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
defendants-appellees.

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 withaddress at Lucena, Quezon. After the postal teller had made
out money ordersnumbered 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 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.

Page 1 of 344
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 8-½% 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
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 8-½% per annum from September 27,
1961 until fully paid; without any pronouncement as to cost and
attorney's fees.

Page 2 of 344
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.

Page 3 of 344
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 Amrica 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.

Page 4 of 344
 G.R. No. 97753 August 10, 1992
CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofileña & Guingona for private.

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 1 affirming with modifications, the earlier decision of the
Regional Trial Court of Manila, Branch XLII, 2 which 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 CTD
Dates Serial Nos. Quantity Amount

22 Feb. 82 90101 to 90120 20 P80,000

26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000
——— ————
Total 280 P1,120,000
===== ========

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).

Page 5 of 344
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).

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.

Page 6 of 344
 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.

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.

Page 7 of 344
 (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:

Page 8 of 344
 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. 7

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.9 In the construction of a bill or note, the intention of the
parties is to control, if it can be legally ascertained. 10 While 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
Page 9 of 344
Angel de la Cruz and that the amounts deposited are repayable specifically
to him. Rather, the amounts are to be repayable to the bearer of the
documents or, for that matter, whosoever may be the bearer at the time of
presentment.

If it was really the intention of respondent bank to pay the amount to Angel
de la Cruz only, it could have with facility so expressed that fact in clear
and categorical terms in the documents, instead of having the word
"BEARER" stamped on the space provided for the name of the depositor in
each CTD. On the wordings of the documents, therefore, the amounts
deposited are repayable to whoever may be the bearer thereof. Thus,
petitioner's aforesaid witness merely declared that Angel de la Cruz is the
depositor "insofar as the bank is concerned," but obviously other parties not
privy to the transaction between them would not be in a position to know
that the depositor is not the bearer stated in the CTDs. Hence, the situation
would require any party dealing with the CTDs to go behind the plain import
of what is written thereon to unravel the agreement of the parties thereto
through facts aliunde. This need for resort to extrinsic evidence is what is
sought to be avoided by the Negotiable Instruments Law and calls for the
application of the elementary rule that the interpretation of obscure words
or stipulations in a contract shall not favor the party who caused the
obscurity. 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.) 13 This
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

Page 10 of 344
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 17 praying, 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. 18 Had 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. 20 is 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.

Page 11 of 344
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. 22 In the present case, however, there was no
negotiation in the sense of a transfer of the legal title to the CTDs in favor
of petitioner in which situation, 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. 23 As such holder of collateral security, he would be a
pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the
Civil Code provisions on pledge of incorporeal rights, 24 which 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
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. 27 With
regard to this other mode of transfer, the Civil Code specifically declares:

Page 12 of 344
 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. 29 The 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

Page 13 of 344
issues framed by the parties and, consequently, issues not raised in the
trial court cannot be raised for the first time on appeal. 31

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. 32

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

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. 35 It is an auxiliary verb indicating liberty,
opportunity, permission and possibility. 36

Moreover, as correctly analyzed by private respondent, 37 Articles 548 to

558 of the Code of Commerce, on which petitioner seeks to anchor
respondent bank's supposed negligence, merely established, on the one
Page 14 of 344
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.

Page 15 of 344
 G.R. No. 89252 May 24, 1993
RAUL SESBREÑO, petitioner,
vs.
HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND
PILIPINAS BANK, respondents.

Salva, Villanueva & Associates for Delta Motors Corporation.

Reyes, Salazar & Associates for Pilipinas Bank.

FELICIANO, J.:

On 9 February 1981, petitioner Raul Sesbreño made a money market

placement in the amount of P300,000.00 with the Philippine Underwriters
Finance Corporation ("Philfinance"), Cebu Branch; the placement, with a
term of thirty-two (32) days, would mature on 13 March 1981, Philfinance,
also on 9 February 1981, issued the following documents to petitioner:

(a) the Certificate of Confirmation of Sale, "without recourse,"

No. 20496 of one (1) Delta Motors Corporation Promissory Note
("DMC PN") No. 2731 for a term of 32 days at 17.0% per
annum;

(b) the Certificate of securities Delivery Receipt No. 16587

indicating the sale of DMC PN No. 2731 to petitioner, with the
notation that the said security was in custodianship of Pilipinas
Bank, as per Denominated Custodian Receipt ("DCR") No.
10805 dated 9 February 1981; and

(c) post-dated checks payable on 13 March 1981 (i.e., the

maturity date of petitioner's investment), with petitioner as
payee, Philfinance as drawer, and Insular Bank of Asia and
America as drawee, in the total amount of P304,533.33.

On 13 March 1981, petitioner sought to encash the postdated checks

issued by Philfinance. However, the checks were dishonored for having
been drawn against insufficient funds.

On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805

issued by private respondent Pilipinas Bank ("Pilipinas"). It reads as
follows:

PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila

February 9, 1981
———————
VALUE DATE

Page 16 of 344
TO Raul Sesbreño

April 6, 1981
————————
MATURITY DATE

NO. 10805

DENOMINATED CUSTODIAN RECEIPT

This confirms that as a duly Custodian Bank, and upon

instruction of PHILIPPINE UNDERWRITES FINANCE
CORPORATION, we have in our custody the following
securities to you [sic] the extent herein indicated.

SERIAL MAT. FACE ISSUED REGISTERED AMOUNT

NUMBER DATE VALUE BY HOLDER PAYEE

2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33

UNDERWRITERS
FINANCE CORP.

We further certify that these securities may be inspected by you

or your duly authorized representative at any time during
regular banking hours.

Upon your written instructions we shall undertake physical

delivery of the above securities fully assigned to you should this
Denominated Custodianship Receipt remain outstanding in
your favor thirty (30) days after its maturity.

PILIPINAS BANK
(By Elizabeth De Villa
Illegible Signature)1

On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private

respondent Pilipinas, Makati Branch, and handed her a demand letter
informing the bank that his placement with Philfinance in the amount
reflected in the DCR No. 10805 had remained unpaid and outstanding, and
that he in effect was asking for the physical delivery of the underlying
promissory note. Petitioner then examined the original of the DMC PN No.
2731 and found: that the security had been issued on 10 April 1980; that it
would mature on 6 April 1981; that it had a face value of P2,300,833.33,
with the Philfinance as "payee" and private respondent Delta Motors
Corporation ("Delta") as "maker;" and that on face of the promissory note
was stamped "NON NEGOTIABLE." Pilipinas did not deliver the Note, nor
any certificate of participation in respect thereof, to petitioner.

Page 17 of 344
Petitioner later made similar demand letters, dated 3 July 1981 and 3
August 1981,2 again asking private respondent Pilipinas for physical
delivery of the original of DMC PN No. 2731. Pilipinas allegedly referred all
of petitioner's demand letters to Philfinance for written instructions, as has
been supposedly agreed upon in "Securities Custodianship Agreement"
between Pilipinas and Philfinance. Philfinance did not provide the
appropriate instructions; Pilipinas never released DMC PN No. 2731, nor
any other instrument in respect thereof, to petitioner.

Petitioner also made a written demand on 14 July 19813 upon private

respondent Delta for the partial satisfaction of DMC PN No. 2731,
explaining that Philfinance, as payee thereof, had assigned to him said
Note to the extent of P307,933.33. Delta, however, denied any liability to
petitioner on the promissory note, and explained in turn that it had
previously agreed with Philfinance to offset its DMC PN No. 2731 (along
with DMC PN No. 2730) against Philfinance PN No. 143-A issued in favor
of Delta.

