000.00 as attorney's fees. 21 On May 9, 1960 the defendant filed a notice of appeal from the order dated March 25, 1961 denying his motion to set aside the order declaring him in default, an appeal bond in the amount of P60.00, and his record on appeal. The plaintiff filed his opposition to the approval of defendant's record on appeal on May 13, 1960. The following day, May 14, 1960, the lower court dismissed defendant's appeal from the order

dated March 25, 1960 denying his motion to set aside the order of default. 22 On May 19, 1960, the defendant filed a motion for reconsideration of the trial court's order dismissing his appeal. 23 The plaintiff, on May 20, 1960, opposed the defendant's motion for reconsideration of the order dismissing appeal. 24 On May 21, 1960, the trial court reconsidered its previous order dismissing the appeal and approved the defendant's record on appeal. 25 On May 30, 1960, the defendant received a copy of a notice from the Clerk of Court dated May 26, 1960, informing the defendant that the record on appeal filed ed by the defendant was forwarded to the Clerk of Court of Appeals. 26 On June 1, 1960 Aruego filed a motion to set aside the judgment rendered after he was declared in default reiterating the same ground previously advanced by him in his motion for relief from the order of default. 27 Upon opposition of the plaintiff filed on June 3, 1960, 28 the trial court denied the defendant's motion to set aside the judgment by default in an order of June 11, 1960. 29 On June 20, 1960, the defendant filed his notice of appeal from the order of the court denying his motion to set aside the judgment by default, his appeal bond, and his record on appeal. The defendant's record on appeal was approved by the trial court on June 25, 1960. 30 Thus, the defendant had two appeals with the Court of Appeals: (1) Appeal from the order of the lower court denying his motion to set aside the order of default docketed as CA-G.R. NO. 27734-R; (2) Appeal from the order denying his motion to set aside the judgment by default docketed as CA-G.R. NO. 27940-R. In his brief, the defendant-appellant assigned the following errors:
I THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT WAS IN DEFAULT. II THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO DECLARE DEFENDANT IN DEFAULT ALTHOUGH AT THE TIME THERE WAS ALREADY ON FILE AN ANSWER BY HIM WITHOUT FIRST DISPOSING OF SAID ANSWER IN AN APPROPRIATE ACTION. III THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION FOR RELIEF OF ORDER OF DEFAULT AND FROM JUDGMENT BY DEFAULT AGAINST DEFENDANT. 31

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It has been held that to entitle a party to relief from a judgment taken against him through his mistake, inadvertence, surprise or excusable neglect, he must show to the court that he has a meritorious defense. 32 In other words, in order to set aside the order of default, the defendant must not only show that his failure to answer was due to fraud, accident, mistake or excusable negligence but also that he has a meritorious defense. The record discloses that Aruego received a copy of the complaint together with the summons on December 2, 1960; that on December 17, 1960, the last day for filing his answer, Aruego filed a motion to dismiss; that on December 22, 1960 the lower court dismissed the complaint; that on January 23, 1960, the plaintiff filed a motion for reconsideration and on March 7, 1960, acting upon the motion for reconsideration, the trial court issued an order setting aside the order of dismissal; that a copy of the order was received by the defendant on March 11, 1960 at 5:00 o'clock in the afternoon as shown in the affidavit of the deputy sheriff; and that on the following day, March 12, 1960, the defendant filed his answer to the complaint. The failure then of the defendant to file his answer on the last day for pleading is excusable. The order setting aside the dismissal of the complaint was received at 5:00 o'clock in the afternoon. It was therefore impossible for him to have filed his answer on that same day because the courts then held office only up to 5:00 o'clock in the afternoon. Moreover, the defendant immediately filed his answer on the following day. However, while the defendant successfully proved that his failure to answer was due to excusable negligence, he has failed to show that he has a meritorious defense. The defendant does not have a good and substantial defense. Defendant Aruego's defenses consist of the following: a) The defendant signed the bills of exchange referred to in the plaintiff's complaint in a representative capacity, as the then President of the Philippine Education Foundation Company, publisher of "World Current Events and Decision Law Journal," printed by Encal Press and Photo-Engraving, drawer of the said bills of exchange in favor of the plaintiff bank; b) The defendant signed these bills of exchange not as principal obligor, but as accommodation or additional party

obligor, to add to the security of said plaintiff bank. The reason for this statement is that unlike real bills of exchange, where payment of the face value is advanced to the drawer only upon acceptance of the same by the drawee, in the case in question, payment for the supposed bills of exchange were made before acceptance; so that in effect, although these documents are labelled bills of exchange, legally they are not bills of exchange but mere instruments evidencing indebtedness of the drawee who received the face value thereof, with the defendant as only additional security of the same. 33 The first defense of the defendant is that he signed the supposed bills of exchange as an agent of the Philippine Education Foundation Company where he is president. Section 20 of the Negotiable Instruments Law provides that "Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent or as filing a representative character, without disclosing his principal, does not exempt him from personal liability." An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he was signing as a representative of the Philippine Education Foundation Company. 34 He merely signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE ARGUEGO For failure to disclose his principal, Aruego is personally liable for the drafts he accepted. The defendant also contends that he signed the drafts only as an accommodation party and as such, should be made liable only after a showing that the drawer is incapable of paying. This contention is also without merit. An accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value therefor and for the purpose of lending his name to some other person. Such person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of the taking of the instrument knew him to be only an accommodation party. 35 In lending his name to the accommodated party, the accommodation party is in effect a surety for the latter. He lends his name to enable the accommodated party to obtain credit or to raise money. He receives no part of the consideration for the instrument but

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assumes liability to the other parties thereto because he wants to accommodate another. In the instant case, the defendant signed as a drawee/acceptor. Under the Negotiable Instrument Law, a drawee is primarily liable. Thus, if the defendant who is a lawyer, he should not have signed as an acceptor/drawee. In doing so, he became primarily and personally liable for the drafts. The defendant also contends that the drafts signed by him were not really bills of exchange but mere pieces of evidence of indebtedness because payments were made before acceptance. This is also without merit. Under the Negotiable Instruments Law, a bill of exchange is an unconditional order in writting 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. 36 As long as a commercial paper conforms with the definition of a bill of exchange, that paper is considered a bill of exchange. The nature of acceptance is important only in the determination of the kind of liabilities of the parties involved, but not in the determination of whether a commercial paper is a bill of exchange or not. It is evident then that the defendant's appeal can not prosper. To grant the defendant's prayer will result in a new trial which will serve no purpose and will just waste the time of the courts as well as of the parties because the defense is nil or ineffective. 37 WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court of First Instance of Manila denying the petition for relief from the judgment rendered in said case is hereby affirmed, without pronouncement as to costs. SO ORDERED. Teehankee (Chairman), Makasiar, Guerrero and MelencioHerrera JJ., concur.
Footnotes 1 Record on Appeal, p. 323, Rollo, p. 14 for CA-G.R. NO. 27940 docketed as L-25837. 2 Ibid., p. 377. 3 Rollo, p. 5 for CA-G.R. NO. 27940 docketed here as L-25837. 4 Ibid., p. 12. 5 Rollo, pp. 31-36 for CA-G.R. NO. 27754 docketed here as L-25836. The resolution was written by then Presiding Justice Fred Ruiz Castro and concurred in by Justice Carmelino Alvendia and Justice Jesus Y. Peres 6 Record on Appeal p. 1. 7 Ibid., pp. 1-56. 8 Ibid. 9 Ibid., p. 241. 10 Ibid., p. 242. 11 Ibid., pp, 243-245. 12 Ibid., pp. 248-249.

13 Ibid., pp. 249-269. 14 Ibid., pp. 274-275. 15 Ibid., pp. 275-277. 16 Ibid., pp. 302-303. 17 Ibid., pp. 304-307. 18 Ibid., p. 307. 19 Ibid., pp. 308- 314. 20 Ibid., p. 323. 21 Ibid., pp. 327-339. 22 Ibid., pp. 346-347. 23 Ibid., pp. 347-351. 24 Ibid., pp. 352-356. 25 Ibid., p. 357. 26 Ibid., pp. 357-358. 27 Ibid., pp. 358-370, 28 Ibid., pp. 370-377. 29 Ibid., p. 377. 30 Ibid., p. 381. 31 Rollo, p. 19, Brief for the defendant-appellant, pp. 1-2. 32 Bank of Philippine Islands v. de Coster, 47 Phil. 594; The ruling in this case is substantially the same as Section 3, Rule 18 of the New Rules of Court. 33 Record on Appeal, pp. 316-318, Rollo, p. 14. 34 Ibid., pp. 177-240. 35 Section 29, Negotiable Instruments Law. 36 Section 126, Negotiable Instruments Law. 37 Ferrer vs. Yang Sepeng, 60 SCRA 149.