In the meantime, Philfinance, on 18 June 1981, was placed under the joint
management of the Securities and exchange commission ("SEC") and the
Central Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to
date apparently remains in the custody of the SEC.4

As petitioner had failed to collect his investment and interest thereon, he

filed on 28 September 1982 an action for damages with the Regional Trial
Court ("RTC") of Cebu City, Branch 21, against private respondents Delta
and Pilipinas.5The trial court, in a decision dated 5 August 1987, dismissed
the complaint and counterclaims for lack of merit and for lack of cause of
action, with costs against petitioner.

Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No.

15195. In a Decision dated 21 March 1989, the Court of Appeals denied
the appeal and held:6

Be that as it may, from the evidence on record, if there is

anyone that appears liable for the travails of plaintiff-appellant,
it is Philfinance. As correctly observed by the trial court:

This act of Philfinance in accepting the investment

of plaintiff and charging it against DMC PN No.
2731 when its entire face value was already
obligated or earmarked for set-off or compensation
is difficult to comprehend and may have been
motivated with bad faith. Philfinance, therefore, is
solely and legally obligated to return the investment
of plaintiff, together with its earnings, and to answer
all the damages plaintiff has suffered incident
thereto. Unfortunately for plaintiff, Philfinance was
not impleaded as one of the defendants in this case

Page 18 of 344
 at bar; hence, this Court is without jurisdiction to
pronounce judgement against it. (p. 11, Decision)

WHEREFORE, finding no reversible error in the decision

appealed from, the same is hereby affirmed in toto. Cost
against plaintiff-appellant.

Petitioner moved for reconsideration of the above Decision, without

success.

Hence, this Petition for Review on Certiorari.

After consideration of the allegations contained and issues raised in the

pleadings, the Court resolved to give due course to the petition and
required the parties to file their respective memoranda.7

Petitioner reiterates the assignment of errors he directed at the trial court

decision, and contends that respondent court of Appeals gravely erred: (i)
in concluding that he cannot recover from private respondent Delta his
assigned portion of DMC PN No. 2731; (ii) in failing to hold private
respondent Pilipinas solidarily liable on the DMC PN No. 2731 in view of
the provisions stipulated in DCR No. 10805 issued in favor r of petitioner,
and (iii) in refusing to pierce the veil of corporate entity between
Philfinance, and private respondents Delta and Pilipinas, considering that
the three (3) entities belong to the "Silverio Group of Companies" under the
leadership of Mr. Ricardo Silverio, Sr.8

There are at least two (2) sets of relationships which we need to address:
firstly, the relationship of petitioner vis-a-vis Delta; secondly, the
relationship of petitioner in respect of Pilipinas. Actually, of course, there is
a third relationship that is of critical importance: the relationship of petitioner
and Philfinance. However, since Philfinance has not been impleaded in this
case, neither the trial court nor the Court of Appeals acquired jurisdiction
over the person of Philfinance. It is, consequently, not necessary for
present purposes to deal with this third relationship, except to the extent it
necessarily impinges upon or intersects the first and second relationships.

I.

We consider first the relationship between petitioner and Delta.

The Court of appeals in effect held that petitioner acquired no rights vis-a-
vis Delta in respect of the Delta promissory note (DMC PN No. 2731) which
Philfinance sold "without recourse" to petitioner, to the extent of
P304,533.33. The Court of Appeals said on this point:

Nor could plaintiff-appellant have acquired any right over DMC

PN No. 2731 as the same is "non-negotiable" as stamped on its
face (Exhibit "6"), negotiation being defined as the transfer of an
instrument from one person to another so as to constitute the

Page 19 of 344
 transferee the holder of the instrument (Sec. 30, Negotiable
Instruments Law). A person not a holder cannot sue on the
instrument in his own name and cannot demand or receive
payment (Section 51, id.)9

Petitioner admits that DMC PN No. 2731 was non-negotiable but contends
that the Note had been validly transferred, in part to him by assignment and
that as a result of such transfer, Delta as debtor-maker of the Note, was
obligated to pay petitioner the portion of that Note assigned to him by the
payee Philfinance.

Delta, however, disputes petitioner's contention and argues:

(1) that DMC PN No. 2731 was not intended to be negotiated or

otherwise transferred by Philfinance as manifested by the word
"non-negotiable" stamp across the face of the Note10 and
because maker Delta and payee Philfinance intended that this
Note would be offset against the outstanding obligation of
Philfinance represented by Philfinance PN No. 143-A issued to
Delta as payee;

(2) that the assignment of DMC PN No. 2731 by Philfinance

was without Delta's consent, if not against its instructions; and

(3) assuming (arguendo only) that the partial assignment in

favor of petitioner was valid, petitioner took the Note subject to
the defenses available to Delta, in particular, the offsetting of
DMC PN No. 2731 against Philfinance PN No. 143-A.11

We consider Delta's arguments seriatim.

Firstly, it is important to bear in mind that the negotiation of a negotiable

instrument must be distinguished from the assignment or transfer of an
instrument whether that be negotiable or non-negotiable. Only an
instrument qualifying as a negotiable instrument under the relevant statute
may be negotiated either by indorsement thereof coupled with delivery, or
by delivery alone where the negotiable instrument is in bearer form. A
negotiable instrument may, however, instead of being negotiated, also
be assigned or transferred. The legal consequences of negotiation as
distinguished from assignment of a negotiable instrument are, of course,
different. A non-negotiable instrument may, obviously, not be negotiated;
but it may be assigned or transferred, absent an express prohibition against
assignment or transfer written in the face of the instrument:

The words "not negotiable," stamped on the face of the bill of

lading, did not destroy its assignability, but the sole effect was
to exempt the bill from the statutory provisions relative
thereto, and a bill, though not negotiable, may be transferred by
assignment; the assignee taking subject to the equities
between the original parties.12 (Emphasis added)
Page 20 of 344
DMC PN No. 2731, while marked "non-negotiable," was not at the same
time stamped "non-transferable" or "non-assignable." It contained no
stipulation which prohibited Philfinance from assigning or transferring, in
whole or in part, that Note.

Delta adduced the "Letter of Agreement" which it had entered into with
Philfinance and which should be quoted in full:

April 10, 1980

Philippine Underwriters Finance Corp.

Benavidez St., Makati,
Metro Manila.

Attention: Mr. Alfredo O.

Banaria
SVP-Treasurer

GENTLEMEN:

This refers to our outstanding placement of P4,601,666.67 as

evidenced by your Promissory Note No. 143-A, dated April 10,
1980, to mature on April 6, 1981.

As agreed upon, we enclose our non-negotiable Promissory

Note No. 2730 and 2731 for P2,000,000.00 each, dated April
10, 1980, to be offsetted [sic] against your PN No. 143-A upon
co-terminal maturity.

Please deliver the proceeds of our PNs to our representative,

Mr. Eric Castillo.

Very Truly Yours,

(Sgd.)
Florencio B. Biagan
Senior Vice
President13

We find nothing in his "Letter of Agreement" which can be reasonably

construed as a prohibition upon Philfinance assigning or transferring all or
part of DMC PN No. 2731, before the maturity thereof. It is scarcely
necessary to add that, even had this "Letter of Agreement" set forth an
explicit prohibition of transfer upon Philfinance, such a prohibition cannot
be invoked against an assignee or transferee of the Note who parted with
valuable consideration in good faith and without notice of such prohibition.
It is not disputed that petitioner was such an assignee or transferee. Our
conclusion on this point is reinforced by the fact that what Philfinance and
Delta were doing by their exchange of their promissory notes was this:
Delta invested, by making a money market placement with Philfinance,

Page 21 of 344
approximately P4,600,000.00 on 10 April 1980; but promptly, on the same
day, borrowed back the bulk of that placement, i.e., P4,000,000.00, by
issuing its two (2) promissory notes: DMC PN No. 2730 and DMC PN No.
2731, both also dated 10 April 1980. Thus, Philfinance was left with not
P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta
promissory notes.