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THIRD DIVISION G.R. No. 74886 December 8, 1992 PRUDENTIAL BANK, petitioner, vs. INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and ANACLETO R. CHI, respondents. DAVIDE, JR., J.: Petitioner seeks to review and set aside the decision 1 of public respondent; Intermediate Appellate Court (now Court of Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which affirmed in toto the 15 June 1978 decision of Branch 9 (Quezon City) of the then Court of First Instance (now Regional Trial Court) of Rizal in Civil Case No. Q-19312. The latter involved an action instituted by the petitioner for the recovery of a sum of money representing the amount paid by it to the Nissho Company Ltd. of Japan for textile machinery imported by the defendant, now private respondent, Philippine Rayon Mills, Inc. (hereinafter Philippine Rayon), represented by co-defendant Anacleto R. Chi. The facts which gave rise to the instant controversy are summarized by the public respondent as follows: On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of Japan for the importation of textile machineries under a fiveyear deferred payment plan (Exhibit B, Plaintiff's Folder of Exhibits, p 2). To effect payment for said machineries, the defendant-appellant applied for a commercial letter of credit with the Prudential Bank and Trust Company in favor of Nissho. By virtue of said application, the Prudential Bank opened Letter of Credit No. DPP-63762 for $128,548.78 (Exhibit A, Ibid., p. 1). Against this letter of credit, drafts were drawn and issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, 66 to 76), which were all paid by the Prudential Bank through its correspondent in Japan, the Bank of Tokyo, Ltd. As indicated on their faces, two of these drafts (Exhibit X and X-1, Ibid., pp. 65-66) were accepted by the defendantappellant through its president, Anacleto R. Chi, while the others were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76). Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to the defendant-appellant which accepted delivery of the same. To enable the

defendant-appellant to take delivery of the machineries, it executed, by prior arrangement with the Prudential Bank, a trust receipt which was signed by Anacleto R. Chi in his capacity as President (sic) of defendant-appellant company (Exhibit C, Ibid., p. 13). At the back of the trust receipt is a printed form to be accomplished by two sureties who, by the very terms and conditions thereof, were to be jointly and severally liable to the Prudential Bank should the defendant-appellant fail to pay the total amount or any portion of the drafts issued by Nissho and paid for by Prudential Bank. The defendantappellant was able to take delivery of the textile machineries and installed the same at its factory site at 69 Obudan Street, Quezon City. Sometime in 1967, the defendant-appellant ceased business operation (sic). On December 29, 1969, defendantappellant's factory was leased by Yupangco Cotton Mills for an annual rental of P200,000.00 (Exhibit I, Ibid., p. 22). The lease was renewed on January 3, 1973 (Exhibit J, Ibid., p. 26). On January 5, 1974, all the textile machineries in the defendant-appellant's factory were sold to AIC Development Corporation for P300,000.00 (Exhibit K, Ibid., p. 29). The obligation of the defendant-appellant arising from the letter of credit and the trust receipt remained unpaid and unliquidated. Repeated formal demands (Exhibits U, V, and W, Ibid., pp. 62, 63, 64) for the payment of the said trust receipt yielded no result Hence, the present action for the collection of the principal amount of P956,384.95 was filed on October 3, 1974 against the defendant-appellant and Anacleto R. Chi. In their respective answers, the defendants interposed identical special defenses, viz., the complaint states no cause of action; if there is, the same has prescribed; and the plaintiff is guilty of laches. 2 On 15 June 1978, the trial court rendered its decision the dispositive portion of which reads: WHEREFORE, judgment is hereby rendered sentencing the defendant Philippine Rayon Mills, Inc. to pay plaintiff the sum of P153,645.22, the amounts due under Exhibits "X" & "X-1", with interest at 6% per annum beginning September 15, 1974 until fully paid. Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11", inclusive, the same not having been accepted by defendant Philippine Rayon Mills, Inc., plaintiff's cause of

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action thereon has not accrued, hence, the instant case is premature. Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed. Plaintiff is ordered to pay defendant Anacleto R. Chi the sum of P20,000.00 as attorney's fees. With costs against defendant Philippine Rayon Mills, Inc. SO ORDERED.
3

Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said court to reverse or modify the decision, petitioner alleged in its Brief that the trial court erred in (a) disregarding its right to reimbursement from the private respondents for the entire unpaid balance of the imported machines, the total amount of which was paid to the Nissho Company Ltd., thereby violating the principle of the third party payor's right to reimbursement provided for in the second paragraph of Article 1236 of the Civil Code and under the rule against unjust enrichment; (b) refusing to hold Anacleto R. Chi, as the responsible officer of defendant corporation, liable under Section 13 of P.D No 115 for the entire unpaid balance of the imported machines covered by the bank's trust receipt (Exhibit "C"); (c) finding that the solidary guaranty clause signed by Anacleto R. Chi is not a guaranty at all; (d) controverting the judicial admissions of Anacleto R. Chi that he is at least a simple guarantor of the said trust receipt obligation; (e) contravening, based on the assumption that Chi is a simple guarantor, Articles 2059, 2060 and 2062 of the Civil Code and the related evidence and jurisprudence which provide that such liability had already attached; (f) contravening the judicial admissions of Philippine Rayon with respect to its liability to pay the petitioner the amounts involved in the drafts (Exhibits "X", "X-l" to "X-11''); and (g) interpreting "sight" drafts as requiring acceptance by Philippine Rayon before the latter could be held liable thereon. 4 In its decision, public respondent sustained the trial court in all respects. As to the first and last assigned errors, it ruled that the provision on unjust enrichment, Article 2142 of the Civil Code, applies only if there is no express contract between the parties and there is a clear showing that the payment is justified. In the instant case, the relationship existing between the petitioner and Philippine Rayon is governed by specific contracts, namely the application for

letters of credit, the promissory note, the drafts and the trust receipt. With respect to the last ten (10) drafts (Exhibits "X-2" to "X-11") which had not been presented to and were not accepted by Philippine Rayon, petitioner was not justified in unilaterally paying the amounts stated therein. The public respondent did not agree with the petitioner's claim that the drafts were sight drafts which did not require presentment for acceptance to Philippine Rayon because paragraph 8 of the trust receipt presupposes prior acceptance of the drafts. Since the ten (10) drafts were not presented and accepted, no valid demand for payment can be made. Public respondent also disagreed with the petitioner's contention that private respondent Chi is solidarily liable with Philippine Rayon pursuant to Section 13 of P.D. No. 115 and based on his signature on the solidary guaranty clause at the dorsal side of the trust receipt. As to the first contention, the public respondent ruled that the civil liability provided for in said Section 13 attaches only after conviction. As to the second, it expressed misgivings as to whether Chi's signature on the trust receipt made the latter automatically liable thereon because the so-called solidary guaranty clause at the dorsal portion of the trust receipt is to be signed not by one (1) person alone, but by two (2) persons; the last sentence of the same is incomplete and unsigned by witnesses; and it is not acknowledged before a notary public. Besides, even granting that it was executed and acknowledged before a notary public, Chi cannot be held liable therefor because the records fail to show that petitioner had either exhausted the properties of Philippine Rayon or had resorted to all legal remedies as required in Article 2058 of the Civil Code. As provided for under Articles 2052 and 2054 of the Civil Code, the obligation of a guarantor is merely accessory and subsidiary, respectively. Chi's liability would therefore arise only when the principal debtor fails to comply with his obligation. 5 Its motion to reconsider the decision having been denied by the public respondent in its Resolution of 11 June 1986, 6 petitioner filed the instant petition on 31 July 1986 submitting the following legal issues:
I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT GRIEVOUSLY ERRED IN DENYING PETITIONER'S CLAIM FOR FULL REIMBURSEMENT AGAINST THE PRIVATE RESPONDENTS FOR THE PAYMENT PETITIONER MADE TO NISSHO CO. LTD. FOR THE BENEFIT OF PRIVATE RESPONDENT

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UNDER ART. 1283 OF THE NEW CIVIL CODE OF THE PHILIPPINES AND UNDER THE GENERAL PRINCIPLE AGAINST UNJUST ENRICHMENT; II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE UNDER THE TRUST RECEIPT (EXH. C); III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS OF RESPONDENT CHI HE IS LIABLE THEREON AND TO WHAT EXTENT; IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE GUARANTOR; AND IF SO; HAS HIS LIABILITY AS SUCH ALREADY ATTACHED; V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE OFFICER OF RESPONDENT PHIL. RAYON RESPONDENT CHI IS PERSONALLY LIABLE PURSUANT TO THE PROVISION OF SECTION 13, P.D. 115; VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE TRUST RECEIPT (EXH. C); VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL ADMISSIONS RESPONDENT PHIL. RAYON IS LIABLE TO THE PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-11) AND TO WHAT EXTENT; VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR ACCEPTANCE FROM RESPONDENT PHIL. RAYON BEFORE THE LATTER BECOMES LIABLE TO PETITIONER. 7

presented for acceptance. In short, both courts concluded that acceptance of the drafts by Philippine Rayon was indispensable to make the latter liable thereon. We are unable to agree with this proposition. The transaction in the case at bar stemmed from Philippine Rayon's application for a commercial letter of credit with the petitioner in the amount of $128,548.78 to cover the former's contract to purchase and import loom and textile machinery from Nissho Company, Ltd. of Japan under a five-year deferred payment plan. Petitioner approved the application. As correctly ruled by the trial court in its Order of 6 March 1975: 9 . . . By virtue of said Application and Agreement for Commercial Letter of Credit, plaintiff bank 10 was under obligation to pay through its correspondent bank in Japan the drafts that Nisso (sic) Company, Ltd., periodically drew against said letter of credit from 1963 to 1968, pursuant to plaintiff's contract with the defendant Philippine Rayon Mills, Inc. In turn, defendant Philippine Rayon Mills, Inc., was obligated to pay plaintiff bank the amounts of the drafts drawn by Nisso (sic) Company, Ltd. against said plaintiff bank together with any accruing commercial charges, interest, etc. pursuant to the terms and conditions stipulated in the Application and Agreement of Commercial Letter of Credit Annex "A". A letter of credit is defined as an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. 11 Through a letter of credit, the bank merely substitutes its own promise to pay for one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. 12 In the instant case then, the drawee was necessarily the herein petitioner. It was to the latter that the drafts were presented for payment. In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). 13 The said section reads: Sec. 143. When presentment for acceptance must be made. Presentment for acceptance must be made:

In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after the filing of the Comment thereto by private respondent Anacleto Chi and of the Reply to the latter by the petitioner; both parties were also required to submit their respective memoranda which they subsequently complied with. As We see it, the issues may be reduced as follows: 1. Whether presentment for acceptance of the drafts was indispensable to make Philippine Rayon liable thereon; 2. Whether Philippine Rayon is liable on the basis of the trust receipt; 3. Whether private respondent Chi is jointly and severally liable with Philippine Rayon for the obligation sought to be enforced and if not, whether he may be considered a guarantor; in the latter situation, whether the case should have been dismissed on the ground of lack of cause of action as there was no prior exhaustion of Philippine Rayon's properties. Both the trial court and the public respondent ruled that Philippine Rayon could be held liable for the two (2) drafts, Exhibits "X" and "X-1", because only these appear to have been accepted by the latter after due presentment. The liability for the remaining ten (10) drafts (Exhibits "X-2" to "X-11" inclusive) did not arise because the same were not