Apropos Delta's complaint that the partial assignment by Philfinance of

DMC PN No. 2731 had been effected without the consent of Delta, we note
that such consent was not necessary for the validity and enforceability of
the assignment in favor of petitioner.14 Delta's argument that Philfinance's
sale or assignment of part of its rights to DMC PN No. 2731 constituted
conventional subrogation, which required its (Delta's) consent, is quite
mistaken. Conventional subrogation, which in the first place is never lightly
inferred,15 must be clearly established by the unequivocal terms of the
substituting obligation or by the evident incompatibility of the new and old
obligations on every point.16 Nothing of the sort is present in the instant
case.

It is in fact difficult to be impressed with Delta's complaint, since it released

its DMC PN No. 2731 to Philfinance, an entity engaged in the business of
buying and selling debt instruments and other securities, and more
generally, in money market transactions. In Perez v. Court of Appeals,17 the
Court, speaking through Mme. Justice Herrera, made the following
important statement:

There is another aspect to this case. What is involved here is a

money market transaction. As defined by Lawrence Smith "the
money market is a market dealing in standardized short-term
credit instruments (involving large amounts) where lenders and
borrowers do not deal directly with each other but through a
middle manor a dealer in the open market." It involves
"commercial papers" which are instruments "evidencing
indebtness of any person or entity. . ., which are issued,
endorsed, sold or transferred or in any manner conveyed to
another person or entity, with or without recourse". The
fundamental function of the money market device in its
operation is to match and bring together in a most impersonal
manner both the "fund users" and the "fund suppliers." The
money market is an "impersonal market", free from personal
considerations. "The market mechanism is intended to provide
quick mobility of money and securities."

The impersonal character of the money market device

overlooks the individuals or entities concerned. The issuer of a
commercial paper in the money market necessarily knows in
advance that it would be expenditiously transacted and
transferred to any investor/lender without need of notice to said
issuer. In practice, no notification is given to the borrower or

Page 22 of 344
 issuer of commercial paper of the sale or transfer to the
investor.

xxx xxx xxx

There is need to individuate a money market transaction, a relatively

novel institution in the Philippine commercial scene. It has been
intended to facilitate the flow and acquisition of capital on an
impersonal basis. And as specifically required by Presidential
Decree No. 678, the investing public must be given adequate and
effective protection in availing of the credit of a borrower in the
commercial paper market.18(Citations omitted; emphasis supplied)

We turn to Delta's arguments concerning alleged compensation or

offsetting between DMC PN No. 2731 and Philfinance PN No. 143-A. It is
important to note that at the time Philfinance sold part of its rights under
DMC PN No. 2731 to petitioner on 9 February 1981, no compensation had
as yet taken place and indeed none could have taken place. The essential
requirements of compensation are listed in the Civil Code as follows:

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

necessary:

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

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

(3) That the two debts are due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy,

commenced by third persons and communicated in due time to the
debtor. (Emphasis supplied)

On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No.

143-A was due. This was explicitly recognized by Delta in its 10 April 1980
"Letter of Agreement" with Philfinance, where Delta acknowledged that the
relevant promissory notes were "to be offsetted (sic) against [Philfinance]
PN No. 143-A upon co-terminal maturity."

As noted, the assignment to petitioner was made on 9 February 1981 or

from forty-nine (49) days before the "co-terminal maturity" date, that is to
say, before any compensation had taken place. Further, the assignment to
petitioner would have prevented compensation had taken place between
Philfinance and Delta, to the extent of P304,533.33, because upon
execution of the assignment in favor of petitioner, Philfinance and Delta

Page 23 of 344
would have ceased to be creditors and debtors of each other in their own
right to the extent of the amount assigned by Philfinance to petitioner.
Thus, we conclude that the assignment effected by Philfinance in favor of
petitioner was a valid one and that petitioner accordingly became owner of
DMC PN No. 2731 to the extent of the portion thereof assigned to him.

The record shows, however, that petitioner notified Delta of the fact of the
assignment to him only on 14 July 1981, 19 that is, after the maturity not
only of the money market placement made by petitioner but also of both
DMC PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner
notified Delta of his rights as assignee after compensation had taken place
by operation of law because the offsetting instruments had both reached
maturity. It is a firmly settled doctrine that the rights of an assignee are not
any greater that the rights of the assignor, since the assignee is merely
substituted in the place of the assignor 20 and that the assignee acquires
his rights subject to the equities — i.e., the defenses — which the debtor
could have set up against the original assignor before notice of the
assignment was given to the debtor. Article 1285 of the Civil Code provides
that:

Art. 1285. The debtor who has consented to the assignment of rights
made by a creditor in favor of a third person, cannot set up against
the assignee the compensation which would pertain to him against
the assignor, unless the assignor was notified by the debtor at the
time he gave his consent, that he reserved his right to the
compensation.

If the creditor communicated the cession to him but the debtor did
not consent thereto, the latter may set up the compensation of
debts previous to the cession, but not of subsequent ones.

If the assignment is made without the knowledge of the debtor, he

may set up the compensation of all credits prior to the same and
also later ones until he had knowledge of the assignment.
(Emphasis supplied)

Article 1626 of the same code states that: "the debtor who, before having
knowledge of the assignment, pays his creditor shall be released from the
obligation." In Sison v. Yap-Tico,21 the Court explained that:

[n]o man is bound to remain a debtor; he may pay to him with whom
he contacted to pay; and if he pay before notice that his debt has
been assigned, the law holds him exonerated, for the reason that it
is the duty of the person who has acquired a title by transfer to
demand payment of the debt, to give his debt or notice.22

At the time that Delta was first put to notice of the assignment in petitioner's
favor on 14 July 1981, DMC PN No. 2731 had already been discharged by
compensation. Since the assignor Philfinance could not have then
compelled payment anew by Delta of DMC PN No. 2731, petitioner, as
Page 24 of 344
assignee of Philfinance, is similarly disabled from collecting from Delta the
portion of the Note assigned to him.

It bears some emphasis that petitioner could have notified Delta of the
assignment or sale was effected on 9 February 1981. He could have
notified Delta as soon as his money market placement matured on 13
March 1981 without payment thereof being made by Philfinance; at that
time, compensation had yet to set in and discharge DMC PN No. 2731.
Again petitioner could have notified Delta on 26 March 1981 when
petitioner received from Philfinance the Denominated Custodianship
Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor
of petitioner. Petitioner could, in fine, have notified Delta at any time before
the maturity date of DMC PN No. 2731. Because petitioner failed to do so,
and because the record is bare of any indication that Philfinance had itself
notified Delta of the assignment to petitioner, the Court is compelled to
uphold the defense of compensation raised by private respondent Delta. Of
course, Philfinance remains liable to petitioner under the terms of the
assignment made by Philfinance to petitioner.

II.

We turn now to the relationship between petitioner and private respondent

Pilipinas. Petitioner contends that Pilipinas became solidarily liable with
Philfinance and Delta when Pilipinas issued DCR No. 10805 with the
following words:

Upon your written instruction, we [Pilipinas] shall undertake physical

delivery of the above securities fully assigned to you —.23

The Court is not persuaded. We find nothing in the DCR that establishes an
obligation on the part of Pilipinas to pay petitioner the amount of
P307,933.33 nor any assumption of liability in solidum with Philfinance and
Delta under DMC PN No. 2731. We read the DCR as a confirmation on the
part of Pilipinas that:

(1) it has in its custody, as duly constituted custodian bank, DMC PN

No. 2731 of a certain face value, to mature on 6 April 1981 and
payable to the order of Philfinance;

(2) Pilipinas was, from and after said date of the assignment by
Philfinance to petitioner (9 February 1981), holding that Note on behalf
and for the benefit of petitioner, at least to the extent it had been
assigned to petitioner by payee Philfinance;24

(3) petitioner may inspect the Note either "personally or by authorized

representative", at any time during regular bank hours; and

(4) upon written instructions of petitioner, Pilipinas would physically

deliver the DMC PN No. 2731 (or a participation therein to the extent of

Page 25 of 344
 P307,933.33) "should this Denominated Custodianship receipt remain
outstanding in [petitioner's] favor thirty (30) days after its maturity."

Thus, we find nothing written in printers ink on the DCR which could
reasonably be read as converting Pilipinas into an obligor under the terms
of DMC PN No. 2731 assigned to petitioner, either upon maturity thereof or
any other time. We note that both in his complaint and in his testimony
before the trial court, petitioner referred merely to the obligation of private
respondent Pilipinas to effect the physical delivery to him of DMC PN No.
2731.25 Accordingly, petitioner's theory that Pilipinas had assumed a
solidary obligation to pay the amount represented by a portion of the Note
assigned to him by Philfinance, appears to be a new theory constructed
only after the trial court had ruled against him. The solidary liability that
petitioner seeks to impute Pilipinas cannot, however, be lightly inferred.
Under article 1207 of the Civil Code, "there is a solidary liability only when
the law or the nature of the obligation requires solidarity," The record here
exhibits no express assumption of solidary liability vis-a-vis petitioner, on
the part of Pilipinas. Petitioner has not pointed to us to any law which
imposed such liability upon Pilipinas nor has petitioner argued that the very
nature of the custodianship assumed by private respondent Pilipinas
necessarily implies solidary liability under the securities, custody of which
was taken by Pilipinas. Accordingly, we are unable to hold Pilipinas
solidarily liable with Philfinance and private respondent Delta under DMC
PN No. 2731.

We do not, however, mean to suggest that Pilipinas has no responsibility

and liability in respect of petitioner under the terms of the DCR. To the
contrary, we find, after prolonged analysis and deliberation, that private
respondent Pilipinas had breached its undertaking under the DCR to
petitioner Sesbreño.

We believe and so hold that a contract of deposit was constituted by the act
of Philfinance in designating Pilipinas as custodian or depositary bank. The
depositor was initially Philfinance; the obligation of the depository was
owed, however, to petitioner Sesbreño as beneficiary of the custodianship
or depository agreement. We do not consider that this is a simple case of a
stipulation pour autri. The custodianship or depositary agreement was
established as an integral part of the money market transaction entered
into by petitioner with Philfinance. Petitioner bought a portion of DMC PN
No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas
in order that the thing sold would be placed outside the control of the
vendor. Indeed, the constituting of the depositary or custodianship
agreement was equivalent to constructive delivery of the Note (to the extent
it had been sold or assigned to petitioner) to petitioner. It will be seen that
custodianship agreements are designed to facilitate transactions in the
money market by providing a basis for confidence on the part of the
investors or placers that the instruments bought by them are effectively
taken out of the pocket, as it were, of the vendors and placed safely
beyond their reach, that those instruments will be there available to the

Page 26 of 344
placers of funds should they have need of them. The depositary in a
contract of deposit is obliged to return the security or the thing deposited
upon demand of the depositor (or, in the presented case, of the beneficiary)
of the contract, even though a term for such return may have been
established in the said contract.26 Accordingly, any stipulation in the
contract of deposit or custodianship that runs counter to the fundamental
purpose of that agreement or which was not brought to the notice of and
accepted by the placer-beneficiary, cannot be enforced as against such
beneficiary-placer.

We believe that the position taken above is supported by considerations of

public policy. If there is any party that needs the equalizing protection of the
law in money market transactions, it is the members of the general public
whom place their savings in such market for the purpose of generating
interest revenues.27 The custodian bank, if it is not related either in terms of
equity ownership or management control to the borrower of the funds, or
the commercial paper dealer, is normally a preferred or traditional banker of
such borrower or dealer (here, Philfinance). The custodian bank would
have every incentive to protect the interest of its client the borrower or
dealer as against the placer of funds. The providers of such funds must be
safeguarded from the impact of stipulations privately made between the
borrowers or dealers and the custodian banks, and disclosed to fund-
providers only after trouble has erupted.

In the case at bar, the custodian-depositary bank Pilipinas refused to

deliver the security deposited with it when petitioner first demanded
physical delivery thereof on 2 April 1981. We must again note, in this
connection, that on 2 April 1981, DMC PN No. 2731 had not yet matured
and therefore, compensation or offsetting against Philfinance PN No. 143-A
had not yet taken place. Instead of complying with the demand of the
petitioner, Pilipinas purported to require and await the instructions of
Philfinance, in obvious contravention of its undertaking under the DCR to
effect physical delivery of the Note upon receipt of "written instructions"
from petitioner Sesbreño. The ostensible term written into the DCR (i.e.,
"should this [DCR] remain outstanding in your favor thirty [30] days after its
maturity") was not a defense against petitioner's demand for physical
surrender of the Note on at least three grounds: firstly, such term was
never brought to the attention of petitioner Sesbreño at the time the money
market placement with Philfinance was made; secondly, such term runs
counter to the very purpose of the custodianship or depositary agreement
as an integral part of a money market transaction; and thirdly, it is
inconsistent with the provisions of Article 1988 of the Civil Code noted
above. Indeed, in principle, petitioner became entitled to demand physical
delivery of the Note held by Pilipinas as soon as petitioner's money market
placement matured on 13 March 1981 without payment from Philfinance.

We conclude, therefore, that private respondent Pilipinas must respond to

petitioner for damages sustained by arising out of its breach of duty. By
failing to deliver the Note to the petitioner as depositor-beneficiary of the

Page 27 of 344
thing deposited, Pilipinas effectively and unlawfully deprived petitioner of
the Note deposited with it. Whether or not Pilipinas itself benefitted from
such conversion or unlawful deprivation inflicted upon petitioner, is of no
moment for present purposes. Prima facie, the damages suffered by
petitioner consisted of P304,533.33, the portion of the DMC PN No. 2731
assigned to petitioner but lost by him by reason of discharge of the Note by
compensation, plus legal interest of six percent (6%)per annum containing
from 14 March 1981.

The conclusion we have reached is, of course, without prejudice to such

right of reimbursement as Pilipinas may have vis-a-vis Philfinance.

III.

The third principal contention of petitioner — that Philfinance and private

respondents Delta and Pilipinas should be treated as one corporate entity
— need not detain us for long.

In the first place, as already noted, jurisdiction over the person of

Philfinance was never acquired either by the trial court nor by the
respondent Court of Appeals. Petitioner similarly did not seek to implead
Philfinance in the Petition before us.

Secondly, it is not disputed that Philfinance and private respondents Delta

and Pilipinas have been organized as separate corporate entities.
Petitioner asks us to pierce their separate corporate entities, but has been
able only to cite the presence of a common Director — Mr. Ricardo Silverio,
Sr., sitting on the Board of Directors of all three (3) companies. Petitioner
has neither alleged nor proved that one or another of the three (3)
concededly related companies used the other two (2) as mere alter egos or
that the corporate affairs of the other two (2) were administered and
managed for the benefit of one. There is simply not enough evidence of
record to justify disregarding the separate corporate personalities of delta
and Pilipinas and to hold them liable for any assumed or undetermined
liability of Philfinance to petitioner.28

WHEREFORE, for all the foregoing, the Decision and Resolution of the
Court of Appeals in C.A.-G.R. CV No. 15195 dated 21 march 1989 and 17
July 1989, respectively, are hereby MODIFIED and SET ASIDE, to the
extent that such Decision and Resolution had dismissed petitioner's
complaint against Pilipinas Bank. Private respondent Pilipinas bank is
hereby ORDERED to indemnify petitioner for damages in the amount of
P304,533.33, plus legal interest thereon at the rate of six percent (6%) per
annum counted from 2 April 1981. As so modified, the Decision and
Resolution of the Court of Appeals are hereby AFFIRMED. No
pronouncement as to costs.