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(a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or (b) Where the bill expressly stipulates that it shall be presented for acceptance; or (c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. In no other case is presentment for acceptance necessary in order to render any party to the bill liable. Obviously then, sight drafts do not require presentment for acceptance. The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer; 14 this may be done in writing by the drawee in the bill itself, or in a separate instrument. 15 The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are sight drafts. Said the latter: . . . In the instant case the drafts being at sight, they are supposed to be payable upon acceptance unless plaintiff bank has given the Philippine Rayon Mills Inc. time within which to pay the same. The first two drafts (Annexes C & D, Exh. X & X-1) were duly accepted as indicated on their face (sic), and upon such acceptance should have been paid forthwith. These two drafts were not paid and although Philippine Rayon Mills ought to have paid the same, the fact remains that until now they are still unpaid. 16 Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7 provides: Sec. 7. When payable on demand. An instrument is payable on demand (a) When so it is expressed to be payable on demand, or at sight, or on presentation; or (b) In which no time for payment in expressed. Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand. (emphasis supplied) Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at maturity of any accepted draft, bill of

exchange or indebtedness shall not be extinguished or modified" 17 does not, contrary to the holding of the public respondent, contemplate prior acceptance by Philippine Rayon, but by the petitioner. Acceptance, however, was not even necessary in the first place because the drafts which were eventually issued were sight drafts And even if these were not sight drafts, thereby necessitating acceptance, it would be the petitioner and not Philippine Rayon which had to accept the same for the latter was not the drawee. Presentment for acceptance is defined an the production of a bill of exchange to a drawee for acceptance. 18 The trial court and the public respondent, therefore, erred in ruling that presentment for acceptance was an indispensable requisite for Philippine Rayon's liability on the drafts to attach. Contrary to both courts' pronouncements, Philippine Rayon immediately became liable thereon upon petitioner's payment thereof. Such is the essence of the letter of credit issued by the petitioner. A different conclusion would violate the principle upon which commercial letters of credit are founded because in such a case, both the beneficiary and the issuer, Nissho Company Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine Rayon even if the latter had already received the imported machinery and the petitioner had fully paid for it. The typical setting and purpose of a letter of credit are described in Hibernia Bank and Trust Co. vs. J. Aron & Co., Inc., 19 thus: Commercial letters of credit have come into general use in international sales transactions where much time necessarily elapses between the sale and the receipt by a purchaser of the merchandise, during which interval great price changes may occur. Buyers and sellers struggle for the advantage of position. The seller is desirous of being paid as surely and as soon as possible, realizing that the vendee at a distant point has it in his power to reject on trivial grounds merchandise on arrival, and cause considerable hardship to the shipper. Letters of credit meet this condition by affording celerity and certainty of payment. Their purpose is to insure to a seller payment of a definite amount upon presentation of documents. The bank deals only with documents. It has nothing to do with the quality of the merchandise. Disputes as to the merchandise shipped may arise and be litigated later between vendor and vendee, but they may not impede acceptance of drafts and payment by the issuing bank when the proper documents are presented.

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The trial court and the public respondent likewise erred in disregarding the trust receipt and in not holding that Philippine Rayon was liable thereon. In People vs. Yu Chai Ho, 20 this Court explains the nature of a trust receipt by quoting In re Dunlap Carpet Co., 21 thus: By this arrangement a banker advances money to an intending importer, and thereby lends the aid of capital, of credit, or of business facilities and agencies abroad, to the enterprise of foreign commerce. Much of this trade could hardly be carried on by any other means, and therefore it is of the first importance that the fundamental factor in the transaction, the banker's advance of money and credit, should receive the amplest protection. Accordingly, in order to secure that the banker shall be repaid at the critical point that is, when the imported goods finally reach the hands of the intended vendee the banker takes the full title to the goods at the very beginning; he takes it as soon as the goods are bought and settled for by his payments or acceptances in the foreign country, and he continues to hold that title as his indispensable security until the goods are sold in the United States and the vendee is called upon to pay for them. This security is not an ordinary pledge by the importer to the banker, for the importer has never owned the goods, and moreover he is not able to deliver the possession; but the security is the complete title vested originally in the bankers, and this characteristic of the transaction has again and again been recognized and protected by the courts. Of course, the title is at bottom a security title, as it has sometimes been called, and the banker is always under the obligation to reconvey; but only after his advances have been fully repaid and after the importer has fulfilled the other terms of the contract. As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 22 trust receipts: . . . [I]n a certain manner, . . . partake of the nature of a conditional sale as provided by the Chattel Mortgage Law, that is, the importer becomes absolute owner of the imported merchandise as soon an he has paid its price. The ownership of the merchandise continues to be vested in the owner thereof or in the person who has advanced payment, until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest.

Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on 29 January 1973, a trust receipt transaction is defined as "any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as the entrustee, whereby the entruster, who owns or holds absolute title or security interests' over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called the "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trusts receipt, or for other purposes substantially equivalent to any one of the following: . . ." It is alleged in the complaint that private respondents "not only have presumably put said machinery to good use and have profited by its operation and/or disposition but very recent information that (sic) reached plaintiff bank that defendants already sold the machinery covered by the trust receipt to Yupangco Cotton Mills," and that "as trustees of the property covered by the trust receipt, . . . and therefore acting in fiduciary (sic) capacity, defendants have willfully violated their duty to account for the whereabouts of the machinery covered by the trust receipt or for the proceeds of any lease, sale or other disposition of the same that they may have made, notwithstanding demands therefor; defendants have fraudulently misapplied or converted to their own use any money realized from the lease, sale, and other disposition of said machinery." 23 While there is no specific prayer for the delivery to the petitioner by Philippine Rayon of the proceeds of the sale of the machinery covered by the trust receipt, such relief is covered by the general prayer for "such further and other relief as may be just and equitable on the premises." 24 And although it is true that the petitioner commenced a criminal action for the violation of the Trust Receipts Law, no legal obstacle prevented it from enforcing the civil liability arising out of the trust, receipt in a separate civil action. Under Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over

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the proceeds of the sale of goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appear in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article 315, paragraph 1(b) of the Revised Penal Code. 25 Under Article 33 of the Civil Code, a civil action for damages, entirely separate and distinct from the criminal action, may be brought by the injured party in cases of defamation, fraud and physical injuries. Estafa falls under fraud. We also conclude, for the reason hereinafter discussed, and not for that adduced by the public respondent, that private respondent Chi's signature in the dorsal portion of the trust receipt did not bind him solidarily with Philippine Rayon. The statement at the dorsal portion of the said trust receipt, which petitioner describes as a "solidary guaranty clause", reads: In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying with the foregoing, we jointly and severally agree and undertake to pay on demand to the PRUDENTIAL BANK AND TRUST COMPANY all sums of money which the said PRUDENTIAL BANK AND TRUST COMPANY may call upon us to pay arising out of or pertaining to, and/or in any event connected with the default of and/or non-fulfillment in any respect of the undertaking of the aforesaid: PHILIPPINE RAYON MILLS, INC. We further agree that the PRUDENTIAL BANK AND TRUST COMPANY does not have to take any steps or exhaust its remedy against aforesaid: before making demand on me/us. (Sgd.) Anacleto R. Chi ANACLETO R. CHI 26 Petitioner insists that by virtue of the clear wording of the statement, specifically the clause ". . . we jointly and severally agree and undertake . . .," and the concluding sentence on exhaustion, Chi's liability therein is solidary. In holding otherwise, the public respondent ratiocinates as follows:

With respect to the second argument, we have our misgivings as to whether the mere signature of defendantappellee Chi of (sic) the guaranty agreement, Exhibit "C-1", will make it an actionable document. It should be noted that Exhibit "C-1" was prepared and printed by the plaintiffappellant. A perusal of Exhibit "C-1" shows that it was to be signed and executed by two persons. It was signed only by defendant-appellee Chi. Exhibit "C-1" was to be witnessed by two persons, but no one signed in that capacity. The last sentence of the guaranty clause is incomplete. Furthermore, the plaintiff-appellant also failed to have the purported guarantee clause acknowledged before a notary public. All these show that the alleged guaranty provision was disregarded and, therefore, not consummated. But granting arguendo that the guaranty provision in Exhibit "C-1" was fully executed and acknowledged still defendantappellee Chi cannot be held liable thereunder because the records show that the plaintiff-appellant had neither exhausted the property of the defendant-appellant nor had it resorted to all legal remedies against the said defendantappellant as provided in Article 2058 of the Civil Code. The obligation of a guarantor is merely accessory under Article 2052 of the Civil Code and subsidiary under Article 2054 of the Civil Code. Therefore, the liability of the defendantappellee arises only when the principal debtor fails to comply with his obligation. 27 Our own reading of the questioned solidary guaranty clause yields no other conclusion than that the obligation of Chi is only that of a guarantor. This is further bolstered by the last sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case because the space therein for the party whose property may not be exhausted was not filled up. Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor before he may be held liable for the obligation. Petitioner likewise admits that the questioned provision is a solidary guaranty clause, thereby clearly distinguishing it from a contract of surety. It, however, described the guaranty as solidary between the guarantors; this would have been correct if two (2) guarantors had signed it. The clause "we jointly and severally agree and undertake" refers to the undertaking of the two (2) parties who are to sign it or to the liability existing between themselves. It does not refer to the undertaking between either one or both of them on the one hand and the petitioner on the other with respect

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to the liability described under the trust receipt. Elsewise stated, their liability is not divisible as between them, i.e., it can be enforced to its full extent against any one of them. Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause should be resolved against the petitioner. The trust receipt, together with the questioned solidary guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi's participation therein is limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion; 28 as such, it must be strictly construed against the party responsible for its preparation.
29

liability presupposes prior conviction as can be gleaned from the phrase "without prejudice to the civil liability arising from the criminal offense." Both are wrong. The said section reads: Sec. 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. A close examination of the quoted provision reveals that it is the last sentence which provides for the correct solution. It is clear that if the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense. The penalty referred to is imprisonment, the duration of which would depend on the amount of the fraud as provided for in Article 315 of the Revised Penal Code. The reason for this is obvious: corporations, partnerships, associations and other juridical entities cannot be put in jail. However, it is these entities which are made liable for the civil liability arising from the criminal offense. This is the import of the clause "without prejudice to the civil liabilities arising from the criminal offense." And, as We stated earlier, since that violation of a trust receipt constitutes fraud under Article 33 of the Civil Code, petitioner was acting well within its rights in filing an independent civil action to enforce the civil liability arising therefrom against Philippine Rayon. The remaining issue to be resolved concerns the propriety of the dismissal of the case against private respondent Chi. The trial court based the dismissal, and the respondent