SO ORDERED.

Page 28 of 344
 G.R. No. 100290 June 4, 1993
NORBERTO TIBAJIA, JR. and CARMEN TIBAJIA, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and EDEN TAN, respondents.

PADILLA, J.:

Petitioners, spouses Norberto Tibajia, Jr. and Carmen Tibajia, are before
this Court assailing the decision * of respondent appellate court dated 24
April 1991 in CA-G.R. SP No. 24164 denying their petition
for certiorari prohibition, and injunction which sought to annul the order of
Judge Eutropio Migriño of the Regional Trial Court, Branch 151, Pasig,
Metro Manila in Civil Case No. 54863 entitled "Eden Tan vs. Sps. Norberto
and Carmen Tibajia."

Stated briefly, the relevant facts are as follows:

Case No. 54863 was a suit for collection of a sum of money filed by Eden
Tan against the Tibajia spouses. A writ of attachment was issued by the
trial court on 17 August 1987 and on 17 September 1987, the Deputy
Sheriff filed a return stating that a deposit made by the Tibajia spouses in
the Regional Trial Court of Kalookan City in the amount of Four Hundred
Forty Two Thousand Seven Hundred and Fifty Pesos (P442,750.00) in
another case, had been garnished by him. On 10 March 1988, the Regional
Trial Court, Branch 151 of Pasig, Metro Manila rendered its decision in Civil
Case No. 54863 in favor of the plaintiff Eden Tan, ordering the Tibajia
spouses to pay her an amount in excess of Three Hundred Thousand
Pesos (P300,000.00). On appeal, the Court of Appeals modified the
decision by reducing the award of moral and exemplary damages. The
decision having become final, Eden Tan filed the corresponding motion for
execution and thereafter, the garnished funds which by then were on
deposit with the cashier of the Regional Trial Court of Pasig, Metro Manila,
were levied upon.

On 14 December 1990, the Tibajia spouses delivered to Deputy Sheriff

Eduardo Bolima the total money judgment in the following form:

Cashier's Check P262,750.00

Cash 135,733.70
————
Total P398,483.70

Private respondent, Eden Tan, refused to accept the payment made by the
Tibajia spouses and instead insisted that the garnished funds deposited
with the cashier of the Regional Trial Court of Pasig, Metro Manila be
withdrawn to satisfy the judgment obligation. On 15 January 1991,
defendant spouses (petitioners) filed a motion to lift the writ of execution on
the ground that the judgment debt had already been paid. On 29 January
1991, the motion was denied by the trial court on the ground that payment
in cashier's check is not payment in legal tender and that payment was
Page 29 of 344
made by a third party other than the defendant. A motion for
reconsideration was denied on 8 February 1991. Thereafter, the spouses
Tibajia filed a petition for certiorari, prohibition and injunction in the Court of
Appeals. The appellate court dismissed the petition on 24 April 1991
holding that payment by cashier's check is not payment in legal tender as
required by Republic Act No. 529. The motion for reconsideration was
denied on 27 May 1991.

In this petition for review, the Tibajia spouses raise the following issues:

I WHETHER OR NOT THE BPI CASHIER'S CHECK NO.

014021 IN THE AMOUNT OF P262,750.00 TENDERED BY
PETITIONERS FOR PAYMENT OF THE JUDGMENT DEBT,
IS "LEGAL TENDER".

II WHETHER OR NOT THE PRIVATE RESPONDENT MAY

VALIDLY REFUSE THE TENDER OF PAYMENT PARTLY IN
CHECK AND PARTLY IN CASH MADE BY PETITIONERS,
THRU AURORA VITO AND COUNSEL, FOR THE
SATISFACTION OF THE MONETARY OBLIGATION OF
PETITIONERS-SPOUSES.1

The only issue to be resolved in this case is whether or not payment by

means of check (even by cashier's check) is considered payment in legal
tender as required by the Civil Code, Republic Act No. 529, and the Central
Bank Act.

It is contended by the petitioners that the check, which was a cashier's

check of the Bank of the Philippine Islands, undoubtedly a bank of good
standing and reputation, and which was a crossed check marked "For
Payee's Account Only" and payable to private respondent Eden Tan, is
considered legal tender, payment with which operates to discharge their
monetary obligation.2 Petitioners, to support their contention, cite the case
of New Pacific Timber and Supply Co., Inc. v. Señeris3 where this Court
held through Mr. Justice Hermogenes Concepcion, Jr. that "It is a well-
known and accepted practice in the business sector that a cashier's check
is deemed as cash".

The provisions of law applicable to the case at bar are the following:

a. Article 1249 of the Civil Code which provides:

Art. 1249. 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

Page 30 of 344
 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.;

b. Section 1 of Republic Act No. 529, as amended, which provides:

Sec. 1. Every provision contained in, or made with respect to,

any obligation which purports to give the obligee the right to
require payment in gold or in any particular kind of coin or
currency other than Philippine currency or in an amount of
money of the Philippines measured thereby, shall be as it is
hereby declared against public policy null and void, and of no
effect, and no such provision shall be contained in, or made
with respect to, any obligation thereafter incurred. Every
obligation heretofore and hereafter incurred, whether or not any
such provision as to payment is contained therein or made with
respect thereto, shall be discharged upon payment in any coin
or currency which at the time of payment is legal tender for
public and private debts.

c. Section 63 of Republic Act No. 265, as amended (Central Bank Act)

which provides:

Sec. 63. Legal character — Checks representing deposit

money do not have legal tender power and their acceptance in
the payment of debts, both public and private, is at the option of
the creditor: Provided, however, that a check which has been
cleared and credited to the account of the creditor shall be
equivalent to a delivery to the creditor of cash in an amount
equal to the amount credited to his account.

From the aforequoted provisions of law, it is clear that this petition must fail.

In the recent cases of Philippine Airlines, Inc. vs. Court of

Appeals4 and Roman Catholic Bishop of Malolos, Inc. vs. Intermediate
Appellate Court,5 this Court held that —

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.

The ruling in these two (2) cases merely applies the statutory provisions
which lay down the rule that a check is not legal tender and that a creditor
may validly refuse payment by check, whether it be a manager's, cashier's
or personal check.

Page 31 of 344
Petitioners erroneously rely on one of the dissenting opinions in
the Philippine Airlines case6 to support their cause. The dissenting opinion
however does not in any way support the contention that a check is legal
tender but, on the contrary, states that "If the PAL checks in question had
not been encashed by Sheriff Reyes, there would be no payment by PAL
and, consequently, no discharge or satisfaction of its judgment
obligation."7 Moreover, the circumstances in the Philippine Airlines case are
quite different from those in the case at bar for in that case the checks
issued by the judgment debtor were made payable to the sheriff, Emilio Z.
Reyes, who encashed the checks but failed to deliver the proceeds of said
encashment to the judgment creditor.

In the more recent case of Fortunado vs. Court of Appeals,8 this Court
stressed that, "We are not, by this decision, sanctioning the use of a check
for the payment of obligations over the objection of the creditor."

WHEREFORE, the petition is DENIED. The appealed decision is hereby

AFFIRMED, with costs against the petitioners.

SO ORDERED.

Page 32 of 344
 G.R. No. L-49188 January 30, 1990
PHILIPPINE AIRLINES, INC., petitioner,
vs.
HON. COURT OF APPEALS, HON. JUDGE RICARDO D. GALANO,
Court of First Instance of Manila, Branch XIII, JAIME K. DEL
ROSARIO, Deputy Sheriff, Court of First Instance, Manila, and AMELIA
TAN, respondents.

GUTIERREZ, JR., J.:

Behind the simple issue of validity of an alias writ of execution in this case
is a more fundamental question. Should the Court allow a too literal
interpretation of the Rules with an open invitation to knavery to prevail over
a more discerning and just approach? Should we not apply the ancient rule
of statutory construction that laws are to be interpreted by the spirit which
vivifies and not by the letter which killeth?