Neither can We agree with the reasoning of the public respondent that this solidary guaranty clause was effectively disregarded simply because it was not signed and witnessed by two (2) persons and acknowledged before a notary public. While indeed, the clause ought to have been signed by two (2) guarantors, the fact that it was only Chi who signed the same did not make his act an idle ceremony or render the clause totally meaningless. By his signing, Chi became the sole guarantor. The attestation by witnesses and the acknowledgement before a notary public are not required by law to make a party liable on the instrument. The rule is that contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present; however, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that it be proved in a certain way, that requirement is absolute and indispensable. 30 With respect to a guaranty, 31 which is a promise to answer for the debt or default of another, the law merely requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be unenforceable unless ratified. 32 While the acknowledgement of a surety before a notary public is required to make the same a public document, under Article 1358 of the Civil Code, a contract of guaranty does not have to appear in a public document. And now to the other ground relied upon by the petitioner as basis for the solidary liability of Chi, namely the criminal proceedings against the latter for the violation of P.D. No. 115. Petitioner claims that because of the said criminal proceedings, Chi would be answerable for the civil liability arising therefrom pursuant to Section 13 of P.D. No. 115. Public respondent rejected this claim because such civil

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Court its affirmance thereof, on the theory that Chi is not liable on the trust receipt in any capacity either as surety or as guarantor because his signature at the dorsal portion thereof was useless; and even if he could be bound by such signature as a simple guarantor, he cannot, pursuant to Article 2058 of the Civil Code, be compelled to pay until after petitioner has exhausted and resorted to all legal remedies against the principal debtor, Philippine Rayon. The records fail to show that petitioner had done so 33 Reliance is thus placed on Article 2058 of the Civil Code which provides: Art. 2056. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor. Simply stated, there is as yet no cause of action against Chi. We are not persuaded. Excussion is not a condition sine qua non for the institution of an action against a guarantor. In Southern Motors, Inc. vs. Barbosa, 34 this Court stated: 4. Although an ordinary personal guarantor not a mortgagor or pledgor may demand the aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said guarantor, who shall be entitled, however, to a deferment of the execution of said judgment against him until after the properties of the principal debtor shall have been exhausted to satisfy the obligation involved in the case. There was then nothing procedurally objectionable in impleading private respondent Chi as a co-defendant in Civil Case No. Q-19312 before the trial court. As a matter of fact, Section 6, Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows it. It reads: Sec. 6. Permissive joinder of parties. All persons in whom or against whom any right to relief in respect to or arising out of the same transaction or series of transactions is alleged to exist, whether jointly, severally, or in the alternative, may, except as otherwise provided in these rules, join as plaintiffs or be joined as defendants in one complaint, where any question of law or fact common to all such plaintiffs or to all such defendants may arise in the action; but the court may make such orders as may be just to prevent any plaintiff or defendant from being

embarrassed or put to expense in connection with any proceedings in which he may have no interest. This is the equity rule relating to multifariousness. It is based on trial convenience and is designed to permit the joinder of plaintiffs or defendants whenever there is a common question of law or fact. It will save the parties unnecessary work, trouble and expense. 35 However, Chi's liability is limited to the principal obligation in the trust receipt plus all the accessories thereof including judicial costs; with respect to the latter, he shall only be liable for those costs incurred after being judicially required to pay. 36 Interest and damages, being accessories of the principal obligation, should also be paid; these, however, shall run only from the date of the filing of the complaint. Attorney's fees may even be allowed in appropriate cases. 37 In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to be paid by Philippine Rayon since it is only the trust receipt that is covered by the guaranty and not the full extent of the latter's liability. All things considered, he can be held liable for the sum of P10,000.00 as attorney's fees in favor of the petitioner. Thus, the trial court committed grave abuse of discretion in dismissing the complaint as against private respondent Chi and condemning petitioner to pay him P20,000.00 as attorney's fees. In the light of the foregoing, it would no longer necessary to discuss the other issues raised by the petitioner WHEREFORE, the instant Petition is hereby GRANTED. The appealed Decision of 10 March 1986 of the public respondent in AC-G.R. CV No. 66733 and, necessarily, that of Branch 9 (Quezon City) of the then Court of First Instance of Rizal in Civil Case No. Q-19312 are hereby REVERSED and SET ASIDE and another is hereby entered: 1. Declaring private respondent Philippine Rayon Mills, Inc. liable on the twelve drafts in question (Exhibits "X", "X-1" to "X-11", inclusive) and on the trust receipt (Exhibit "C"), and ordering it to pay petitioner: (a) the amounts due thereon in the total sum of P956,384.95 as of 15 September 1974, with interest thereon at six percent (6%) per annum from 16 September 1974 until it is fully paid, less whatever may have been applied thereto by virtue of foreclosure of

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mortgages, if any; (b) a sum equal to ten percent (10%) of the aforesaid amount as attorney's fees; and (c) the costs. 2. Declaring private respondent Anacleto R. Chi secondarily liable on the trust receipt and ordering him to pay the face value thereof, with interest at the legal rate, commencing from the date of the filing of the complaint in Civil Case No. Q-19312 until the same is fully paid as well as the costs and attorney's fees in the sum of P10,000.00 if the writ of execution for the enforcement of the above awards against Philippine Rayon Mills, Inc. is returned unsatisfied. Costs against private respondents. SO ORDERED. Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.
Footnotes 1 Rollo, 39-47; per Associate Justice Crisolito Pascual, concurred in by Associate Justices Jose C. Campos, Jr. and Serafin E. Camilon. 2 Rollo, 39-41. 3 Rollo, 81-83. 4 Brief for Appellant, 1-4; Rollo, 85, et seq. 5 Rollo, 45-46. 6 Id., 48. 7 Rollo, 16. 8 Id., 131. 9 Record on Appeal, 123. 10 Herein petitioner. 11 Black's Law Dictionary, Fifth ed., 813; DAVIDSON, KNOWLES, FORSYTHE AND JESPERSEN Business Law, Principles, and Cases, 1984 ed., 390. 12 ROSE, Money and Capital Markets, 1983 ed., 692. 13 Act No. 2031. 14 Section 132, NIL. 15 Sections 133 and 134, Id. 16 Rollo, 66. 17 Id., 17. 18 AGBAYANI, A.F., Commercial Laws of the Philippines, 1987 ed., vol. 1, 409, citing Windham Bank vs. Norton, 22 Conn. 213, 56 Am. Dec. 397, 19 134 Misc. 18, 21-22, 233 N.Y.S. 486, 490-491, cited in Johnston vs. State Bank, 195 N.W. 2d 126, 130-131 (Iowa 1972), and excerpted in CORMAN, Commercial Law, Cases and Materials, 1976 ed., 622. 20 53 Phil. 874, 876-877 [1928]; see also, Samo vs. People, 115 Phil. 346 [1962]. 21 206 Fed., 126. 22 63 Phil. 814, 82l [1936]. 23 Record on Appeal, 6-7. 24 Id., 9. 25 Even before P.D. No. 115, these acts covered by Section 13 were already considered as estafa; see People vs. Yu Chai Ho. supra.; Samo vs. People, supra.; Robles vs. Court of Appeals, 199 SCRA 195 [1991]. 26 Record on Appeal, 43. 27 Rollo, 45-46. 28 Sweet Lines, Inc. vs. Teves, 83 SCRA 361 [1978]; Angeles vs. Calasanz, 135 SCRA 323 [1985]. 29 Western Guaranty Corp. vs Court of Appeals, 187 SCRA 652 [1990]; BPI Credit Corp. vs. Court of Appeals, 204 SCRA 601, [1991]. 30 Article 1356, Civil Code. 31 Article 2047 of the Civil Code defines it as follows "By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so." 32 Article 1403 (2) (b), Civil Code. 33 Rollo, 75, 34 99 Phil. 263, 268 [1956]. 35 FRANCISCO, V.J., The Revised Rules of Court, vol. I, 1973 ed., 258. 36 Second paragraph, (Article 2055, Civil Code; see National Marketing Corp. vs. Marquez, 26 SCRA 722 [1969]; Republic vs. Pal-Fox Lumber Co., Inc., 43 SCRA 365 [1972]. 37 Plaridel Surety & Insurance Co., Inc. vs. P.L. Galang. Machinery Co., Inc., 100 Phil. 679 [1957]; Philippine National Bank vs. Luzon Surety Co., Inc., 68 SCRA 207. [1975].

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SECOND DIVISION G.R. No. 96452 May 7, 1992 PERLA COMPANIA DE SEGUROS, INC. petitioner, vs. THE COURT OF APPEALS, HERMINIO LIM and EVELYN LIM, respondents. G.R. No. 96493 May 7, 1992 FCP CREDIT CORPORATION, petitioner, vs. THE COURT OF APPEALS, Special Third Division, HERMINIO LIM and EVELYN LIM, respondents.
Yolanda Quisumbing-Javellana and Nelson A. Loyola for petitioner. Wilson L. Tee for respondents Herminio and Evelyn Lim.