This is a petition to review on certiorari the decision of the Court of Appeals

in CA-G.R. No. 07695 entitled "Philippine Airlines, Inc. v. Hon. Judge
Ricardo D. Galano, et al.", dismissing the petition for certiorari against the
order of the Court of First Instance of Manila which issued an alias writ of
execution against the petitioner.

The petition involving the alias writ of execution had its beginnings on
November 8, 1967, when respondent Amelia Tan, under the name and
style of Able Printing Press commenced a complaint for damages before
the Court of First Instance of Manila. The case was docketed as Civil Case
No. 71307, entitled Amelia Tan, et al. v. Philippine Airlines, Inc.

After trial, the Court of First Instance of Manila, Branch 13, then presided
over by the late Judge Jesus P. Morfe rendered judgment on June 29,
1972, in favor of private respondent Amelia Tan and against petitioner
Philippine Airlines, Inc. (PAL) as follows:

WHEREFORE, judgment is hereby rendered, ordering the defendant

Philippine Air Lines:

1. On the first cause of action, to pay to the plaintiff the amount

of P75,000.00 as actual damages, with legal interest thereon
from plaintiffs extra-judicial demand made by the letter of July
20, 1967;

2. On the third cause of action, to pay to the plaintiff the amount

of P18,200.00, representing the unrealized profit of 10%
included in the contract price of P200,000.00 plus legal interest
thereon from July 20,1967;

3. On the fourth cause of action, to pay to the plaintiff the

amount of P20,000.00 as and for moral damages, with legal
interest thereon from July 20, 1 967;

Page 33 of 344
 4. On the sixth cause of action, to pay to the plaintiff the amount
of P5,000.00 damages as and for attorney's fee.

Plaintiffs second and fifth causes of action, and defendant's

counterclaim, are dismissed.

With costs against the defendant. (CA Rollo, p. 18)

On July 28, 1972, the petitioner filed its appeal with the Court of Appeals.
The case was docketed as CA-G.R. No. 51079-R.

On February 3, 1977, the appellate court rendered its decision, the

dispositive portion of which reads:

IN VIEW WHEREOF, with the modification that PAL is condemned to

pay plaintiff the sum of P25,000.00 as damages and P5,000.00 as
attorney's fee, judgment is affirmed, with costs. (CA Rollo, p. 29)

Notice of judgment was sent by the Court of Appeals to the trial court and
on dates subsequent thereto, a motion for reconsideration was filed by
respondent Amelia Tan, duly opposed by petitioner PAL.

On May 23,1977, the Court of Appeals rendered its resolution denying the
respondent's motion for reconsideration for lack of merit.

No further appeal having been taken by the parties, the judgment became
final and executory and on May 31, 1977, judgment was correspondingly
entered in the case.

The case was remanded to the trial court for execution and on September
2,1977, respondent Amelia Tan filed a motion praying for the issuance of a
writ of execution of the judgment rendered by the Court of Appeals. On
October 11, 1977, the trial court, presided over by Judge Galano, issued its
order of execution with the corresponding writ in favor of the respondent.
The writ was duly referred to Deputy Sheriff Emilio Z. Reyes of Branch 13
of the Court of First Instance of Manila for enforcement.

Four months later, on February 11, 1978, respondent Amelia Tan moved
for the issuance of an alias writ of execution stating that the judgment
rendered by the lower court, and affirmed with modification by the Court of
Appeals, remained unsatisfied.

On March 1, 1978, the petitioner filed an opposition to the motion for the
issuance of an alias writ of execution stating that it had already fully paid its
obligation to plaintiff through the deputy sheriff of the respondent court,
Emilio Z. Reyes, as evidenced by cash vouchers properly signed and
receipted by said Emilio Z. Reyes.

On March 3,1978, the Court of Appeals denied the issuance of the alias
writ for being premature, ordering the executing sheriff Emilio Z. Reyes to

Page 34 of 344
appear with his return and explain the reason for his failure to surrender the
amounts paid to him by petitioner PAL. However, the order could not be
served upon Deputy Sheriff Reyes who had absconded or disappeared.

On March 28, 1978, motion for the issuance of a partial alias writ of
execution was filed by respondent Amelia Tan.

On April 19, 1978, respondent Amelia Tan filed a motion to withdraw

"Motion for Partial Alias Writ of Execution" with Substitute Motion for Alias
Writ of Execution. On May 1, 1978, the respondent Judge issued an order
which reads:

As prayed for by counsel for the plaintiff, the Motion to Withdraw

'Motion for Partial Alias Writ of Execution with Substitute Motion for
Alias Writ of Execution is hereby granted, and the motion for partial
alias writ of execution is considered withdrawn.

Let an Alias Writ of Execution issue against the defendant for the fall
satisfaction of the judgment rendered. Deputy Sheriff Jaime K. del
Rosario is hereby appointed Special Sheriff for the enforcement
thereof. (CA Rollo, p. 34)

On May 18, 1978, the petitioner received a copy of the first alias writ of
execution issued on the same day directing Special Sheriff Jaime K. del
Rosario to levy on execution in the sum of P25,000.00 with legal interest
thereon from July 20,1967 when respondent Amelia Tan made an extra-
judicial demand through a letter. Levy was also ordered for the further sum
of P5,000.00 awarded as attorney's fees.

On May 23, 1978, the petitioner filed an urgent motion to quash the alias
writ of execution stating that no return of the writ had as yet been made by
Deputy Sheriff Emilio Z. Reyes and that the judgment debt had already
been fully satisfied by the petitioner as evidenced by the cash vouchers
signed and receipted by the server of the writ of execution, Deputy Sheriff
Emilio Z. Reyes.

On May 26,1978, the respondent Jaime K. del Rosario served a notice of

garnishment on the depository bank of petitioner, Far East Bank and Trust
Company, Rosario Branch, Binondo, Manila, through its manager and
garnished the petitioner's deposit in the said bank in the total amount of
P64,408.00 as of May 16, 1978. Hence, this petition for certiorari filed by
the Philippine Airlines, Inc., on the grounds that:

AN ALIAS WRIT OF EXECUTION CANNOT BE ISSUED WITHOUT

PRIOR RETURN OF THE ORIGINAL WRIT BY THE
IMPLEMENTING OFFICER.

II

Page 35 of 344
 PAYMENT OF JUDGMENT TO THE IMPLEMENTING OFFICER AS
DIRECTED IN THE WRIT OF EXECUTION CONSTITUTES
SATISFACTION OF JUDGMENT.

III

INTEREST IS NOT PAYABLE WHEN THE DECISION IS SILENT AS

TO THE PAYMENT THEREOF.

IV

SECTION 5, RULE 39, PARTICULARLY REFERS TO LEVY OF

PROPERTY OF JUDGMENT DEBTOR AND DISPOSAL OR SALE
THEREOF TO SATISFY JUDGMENT.

Can an alias writ of execution be issued without a prior return of the original
writ by the implementing officer?

We rule in the affirmative and we quote the respondent court's decision

with approval:

The issuance of the questioned alias writ of execution under the

circumstances here obtaining is justified because even with the
absence of a Sheriffs return on the original writ, the unalterable fact
remains that such a return is incapable of being obtained (sic)
because the officer who is to make the said return has absconded
and cannot be brought to the Court despite the earlier order of the
court for him to appear for this purpose. (Order of Feb. 21, 1978,
Annex C, Petition). Obviously, taking cognizance of this
circumstance, the order of May 11, 1978 directing the issuance of an
alias writ was therefore issued. (Annex D. Petition). The need for
such a return as a condition precedent for the issuance of an alias
writ was justifiably dispensed with by the court below and its action in
this regard meets with our concurrence. A contrary view will produce
an abhorent situation whereby the mischief of an erring officer of the
court could be utilized to impede indefinitely the undisputed and
awarded rights which a prevailing party rightfully deserves to obtain
and with dispatch. The final judgment in this case should not indeed
be permitted to become illusory or incapable of execution for an
indefinite and over extended period, as had already transpired.
(Rollo, pp. 35-36)

Judicium non debet esse illusorium; suum effectum habere debet (A

judgment ought not to be illusory it ought to have its proper effect).