On December 24, 1981, private respondents spouses Herminio and Evelyn Lim executed a promissory note in favor Supercars, Inc. in the sum of P77,940.00, payable in monthly installments according to the schedule of payment indicated in said note, 3 and secured by a chattel mortgage over a brand new red Ford Laser 1300 5DR Hatchback 1981 model with motor and serial No. SUPJYK-03780, which is registered under the name of private respondent Herminio Lim 4 and insured with the petitioner Perla Compania de Seguros, Inc. (Perla for brevity) for comprehensive coverage under Policy No. PC/41PP-QCB-43383. 5 On the same date, Supercars, Inc., with notice to private respondents spouses, assigned to petitioner FCP Credit Corporation (FCP for brevity) its rights, title and interest on said promissory note and chattel mortgage as shown by the Deed of Assignment. 6 At around 2:30 P.M. of November 9, 1982, said vehicle was carnapped while parked at the back of Broadway Centrum along N. Domingo Street, Quezon City. Private respondent Evelyn Lim, who was driving said car before it was carnapped, immediately called up the Anti-Carnapping Unit of the Philippine Constabulary to report said incident and thereafter, went to the nearest police substation at Araneta, Cubao to make a police report regarding said incident, as shown by the certification issued by the Quezon City police.
7

NOCON, J.: These are two petitions for review on certiorari, one filed by Perla Compania de Seguros, Inc. in G.R. No. 96452, and the other by FCP Credit Corporation in G.R. No. 96493, both seeking to annul and set aside the decision dated July 30, 1990 1 of the Court of Appeals in CA-G.R. No. 13037, which reversed the decision of the Regional Trial Court of Manila, Branch VIII in Civil Case No. 83-19098 for replevin and damages. The dispositive portion of the decision of the Court of Appeals reads, as follows: WHEREFORE, the decision appealed from is reversed; and appellee Perla Compania de Seguros, Inc. is ordered to indemnify appellants Herminio and Evelyn Lim for the loss of their insured vehicle; while said appellants are ordered to pay appellee FCP Credit Corporation all the unpaid installments that were due and payable before the date said vehicle was carnapped; and appellee Perla Compania de Seguros, Inc. is also ordered to pay appellants moral damages of P12,000.00 for the latter's mental sufferings, exemplary damages of P20,000.00 for appellee Perla Compania de Seguros, Inc.'s unreasonable refusal on sham grounds to honor the just insurance claim of appellants by way of example and correction for public good, and attorney's fees of P10,000.00 as a just and equitable reimbursement for the expenses incurred therefor by appellants, and the costs of suit both in the lower court and in this appeal. 2 The facts as found by the trial court are as follows:

On November 10, 1982, private respondent Evelyn Lim reported said incident to the Land Transportation Commission in Quezon City, as shown by the letter of her counsel to said office, 8 in compliance with the insurance requirement. She also filed a complaint with the Headquarters, Constabulary Highway Patrol Group. 9 On November 11, 1982, private respondent filed a claim for loss with the petitioner Perla but said claim was denied on November 18, 1982 10 on the ground that Evelyn Lim, who was using the vehicle before it was carnapped, was in possession of an expired driver's license at the time of the loss of said vehicle which is in violation of the authorized driver clause of the insurance policy, which states, to wit: AUTHORIZED DRIVER: Any of the following: (a) The Insured (b) Any person driving on the Insured's order, or with his permission. Provided that the person driving is permitted, in accordance with the

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licensing or other laws or regulations, to drive the Scheduled Vehicle, or has been permitted and is not disqualified by order of a Court of Law or by reason of any enactment or regulation in that behalf. 11 On November 17, 1982, private respondents requests from petitioner FCP for a suspension of payment on the monthly amortization agreed upon due to the loss of the vehicle and, since the carnapped vehicle insured with petitioner Perla, said insurance company should be made to pay the remaining balance of the promissory note and the chattel mortgage contract. Perla, however, denied private respondents' claim. Consequently, petitioner FCP demanded that private respondents pay the whole balance of the promissory note or to return the vehicle 12 but the latter refused. On July 25, 1983, petitioner FCP filed a complaint against private respondents, who in turn filed an amended third party complaint against petitioner Perla on December 8, 1983. After trial on the merits, the trial court rendered a decision, the dispositive portion which reads: WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows: 1. Ordering defendants Herminio Lim and Evelyn Lim to pay, jointly and severally, plaintiff the sum of P55,055.93 plus interest thereon at the rate of 24% per annum from July 2, 1983 until fully paid; 2. Ordering defendants to pay plaintiff P50,000.00 as and for attorney's fees; and the costs of suit. Upon the other hand, likewise, ordering the DISMISSAL of the Third-Party Complaint filed against Third-Party Defendant. 13 Not satisfied with said decision, private respondents appealed the same to the Court of Appeals, which reversed said decision. After petitioners' separate motions for reconsideration were denied by the Court of Appeals in its resolution of December 10, 1990, petitioners filed these separate petitions for review on certiorari. Petitioner Perla alleged that there was grave abuse of discretion on the part of the appellate court in holding that private respondents did not violate the insurance contract

because the authorized driver clause is not applicable to the "Theft" clause of said Contract. For its part, petitioner FCP raised the issue of whether or not the loss of the collateral exempted the debtor from his admitted obligations under the promissory note particularly the payment of interest, litigation expenses and attorney's fees. We find no merit in Perla's petition. The comprehensive motor car insurance policy issued by petitioner Perla undertook to indemnify the private respondents against loss or damage to the car (a) by accidental collision or overturning, or collision or overturning consequent upon mechanical breakdown or consequent upon wear and tear; (b) by fire, external explosion, selfignition or lightning or burglary, housebreaking or theft; and (c) by malicious act. 14 Where a car is admittedly, as in this case, unlawfully and wrongfully taken without the owner's consent or knowledge, such taking constitutes theft, and, therefore, it is the "THEFT"' clause, and not the "AUTHORIZED DRIVER" clause that should apply. As correctly stated by the respondent court in its decision: . . . Theft is an entirely different legal concept from that of accident. Theft is committed by a person with the intent to gain or, to put it in another way, with the concurrence of the doer's will. On the other hand, accident, although it may proceed or result from negligence, is the happening of an event without the concurrence of the will of the person by whose agency it was caused. (Bouvier's Law Dictionary, Vol. I, 1914 ed., p. 101). Clearly, the risk against accident is distinct from the risk against theft. The "authorized driver clause" in a typical insurance policy is in contemplation or anticipation of accident in the legal sense in which it should be understood, and not in contemplation or anticipation of an event such as theft. The distinction often seized upon by insurance companies in resisting claims from their assureds between death occurring as a result of accident and death occurring as a result of intent may, by analogy, apply to the case at bar. Thus, if the insured vehicle had figured in an accident at the time she drove it with an expired license, then, appellee Perla Compania could properly resist appellants' claim for indemnification for the loss or

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destruction of the vehicle resulting from the accident. But in the present case. The loss of the insured vehicle did not result from an accident where intent was involved; the loss in the present case was caused by theft, the commission of which was attended by intent. 15 It is worthy to note that there is no causal connection between the possession of a valid driver's license and the loss of a vehicle. To rule otherwise would render car insurance practically a sham since an insurance company can easily escape liability by citing restrictions which are not applicable or germane to the claim, thereby reducing indemnity to a shadow. We however find the petition of FCP meritorious. This Court agrees with petitioner FCP that private respondents are not relieved of their obligation to pay the former the installments due on the promissory note on account of the loss of the automobile. The chattel mortgage constituted over the automobile is merely an accessory contract to the promissory note. Being the principal contract, the promissory note is unaffected by whatever befalls the subject matter of the accessory contract. Therefore, the unpaid balance on the promissory note should be paid, and not just the installments due and payable before the automobile was carnapped, as erronously held by the Court of Appeals. However, this does not mean that private respondents are bound to pay the interest, litigation expenses and attorney's fees stipulated in the promissory note. Because of the peculiar relationship between the three contracts in this case, i.e., the promissory note, the chattel mortgage contract and the insurance policy, this Court is compelled to construe all three contracts as intimately interrelated to each other, despite the fact that at first glance there is no relationship whatsoever between the parties thereto. Under the promissory note, private respondents are obliged to pay Supercars, Inc. the amount stated therein in accordance with the schedule provided for. To secure said promissory note, private respondents constituted a chattel mortgage in favor of Supercars, Inc. over the automobile the former purchased from the latter. The chattel mortgage, in turn, required private respondents to insure the automobile and to make the proceeds thereof payable to Supercars, Inc. The promissory note and chattel mortgage were assigned by

Supercars, Inc. to petitioner FCP, with the knowledge of private respondents. Private respondents were able to secure an insurance policy from petitioner Perla, and the same was made specifically payable to petitioner FCP. 16 The insurance policy was therefore meant to be an additional security to the principal contract, that is, to insure that the promissory note will still be paid in case the automobile is lost through accident or theft. The Chattel Mortgage Contract provided that: THE SAID MORTGAGOR COVENANTS AND AGREES THAT HE/IT WILL CAUSE THE PROPERTY/IES HEREIN-ABOVE MORTGAGED TO BE INSURED AGAINST LOSS OR DAMAGE BY ACCIDENT, THEFT AND FIRE FOR A PERIOD OF ONE YEAR FROM DATE HEREOF AND EVERY YEAR THEREAFTER UNTIL THE MORTGAGE OBLIGATION IS FULLY PAID WITH AN INSURANCE COMPANY OR COMPANIES ACCEPTABLE TO THE MORTGAGEE IN AN AMOUNT NOT LESS THAN THE OUTSTANDING BALANCE OF THE MORTGAGE OBLIGATION; THAT HE/IT WILL MAKE ALL LOSS, IF ANY, UNDER SUCH POLICY OR POLICIES, PAYABLE TO THE MORTGAGE OR ITS ASSIGNS AS ITS INTERESTS MAY APPEAR AND FORTHWITH DELIVER SUCH POLICY OR POLICIES TO THE MORTGAGEE, . . . . 17 It is clear from the abovementioned provision that upon the loss of the insured vehicle, the insurance company Perla undertakes to pay directly to the mortgagor or to their assignee, FCP, the outstanding balance of the mortgage at the time of said loss under the mortgage contract. If the claim on the insurance policy had been approved by petitioner Perla, it would have paid the proceeds thereof directly to petitioner FCP, and this would have had the effect of extinguishing private respondents' obligation to petitioner FCP. Therefore, private respondents were justified in asking petitioner FCP to demand the unpaid installments from petitioner Perla. Because petitioner Perla had unreasonably denied their valid claim, private respondents should not be made to pay the interest, liquidated damages and attorney's fees as stipulated in the promissory note. As mentioned above, the contract of indemnity was procured to insure the return of the money loaned from petitioner FCP, and the unjustified refusal of petitioner Perla to recognize the valid claim of the private respondents should not in any way prejudice the latter.

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Private respondents can not be said to have unduly enriched themselves at the expense of petitioner FCP since they will be required to pay the latter the unpaid balance of its obligation under the promissory note. In view of the foregoing discussion, We hold that the Court of Appeals did not err in requiring petitioner Perla to indemnify private respondents for the loss of their insured vehicle. However, the latter should be ordered to pay petitioner FCP the amount of P55,055.93, representing the unpaid installments from December 30, 1982 up to July 1, 1983, as shown in the statement of account prepared by petitioner FCP, 18 plus legal interest from July 2, 1983 until fully paid. As to the award of moral damages, exemplary damages and attorney's fees, private respondents are legally entitled to the same since petitioner Perla had acted in bad faith by unreasonably refusing to honor the insurance claim of the private respondents. Besides, awards for moral and exemplary damages, as well as attorney's fees are left to the sound discretion of the Court. Such discretion, if well exercised, will not be disturbed on appeal. 19 WHEREFORE, the assailed decision of the Court of Appeals is hereby MODIFIED to require private respondents to pay petitioner FCP the amount of P55,055.93, with legal interest from July 2, 1983 until fully paid. The decision appealed from is hereby affirmed as to all other respects. No pronouncement as to costs. SO ORDERED. Melencio-Herrera, Paras, Padilla and Regalado, JJ., concur.
Footnotes 1 Ponente: Justice Jesus M. Elbinias; Justices Pedro P. Ramirez and Regina G. Ordoez-Benitez, concurring. 2 Decision of the Court of Appeals, p. 7; Rollo, p. 63. 3 Exhibit "A", Exhibit "5". 4 Exhibit "B". 5 Exhibit "2", Exhibit "1-Perla". 6 Exhibit "B". 7 Exhibit "6", Records, p. 101. 8 Exhibit "7". 9 Exhibit "8". 10 Exhibit "2-a-Perla". 11 Exhibit "1-a Perla de Seguro"; Records, p. 88.

12 Exhibits "C" and "D". 13 RTC's Decision, pp. 8-9; Records, pp. 34-35. 14 Exhibit, "2". 15 Decision of the Court of Appeals, p. 6; Rollo, p. 62. 16 Exhibit "2"; Records, p. 88. 17 Exhibit "B"; Records, p. 80. Emphasis supplied. 18 Exhibit "D", Records, p. 84. 19 Philippine Airline, Inc. vs. Court of Appeals, 188 SCRA 461 (1990).

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EN BANC G.R. No. L-15380 September 30, 1960 CHAN WAN, plaintiff-appellant, vs. TAN KIM and CHEN SO, defendants-appellees.
Manuel Domingo for appellant. C.M. de los Reyes for appellees.

provisions about them, some of which are quoted in the margin. 2 In the Philippine National Bank vs. Zulueta, 101 Phil., 1071; 55 Off. Gaz., 222, we applied some provisions of said Bills of Exchange Act because the Negotiable Law, originating from England and codified in the United States, permits resort thereto in matters not covered by it and local legislation.3 Eight of the checks here in question bear across their face two parallel transverse lines between which these words are written: non-negotiable China Banking Corporation. These checks have, therefore, been crossed specially to the China Banking Corporation, and should have been presented for payment by China Banking, and not by Chan Wan. 4 Inasmuch as Chan Wan did present them for payment himself the Manila court said there was no proper presentment, and the liability did not attach to the drawer. We agree to the legal premises and conclusion. It must be remembered, at this point, that the drawer in drawing the check engaged that "on due presentment, the check would be paid, and that if it be dishonored . . . he will pay the amount thereof to the holder".5 Wherefore, in the absence of due presentment, the drawer did not become liable. Nevertheless we find, on the backs of the checks, endorsements which apparently show they had been deposited with the China Banking Corporation and were, by the latter, presented to the drawee bank for collection. For instance, on the back of the check Exhibit A (same as in Exh. B), this endorsement appears: For deposit to the account of White House Shoe Supply with the China Banking Corporation. and then this: Cleared through the clearing office of Central Bank of the Philippines. All prior endorsements and/or lack of endorsements guaranteed. China Banking Corporation. And on the back of Exh. G: For deposit to the credit of our account. Viuda e Hijos de Chua Chiong Pio. People's Shoe Company. followed by the endorsement of China Banking Corporation as in Exhibits A and B. All the crossed checks have the "clearance" endorsement of China Banking Corporation.

BENGZON, J.: This suit to collect eleven checks totalling P4,290.00 is here for decision because it involves no issue of fact. Such checks payable to "cash or bearer" and drawn by defendant Tan Kim (the other defendant is her husband) upon the Equitable Banking Corporation, were all presented for payment by Chan Wan to the drawee bank, but they "were all dishonored and returned to him unpaid due to insufficient funds and/or causes attributable to the drawer." At the hearing of the case, in the Manila court of first instance, the plaintiff did not take the witness stand. His attorney, however, testified only to identify the checks which are Exhibits A to K plus the letters of demand upon defendants. On the other hand, Tan Kim declared without contradiction that the checks had been issued to two persons named Pinong and Muy for some shoes the former had promised to make and "were intended as mere receipts". In view of such circumstances, the court declined to order payment for two principal reasons: (a) plaintiff failed to prove he was a holder in due course, and (b) the checks being crossed checks should not have been deposited instead with the bank mentioned in the crossing. It may be stated in this connection, that defendants asserted a counterclaim, the court dismissed it for failure of proof, and from such dismissal they did not appeal. The only issue is, therefore, the plaintiff's right to collect on the eleven commercial documents. The Negotiable Instruments Law regulating the issuance of negotiable checks, the rights and the liabilities arising therefrom, does not mention "crossed checks". Art. 541 of the Code of Commerce refers to such instruments. 1 The bills of Exchange Act of England of 1882, contains several

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These circumstances would seem to show deposit of the checks with China Banking Corporation and subsequent presentation by the latter through the clearing office; but as drawee had no funds, they were unpaid and returned, some of them stamped "account closed". How they reached his hands, plaintiff did not indicate. Most probably, as the trial court surmised, this is not a finding of fact he got them after they had been thus returned, because he presented them in court with such "account closed" stamps, without bothering to explain. Naturally and rightly, the lower court held him not to be a holder in due course under the circumstances, since he knew, upon taking them up, that the checks had already been dishonored.6 Yet it does not follow as a legal proposition, that simply because he was not a holder in due course Chan Wan could not recover on the checks. The Negotiable Instruments Law does not provide that a holder7 who is not a holder in due course, may not in any case, recover on the instrument. If B purchases an overdue negotiable promissory note signed by A, he is not a holder in due course; but he may recover from A,8 if the latter has no valid excuse for refusing payment. The only disadvantage of holder who is not a holder in due course is that the negotiable instrument is subject to defense as if it were non- negotiable.9 Now what defense did the defendant Tan Kim prove? The lower court's decision does not mention any; evidently His Honor had in mind the defense pleaded in defendant's answer, but though it unnecessary to specify, because the "crossing" and presentation incidents sufficed to bar recovery, in his opinion.1awphl.nt Tan Kim admitted on cross-examination either that the checks had been issued as evidence of debts to Pinong and Muy, and/or that they had been issued in payment of shoes which Pinong had promised to make for her. Seeming to imply that Pinong had to make the shoes, she asserted Pinong had "promised to pay the checks for me". Yet she did not complete the idea, perhaps because she was just answering cross- questions, her main testimony having referred merely to their counter-claim. Needless to say, if it were true that the checks had been issued in payment for shoes that were never made and delivered, Tan Kim would have a good defense as against a holder who is not a holder in due course. 10

Considering the deficiency of important details on which a fair adjudication of the parties' right depends, we think the record should be and is hereby returned, in the interest of justice, to the court below for additional evidence, and such further proceedings as are not inconsistent with this opinion. With the understanding that, as defendants did not appeal, their counterclaim must be and is hereby definitely dismissed. So ordered. Paras, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera, Gutierrez David, Paredes and Dizon, JJ., concur.
Footnotes SEC. 541. The maker or any legal holder of a check shall be entitled to indicate therein that it be paid to certain banker or institution, which he shall do by writing across the face the name of said banker or institution, or only the words "and company."
1

The payment made to a person other than the banker or institution shall not exempt the person on whom it is drawn, if the payment was not correctly made.
2

76. [General and Special Crossing Defined.] (1) Where a check bears across its face an addition of

(a) The words "and company" or any abbreviation thereof between two parallel transverse lines, either with or without the words "not negotiable;" or (b) Two parallel transverse lines simply, either with or without the words "not negotiable;" that addition constitutes a crossing, and the cheque is crossed generally. (2) Where a cheque bears across its face an addition of the name of a banker, either with or without the words "not negotiable," that addition constitutes a crossing, and the cheque is crossed specially and to that banker. 79. . . . (2) Where the banker on whom a cheque is drawn which is so crossed nevertheless pays the same, or pays the same, or pays a cheque crossed generally otherwise than to a banker, or if crossed specially otherwise than to the banker to whom it is crossed, or his agent for collection being a banker, he is liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid. (Taken from Brannan's Negotiable Instruments Law, 60th Ed. 1250-1251.)
3

Sec. 196, Negotiable Instruments Law.

If it is not presented by said Bank for payment, the drawee runs the risk, in case of payment to persons not entitled thereto. So the practice is for the drawee to refuse when presented by individuals. The check is generally deposited with the bank mentioned in the crossing, so that the latter may take charge of the collection.
4 5

Sec. 61. Negotiable Instruments Law. Sec. 52 (b), Negotiable Instruments Law. He was a holder all right, because he had possession of the checks that were payable to bearer. Sec. 51. Negotiable Instruments Law. SEC. 58 Negotiable Instruments Law. Lack of consideration is a defense. (Sec. 28, Negotiable Instruments Law.)