Indeed, technicality cannot be countenanced to defeat the execution of a

judgment for execution is the fruit and end of the suit and is very aptly
called the life of the law (Ipekdjian Merchandising Co. v. Court of Tax
Appeals, 8 SCRA 59 [1963]; Commissioner of Internal Revenue v. Visayan
Electric Co., 19 SCRA 697, 698 [1967]). A judgment cannot be rendered

Page 36 of 344
nugatory by the unreasonable application of a strict rule of procedure.
Vested rights were never intended to rest on the requirement of a return,
the office of which is merely to inform the court and the parties, of any and
all actions taken under the writ of execution. Where such information can
be established in some other manner, the absence of an executing officer's
return will not preclude a judgment from being treated as discharged or
being executed through an alias writ of execution as the case may be.
More so, as in the case at bar. Where the return cannot be expected to be
forthcoming, to require the same would be to compel the enforcement of
rights under a judgment to rest on an impossibility, thereby allowing the
total avoidance of judgment debts. So long as a judgment is not satisfied, a
plaintiff is entitled to other writs of execution (Government of the Philippines
v. Echaus and Gonzales, 71 Phil. 318). It is a well known legal maxim that
he who cannot prosecute his judgment with effect, sues his case vainly.

More important in the determination of the propriety of the trial court's

issuance of an alias writ of execution is the issue of satisfaction of
judgment.

Under the peculiar circumstances surrounding this case, did the payment
made to the absconding sheriff by check in his name operate to satisfy the
judgment debt? The Court rules that the plaintiff who has won her case
should not be adjudged as having sued in vain. To decide otherwise would
not only give her an empty but a pyrrhic victory.

It should be emphasized that under the initial judgment, Amelia Tan was
found to have been wronged by PAL.

She filed her complaint in 1967.

After ten (10) years of protracted litigation in the Court of First Instance and
the Court of Appeals, Ms. Tan won her case.

It is now 1990.

Almost twenty-two (22) years later, Ms. Tan has not seen a centavo of what
the courts have solemnly declared as rightfully hers. Through absolutely no
fault of her own, Ms. Tan has been deprived of what, technically, she
should have been paid from the start, before 1967, without need of her
going to court to enforce her rights. And all because PAL did not issue the
checks intended for her, in her name.

Under the peculiar circumstances of this case, the payment to the

absconding sheriff by check in his name did not operate as a satisfaction of
the judgment debt.

In general, a payment, in order to be effective to discharge an obligation,

must be made to the proper person. Article 1240 of the Civil Code provides:

Page 37 of 344
 Payment shall be made to the person in whose favor the obligation
has been constituted, or his successor in interest, or any
person authorized to receive it. (Emphasis supplied)

Thus, payment must be made to the obligee himself or to an agent having

authority, express or implied, to receive the particular payment (Ulen v.
Knecttle 50 Wyo 94, 58 [2d] 446, 111 ALR 65). Payment made to one
having apparent authority to receive the money will, as a rule, be treated as
though actual authority had been given for its receipt. Likewise, if payment
is made to one who by law is authorized to act for the creditor, it will work a
discharge (Hendry v. Benlisa 37 Fla. 609, 20 SO 800,34 LRA 283). The
receipt of money due on ajudgment by an officer authorized by law to
accept it will, therefore, satisfy the debt (See 40 Am Jm 729, 25; Hendry v.
Benlisa supra; Seattle v. Stirrat 55 Wash. 104 p. 834,24 LRA [NS] 1275).

The theory is where payment is made to a person authorized and

recognized by the creditor, the payment to such a person so authorized is
deemed payment to the creditor. Under ordinary circumstances, payment
by the judgment debtor in the case at bar, to the sheriff should be valid
payment to extinguish the judgment debt.

There are circumstances in this case, however, which compel a different

conclusion.

The payment made by the petitioner to the absconding sheriff was not in
cash or legal tender but in checks. The checks were not payable to Amelia
Tan or Able Printing Press but to the absconding sheriff.

Did such payments extinguish the judgment debt?

Article 1249 of the Civil Code provides:

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.

In the absence of an agreement, either express or implied, payment means

the discharge of a debt or obligation in money (US v. Robertson, 5 Pet.
[US] 641, 8 L. ed. 257) and unless the parties so agree, a debtor has no
rights, except at his own peril, to substitute something in lieu of cash as
medium of payment of his debt (Anderson v. Gill, 79 Md.. 312, 29 A 527, 25
LRA 200,47 Am. St. Rep. 402). Consequently, unless authorized to do so

Page 38 of 344
by law or by consent of the obligee a public officer has no authority to
accept anything other than money in payment of an obligation under a
judgment being executed. Strictly speaking, the acceptance by the sheriff
of the petitioner's checks, in the case at bar, does not, per se, operate as a
discharge of the judgment debt.

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 (See. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan
Landon Co. v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44;
21 R.C.L. 60, 61). A check, whether a manager's check or ordinary cheek,
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 not extinguished and remains suspended until
the payment by commercial document is actually realized (Art. 1249, Civil
Code, par. 3).

If bouncing checks had been issued in the name of Amelia Tan and not the
Sheriff's, there would have been no payment. After dishonor of the checks,
Ms. Tan could have run after other properties of PAL. The theory is that
she has received no value for what had been awarded her. Because the
checks were drawn in the name of Emilio Z. Reyes, neither has she
received anything. The same rule should apply.

It is argued that if PAL had paid in cash to Sheriff Reyes, there would have
been payment in full legal contemplation. The reasoning is logical but is it
valid and proper? Logic has its limits in decision making. We should not
follow rulings to their logical extremes if in doing so we arrive at unjust or
absurd results.

In the first place, PAL did not pay in cash. It paid in cheeks.

And second, payment in cash always carries with it certain cautions.

Nobody hands over big amounts of cash in a careless and inane manner.
Mature thought is given to the possibility of the cash being lost, of the
bearer being waylaid or running off with what he is carrying for another.
Payment in checks is precisely intended to avoid the possibility of the
money going to the wrong party. The situation is entirely different where a
Sheriff seizes a car, a tractor, or a piece of land. Logic often has to give
way to experience and to reality. Having paid with checks, PAL should
have done so properly.

Payment in money or cash to the implementing officer may be deemed

absolute payment of the judgment debt but the Court has never, in the least
bit, suggested that judgment debtors should settle their obligations by
turning over huge amounts of cash or legal tender to sheriffs and other
executing officers. Payment in cash would result in damage or interminable

Page 39 of 344
litigations each time a sheriff with huge amounts of cash in his hands
decides to abscond.

As a protective measure, therefore, the courts encourage the practice of

payments by cheek provided adequate controls are instituted to prevent
wrongful payment and illegal withdrawal or disbursement of funds. If
particularly big amounts are involved, escrow arrangements with a bank
and carefully supervised by the court would be the safer procedure. Actual
transfer of funds takes place within the safety of bank premises. These
practices are perfectly legal. The object is always the safe and incorrupt
execution of the judgment.

It is, indeed, out of the ordinary that checks intended for a particular payee
are made out in the name of another. Making the checks payable to the
judgment creditor would have prevented the encashment or the taking of
undue advantage by the sheriff, or any person into whose hands the
checks may have fallen, whether wrongfully or in behalf of the creditor. The
issuance of the checks in the name of the sheriff clearly made possible the
misappropriation of the funds that were withdrawn.