10

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SECOND DIVISION G.R. No. 93048 March 3, 1994 BATAAN CIGAR AND CIGARETTE FACTORY, INC., petitioner, vs. THE COURT OF APPEALS and STATE INVESTMENT HOUSE, INC., respondents.
Teresita Gandiongco Oledan for petitioner. Acaban & Sabado for private respondent.

P100,000.00, post dated September 15 & 30, 1979 respectively, drawn by petitioner in favor of George King. In as much as George King failed to deliver the bales of tobacco leaf as agreed despite petitioner's demand, BCCFI issued on March 30, 1979, a stop payment order on all checks payable to George King, including check TCBT 551826. Subsequently, stop payment was also ordered on checks TCBT Nos. 608967 & 608968 on September 14 & 28, 1979, respectively, due to George King's failure to deliver the tobacco leaves. Efforts of SIHI to collect from BCCFI having failed, it instituted the present case, naming only BCCFI as party defendant. The trial court pronounced SIHI as having a valid claim being a holder in due course. It further said that the non-inclusion of King Tim Pua George as party defendant is immaterial in this case, since he, as payee, is not an indispensable party. The main issue then is whether SIHI, a second indorser, a holder of crossed checks, is a holder in due course, to be able to collect from the drawer, BCCFI. The Negotiable Instruments Law states what constitutes a holder in due course, thus:
Sec. 52 A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

NOCON, J.: For our review is the decision of the Court of Appeals in the case entitled "State Investment House, Inc. v. Bataan Cigar & Cigarette Factory Inc.," 1 affirming the decision of the Regional Trial Court 2 in a complaint filed by the State Investment House, Inc. (hereinafter referred to as SIHI) for collection on three unpaid checks issued by Bataan Cigar & Cigarette Factory, Inc. (hereinafter referred to as BCCFI). The foregoing decisions unanimously ruled in favor of SIHI, the private respondent in this case. Emanating from the records are the following facts. Petitioner, Bataan Cigar & Cigarette Factory, Inc. (BCCFI), a corporation involved in the manufacturing of cigarettes, engaged one of its suppliers, King Tim Pua George (herein after referred to as George King), to deliver 2,000 bales of tobacco leaf starting October 1978. In consideration thereof, BCCFI, on July 13, 1978 issued crossed checks post dated sometime in March 1979 in the total amount of P820,000.00. 3 Relying on the supplier's representation that he would complete delivery within three months from December 5, 1978, petitioner agreed to purchase additional 2,500 bales of tobacco leaves, despite the supplier's failure to deliver in accordance with their earlier agreement. Again petitioner issued post dated crossed checks in the total amount of P1,100,000.00, payable sometime in September 1979. 4 During these times, George King was simultaneously dealing with private respondent SIHI. On July 19, 1978, he sold at a discount check TCBT 551826 5 bearing an amount of P164,000.00, post dated March 31, 1979, drawn by petitioner, naming George King as payee to SIHI. On December 19 and 26, 1978, he again sold to respondent checks TCBT Nos. 608967 & 608968, 6 both in the amount of

Section 59 of the NIL further states that every holder is deemed prima facie a holder in due course. However, when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims, acquired the title as holder in due course. The facts in this present case are on all fours to the case of State Investment House, Inc. (the very respondent in this

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case) v. Intermediate Appellate Court 7 wherein we made a discourse on the effects of crossing of checks. As preliminary, a check is defined by law as a bill of exchange drawn on a bank payable on demand. 8 There are a variety of checks, the more popular of which are the memorandum check, cashier's check, traveler's check and crossed check. Crossed check is one where two parallel lines are drawn across its face or across a corner thereof. It may be crossed generally or specially. A check is crossed specially when the name of a particular banker or a company is written between the parallel lines drawn. It is crossed generally when only the words "and company" are written or nothing is written at all between the parallel lines. It may be issued so that the presentment can be made only by a bank. Veritably the Negotiable Instruments Law (NIL) does not mention "crossed checks," although Article 541 9 of the Code of Commerce refers to such instruments. According to commentators, the negotiability of a check is not affected by its being crossed, whether specially or generally. It may legally be negotiated from one person to another as long as the one who encashes the check with the drawee bank is another bank, or if it is specially crossed, by the bank mentioned between the parallel lines. 10 This is specially true in England where the Negotiable Instrument Law originated. In the Philippine business setting, however, we used to be beset with bouncing checks, forging of checks, and so forth that banks have become quite guarded in encashing checks, particularly those which name a specific payee. Unless one is a valued client, a bank will not even accept second indorsements on checks. In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a check should have the following effects: (a) the check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once to one who has an account with a bank; (c) and the act of crossing the check serves as warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course. 11

The foregoing was adopted in the case of SIHI v. IAC, supra. In that case, New Sikatuna Wood Industries, Inc. also sold at a discount to SIHI three post dated crossed checks, issued by Anita Pea Chua naming as payee New Sikatuna Wood Industries, Inc. Ruling that SIHI was not a holder in due course, we then said: The three checks in the case at bar had been crossed generally and issued payable to New Sikatuna Wood Industries, Inc. which could only mean that the drawer had intended the same for deposit only by the rightful person, i.e. the payee named therein. Apparently, it was not the payee who presented the same for payment and therefore, there was no proper presentment, and the liability did not attach to the drawer. Thus, in the absence of due presentment, the drawer did not become liable. Consequently, no right of recourse is available to petitioner (SIHI) against the drawer of the subject checks, private respondent wife (Anita), considering that petitioner is not the proper party authorized to make presentment of the checks in question. xxx xxx xxx That the subject checks had been issued subject to the condition that private respondents (Anita and her husband) on due date would make the back up deposit for said checks but which condition apparently was not made, thus resulting in the non-consummation of the loan intended to be granted by private respondents to New Sikatuna Wood Industries, Inc., constitutes a good defense against petitioner who is not a holder in due course. 12 It is then settled that crossing of checks should put the holder on inquiry and upon him devolves the duty to ascertain the indorser's title to the check or the nature of his possession. Failing in this respect, the holder is declared guilty of gross negligence amounting to legal absence of good faith, contrary to Sec. 52(c) of the Negotiable Instruments Law, 13 and as such the consensus of authority is to the effect that the holder of the check is not a holder in due course. In the present case, BCCFI's defense in stopping payment is as good to SIHI as it is to George King. Because, really, the checks were issued with the intention that George King would supply BCCFI with the bales of tobacco leaf. There being failure of consideration, SIHI is not a holder in due

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course. Consequently, BCCFI cannot be obliged to pay the checks. The foregoing does not mean, however, that respondent could not recover from the checks. The only disadvantage of a holder who is not a holder in due course is that the instrument is subject to defenses as if it were non-negotiable. 14 Hence, respondent can collect from the immediate indorser, in this case, George King. WHEREFORE, finding that the court a quo erred in the application of law, the instant petition is hereby GRANTED. The decision of the Regional Trial Court as affirmed by the Court of Appeals is hereby REVERSED. Cost against private respondent. SO ORDERED. Narvasa, C.J., Regalado and Puno, JJ., concur. Padilla, J., took no part.
#Footnotes 1 CA-G.R. CV No. 03032, Justice Jorge R. Coquia, ponente, Justices Josue N. Bellosillo and Venancio D. Aldecoa, Jr., concurring, November 13, 1987. 2 Judge Agusto E. Villarin, presiding, Branch XL, National Capital Region, Manila. 3 Exhibit "1", Folder of Exhibits, p. 11. 4 Exhibit "4", Folder of Exhibits, p. 14. 5 Annex "A", Folder of Exhibits, p. 3. 6 Annexes "B" and "C", Folder of Exhibits, pp. 4-5. 7 G.R. No. 72764, 175 SCRA 310. 8 Sec. 185, Negotiable Instruments Law. 9 Article 541 -- The maker of any legal holder of a check shall be entitled to indicate therein that it be paid to a certain banker or institution, which he shall do by writing across the face the name of said banker or institution, or only the words "and company". 10 CAMPOS AND LOPEZ-CAMPOS, Negotiable Instruments Law, p. 574-575; AGBAYANI, AGUEDO, Commercial Laws of the Philippines, Vol. 1, 1987 Ed., p. 446. 11 Ocampo v. Gatchalian, G.R. No. L-15126, 3 SCRA 603 (1961); Associated Bank v. Court of Appeals, G.R. No. 89802, 208 SCRA 465; SIHI v. IAC, supra. 12 Id. at pp. 316-317. 13 quoted supra. 14 Chan Wan v. Tan Kim and Chen So, L-15380, 109 Phil., 706 (1960); SIHI v. IAC, supra.

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EN BANC G.R. No. L-4388 August 13, 1952 PHILIPPINE NATIONAL BANK, petitioner, vs. BENITO SEETO, respondent.
Ramon B. de los Reyes for petitioner. Montano A. Ortiz for respondent.

LABRADOR, J.: On March 13, 1948, respondent Benito Seeto called at the branch of the Philippine National Bank, petitioner herein, at Surigao, and presented a check, No. A-21096, in the amount of P5,000 dated at Cebu on March 10, 1948, payable to cash or bearer, and drawn by one Gan Yek Kiao against the Cebu branch of the Philippine National Bank of Communications. After consultation with the employees of the branch, Seeto made a general and unqualified indorsement of the check, and petitioner's agency accepted it and paid respondent the amount of P5,000 therefor. The check was mailed to petitioner's Cebu branch on March 20, 1948, and was presented to the drawee bank for payment on April 9, 1948, but the check was dishonored for "insufficient funds." So the check was returned to petitioner's Surigao agency, and upon receipt thereof by it on April 14, 1948, said branch immediately sent a letter to the respondent herein demanding immediate refund of in the value of the check. A second communication of the same tenor was sent on April 26, 1948, to which respondent answered asking that plaintiff's contemplated suit be deferred while he was making inquiries about the reasons for the dishonor of the check. Thereafter, respondent refused to make the refund demanded, claiming that at the time of the negotiation o the check the drawer had sufficient funds in the drawee bank, and that the petitioner's Surigao agency not delayed to forward the check until the drawer's funds were exhausted, the same would have been paid. Thereupon petitioner presented a complaint in the Court of First Instance of Surigao, alleging that respondent Benito Seeto gave assurance to petitioner's agency in Surigao that the drawer of the check had sufficient funds with the drawee bank, and that upon these assurances petitioner's agency delivered the P5,000 to the respondent after the latter had made a general and unqualified indorsement thereon. Respondent denied having made the alleged assurances.

Upon this issue petitioner submitted two witnesses at the time of the trial, who testified that it was not the practice of petitioner's agency to cash out of town checks, and that the check was cashed because of the assurances given by the respondent that the drawer had sufficient funds, and that he (respondent) would refund the amount paid by petitioner's agency in case the check is dishonored. Respondent denied having given the assurances. The trial court found notwithstanding respondent's denial to the contrary, that the respondent made an undertaking to refund the amount of the checks in the event of dishonor. In support of this finding it found that as the drawee bank is not in Cebu, it was impossible for petitioner's agency to make an independent verification of the drawer's solvency, and must have taken precautions to protect itself against loss by requiring the respondent to give assurances that he would return the amount of the check in the case of nonpayment. It also found that there was no unreasonable delay in the presentation of the check, and, therefore, rendered judgment sentencing respondent to refund the amount he had received for the check. On appeal to the Court of Appeals, this court held that petitioner was guilty of unreasonably retaining and withholding the check, and that the delay in the presentment for payment was inexcusable, so that respondent was thereby discharged from liability. It also held that parol evidence is incompetent to show that one signing of a check as indorser is merely a surety or guarantor, rejecting the evidence adduced at the trial court about the respondent's assurance and promise to refund. It, therefore, reversed the judgment of the trial court and dismissed the complaint, with costs. Against this judgment an appeal by certiorari has been brought to this Court, petitioner Philippine National Bank contending that the Court of Appeals erred in applying sections 143 and 144 of the Negotiable Instruments Law and declaring respondent Benito Seeto discharged of his liability as indorser of the check, and in not admitting parol evidence to show that respondent made oral assurances to refund the value of the check in case of dishonor. In support of petitioner's first assignment of error, it is argued that inasmuch as a check need not to be presented for acceptance, unlike a bill of exchange as required by Section 143, Section 144 of the law is not applicable to the case at bar but Section 84, which provides:

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SEC. 84. Liability of person secondarily liable, when instrument dishonored. Subject to the provisions of this Act, when the instrument is dishonored by nonpayment, as immediate right of recourse to all parties secondarily liable thereon accrues to the holder. It is true that Section 143 and 144 of the law are not applicable, because these are provisions having to do with the presentation of a bill of exchange for acceptance, and are not applicable to a check, as to which presentment for acceptance is not required. It is also true that Section 84 is applicable, but its application is subject to the condition imposed by Section 186, to the effect that the check must be presented for payment within a reasonable time after its issue. SEC. 186. Within what time a check must be presented. A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay. Counsel for the petitioner, however, argues that inasmuch as the above section expressly provides for the discharge of the drawer from liability to the extent of the loss caused by the delay, and, on the other hand, it is silent as to the liability of the indorser, the latter may not be considered discharged from liability by reason of the delay in the presentment of payment under the general principle inclusio unius est exclusion alterius. We find no reason nor merit in the argument. The silence of Section 186 as to the indorser is due to the fact that his discharge is already expressly covered by the provision of Section 84, the indorser being a person secondarily liable on the instrument. The reason for the difference between the liability of the indorser and that of the drawer in case of dishonor is that the drawer is not probably or necessarily prejudiced thereby, while an indorser is, actually or by legal presumption. Innumerable decisions have already been rendered in the state courts of the United States to the effect that although the drawer of a check is discharged only to the extent of loss caused by unreasonable delay in presentment, an indorser is wholly discharged thereby irrespective of any question of loss or injury. ( Swift & Co. vs. Miller, 62 Ind. App. 312, 113 N.E. 447, cited in Brannan's Negotiable

Instruments Law, p. 1134, Nuzum vs. Sheppard, 87 W. Va. 243, 104 S.E. 587, 11 A.L.R. 1024, Ibid.) The proposition maintained in the reported case (Nuzum vs. Sheppard., ante. 1024) that the indorser of a check, unlike the drawer, is relieved of liability thereon by an unreasonable delay in presenting the same for payment, whether or not he is injured by the delay, is supported by the great weight of authority, (Cases cited.) The Court, in Gough v. Staats (N.Y.) supra, says: "Upon the question of due diligence to charge an indorser, whether he has been prejudiced or not by the delay is perfectly immaterial. It is not inquired into. The law presumes he has been prejudiced." According to the Court in Caroll v. Sweet (1891) 128 N.Y. 19, 13 L.R.A. 43, 27 N.E. 763, "presentment to due time as fixed by the law merchant was a condition upon performance of which the liability of the defendant, as indorser, depended, and this delay was not excused, although the drawer of the check had no funds, or was insolvent, or because presentment would not been unavailing as a means of procuring payment." Only where there is affirmative proof that the indorser knew when he cashed the check that there would be no funds in the bank to meet it can the rule be avoided. Otherwise, the failure to present the check in due course of payment will discharge the indorser even though such presentment would have been unavailing. Start v. Tupper (Vt.) supra. (11 A.L.R. Annotation, pp. 1028-1029.) We have been unable to find any authority sustaining the proposition that an indorser of a check is not discharged from liability for an unreasonable delay in presentation for payment. This is contrary to the essential nature and character of negotiable instruments their negotiability. They are supposed to be passed on with promptness in the ordinary course of business transactions; not to be retained or kept for such time as the holder may want, otherwise the smooth flow of commercial transactions would be hindered. There seems to be an intimation in the decision appealed from that inasmuch as the check was drawn payable elsewhere than at the place of business of the drawer, it must be presented for acceptance or negotiable within a reasonable time, and upon failure to do so the drawer and all indorsers thereof are discharged pursuant to Section 144 of the law. Against this insinuation the petitioner argues that the application of sections 143 and 144 is not proper, and

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that it may not be presumed that the check in question was not drawn and executed in Cebu, the residence or place of business of the drawer. There is no evidence at all as to the place where the check was drawn. However, we have already pointed out above that neither Section 143 nor Section 144 is applicable. But our ruling that respondent was discharged upon the dishonor of the check is based on Sections 84 and 186, the latter expressly requiring that a check must be presented for payment within a reasonable time after issue. It is not claimed by the petitioner on this appeal that the conclusion of the Court of Appeals that there was unreasonable delay in the presentation of the check for payment at the drawee bank is erroneous. The petitioner concedes the correctness of this conclusion, although for purposes of argument merely. We find that the conclusion is correct. The fact, admitted by the witnesses for the petitioner, the checks for the drawer issued subsequent to March 13, 1948, drawn against the same bank and cashed at the same Surigao agency, were not dishonored positively shows that the drawer had enough funds when he issued the check in question, and that had it not been for the unreasonable delay in its presentation for payment, the petitioner herein would have been able to receive payment therefor. The check is dated March 10, and was cashed by the petitioner's agency on March 13, 1948. It was not mailed until seven days thereafter, i.e., on March 20, 1948, or ten days after issue. No excuse was given for this delay. Assuming that it took one week, or say ten days, or until March 30, for the check to reach Cebu, neither can there be any excuse for not presenting it for payment at the drawee bank until April 9, 1948, or 10 days after it reached Cebu. We, therefore, find no reason for disturbing the conclusion of the Court of Appeals that there was unreasonable delay in the presentation of the check for payment at the drawee bank, and that is a consequence thereof, the indorser, respondent herein, was thereby discharged. With respect to the second assignment of error, petitioner argues that the verbal assurances given by the respondent to the employees of the bank that he was ready to refund the amount if the check should be dishonored by the drawee bank is a collateral agreement, separate and distinct from the indorsement, by virtue of which petitioner herein was induced to cash the check, and, therefore, admissible as an exception that the parol evidence rule. Petitioners

contention in this respect is not entirely unfounded. In the case of Tan Machan vs. De La Trinidad, et al., 4 Phil., 684, this court held that parol evidence is admissible to show that parties signing as principals merely did so as sureties. In the case of Robles vs. Lizarraga Hermanos, 50 Phil., 387, it was also held by this court that parol evidence is admissible to prove "an independent thereof." (Ibid., p. 395.) In Philips vs. Preston, 5 How. (U.S.) 278, 12 L. ed, 152, the Supreme Court of the United States held that any prior or contemporaneous conversation in connection with a note or its indorsement, may be proved by parol evidence. And Wigmore states that "an extrinsic agreement between indorser and indorsee which cannot be embodied in the instrument without impairing its credit is provable by parol." (9 Wigmore 148, section 2445 [3].) If, therefore, the supposed assurances that the drawer had funds and that the respondent herein would refund the amount of the check if the drawer had no funds, were the considerations or reasons that induced the branch agency of the petitioners to go out of its ordinary practice of not cashing out of town checks and accept the check and to pay its face value, the same would be provable by parol, provided, of course, that the assurances or inducements offered would not vary, alter, or destroy the obligations attached by law to the indorsement. We find, however, that the supposed assurances of refund in case of dishonor of the check are precisely the ordinary obligations of an indorser, and these obligations are, under the law, considered discharged by an unreasonable delay in the presentation of the check for payment. SEC. 66. Liability of general indorser. . . . . And, in addition, he engages that on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. (Emphasis ours.) There was no express obligation assumed by the respondent herein that the drawer would always have funds, or that he (the indorser) would refund the amount of the check even if there was delay in its presentation, so that while the Court of Appeals may have committed an error in disregarding the evidence submitted by petitioner at the trial of the assurances made by respondent herein at the time of the

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negotiation of the check, such error was without prejudice, because the supposed assurances given were part of his obligations as an indorser, which were discharged by the unreasonable delay in the presentation of the check for payment. The judgment appealed from is, therefore, affirmed, with costs against the petitioner. Paras, C.J., Feria, Bengzon, Padilla, Tuason, Montemayor and Bautista Angelo, JJ., concur.

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