As explained and held by the respondent court:

... [K]nowing as it does that the intended payment was for the private
party respondent Amelia Tan, the petitioner corporation, utilizing the
services of its personnel who are or should be knowledgeable about
the accepted procedures and resulting consequences of the checks
drawn, nevertheless, in this instance, without prudence, departed
from what is generally observed and done, and placed as payee in
the checks the name of the errant Sheriff and not the name of the
rightful payee. Petitioner thereby created a situation which permitted
the said Sheriff to personally encash said checks and misappropriate
the proceeds thereof to his exclusive personal benefit. For the
prejudice that resulted, the petitioner himself must bear the fault. The
judicial guideline which we take note of states as follows:

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. (Blondeau, et al. v. Nano, et
al., L-41377, July 26, 1935, 61 Phil. 625)

Having failed to employ the proper safeguards to protect itself, the

judgment debtor whose act made possible the loss had but itself to blame.

The attention of this Court has been called to the bad practice of a number
of executing officers, of requiring checks in satisfaction of judgment debts
to be made out in their own names. If a sheriff directs a judgment debtor to
issue the checks in the sheriff's name, claiming he must get his commission
or fees, the debtor must report the sheriff immediately to the court which
ordered the execution or to the Supreme Court for appropriate disciplinary
action. Fees, commissions, and salaries are paid through regular channels.
Page 40 of 344
This improper procedure also allows such officers, who have sixty (60)
days within which to make a return, to treat the moneys as their personal
finds and to deposit the same in their private accounts to earn sixty (60)
days interest, before said finds are turned over to the court or judgment
creditor (See Balgos v. Velasco, 108 SCRA 525 [1981]). Quite as easily,
such officers could put up the defense that said checks had been issued to
them in their private or personal capacity. Without a receipt evidencing
payment of the judgment debt, the misappropriation of finds by such
officers becomes clean and complete. The practice is ingenious but evil as
it unjustly enriches court personnel at the expense of litigants and the
proper administration of justice. The temptation could be far greater, as
proved to be in this case of the absconding sheriff. The correct and prudent
thing for the petitioner was to have issued the checks in the intended
payee's name.

The pernicious effects of issuing checks in the name of a person other than
the intended payee, without the latter's agreement or consent, are as many
as the ways that an artful mind could concoct to get around the safeguards
provided by the law on negotiable instruments. An angry litigant who loses
a case, as a rule, would not want the winning party to get what he won in
the judgment. He would think of ways to delay the winning party's getting
what has been adjudged in his favor. We cannot condone that practice
especially in cases where the courts and their officers are
involved.1âwphi1 We rule against the petitioner.

Anent the applicability of Section 15, Rule 39, as follows:

Section 15. Execution of money judgments. — The officer must

enforce an execution of a money judgment by levying on all the
property, real and personal of every name and nature whatsoever,
and which may be disposed of for value, of the judgment debtor not
exempt from execution, or on a sufficient amount of such property, if
they be sufficient, and selling the same, and paying to the judgment
creditor, or his attorney, so much of the proceeds as will satisfy the
judgment. ...

the respondent court held:

We are obliged to rule that the judgment debt cannot be considered

satisfied and therefore the orders of the respondent judge granting
the alias writ of execution may not be pronounced as a nullity.

xxx xxx xxx

It is clear and manifest that after levy or garnishment, for a judgment

to be executed there is the requisite of payment by the officer to the
judgment creditor, or his attorney, so much of the proceeds as will
satisfy the judgment and none such payment had been concededly
made yet by the absconding Sheriff to the private respondent Amelia
Tan. The ultimate and essential step to complete the execution of the
Page 41 of 344
 judgment not having been performed by the City Sheriff, the judgment
debt legally and factually remains unsatisfied.

Strictly speaking execution cannot be equated with satisfaction of a

judgment. Under unusual circumstances as those obtaining in this petition,
the distinction comes out clearly.

Execution is the process which carries into effect a decree or judgment

(Painter v. Berglund, 31 Cal. App. 2d. 63, 87 P 2d 360, 363; Miller v.
London, 294 Mass 300, 1 NE 2d 198, 200; Black's Law Dictionary),
whereas the satisfaction of a judgment is the payment of the amount of the
writ, or a lawful tender thereof, or the conversion by sale of the debtor's
property into an amount equal to that due, and, it may be done otherwise
than upon an execution (Section 47, Rule 39). Levy and delivery by an
execution officer are not prerequisites to the satisfaction of a judgment
when the same has already been realized in fact (Section 47, Rule 39).
Execution is for the sheriff to accomplish while satisfaction of the judgment
is for the creditor to achieve. Section 15, Rule 39 merely provides the
sheriff with his duties as executing officer including delivery of the proceeds
of his levy on the debtor's property to satisfy the judgment debt. It is but to
stress that the implementing officer's duty should not stop at his receipt of
payments but must continue until payment is delivered to the obligor or
creditor.

Finally, we find no error in the respondent court's pronouncement on the

inclusion of interests to be recovered under the alias writ of execution. This
logically follows from our ruling that PAL is liable for both the lost checks
and interest. The respondent court's decision in CA-G.R. No. 51079-R does
not totally supersede the trial court's judgment in Civil Case No. 71307. It
merely modified the same as to the principal amount awarded as actual
damages.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby

DISMISSED. The judgment of the respondent Court of Appeals is
AFFIRMED and the trial court's issuance of the alias writ of execution
against the petitioner is upheld without prejudice to any action it should
take against the errant sheriff Emilio Z. Reyes. The Court Administrator is
ordered to follow up the actions taken against Emilio Z. Reyes.

SO ORDERED.

Fernan, C.J., Cruz, Paras, Bidin, Griño-Aquino, Medialdea and Regalado,

JJ., concur.

Separate Opinions

NARVASA, J., dissenting:

Page 42 of 344
The execution of final judgments and orders is a function of the sheriff, an
officer of the court whose authority is by and large statutorily determined to
meet the particular exigencies arising from or connected with the
performance of the multifarious duties of the office. It is the
acknowledgment of the many dimensions of this authority, defined by
statute and chiselled by practice, which compels me to disagree with the
decision reached by the majority.

A consideration of the wide latitude of discretion allowed the sheriff as the

officer of the court most directly involved with the implementation and
execution of final judgments and orders persuades me that PAL's payment
to the sheriff of its judgment debt to Amelia Tan, though made by check
issued in said officer's name, lawfully satisfied said obligation and
foreclosed further recourse therefor against PAL, notwithstanding the
sheriffs failure to deliver to Tan the proceeds of the check.

It is a matter of history that the judiciary .. is an inherit or of the Anglo-

American tradition. While the common law as such .. "is not in force"
in this jurisdiction, "to breathe the breath of life into many of the
institutions, introduced [here] under American sovereignty, recourse
must be had to the rules, principles and doctrines of the common law
under whose protecting aegis the prototypes of these institutions had
their birth" A sheriff is "an officer of great antiquity," and was also
called the shire reeve. A shire in English law is a Saxon word
signifying a division later called a county. A reeve is an ancient
English officer of justice inferior in rank to an alderman .. appointed to
process, keep the King's peace, and put the laws in execution. From
a very remote period in English constitutional history .. the shire had
another officer, namely the shire reeve or as we say, the sheriff. ..
The Sheriff was the special representative of the legal or central
authority, and as such usually nominated by the King. .. Since the
earliest times, both in England and the United States, a sheriff has
continued his status as an adjunct of the court .. . As it was there, so
it has been in the Philippines from the time of the organization of the
judiciary .. . (J. Fernando's concurring opinion in Bagatsing v.
Herrera, 65 SCRA 434)

One of a sheriff s principal functions is to execute final judgments and

orders. The Rules of Court require the writs of execution to issue to him,
directing him to enforce such judgments and orders in the manner therein
provided (Rule 39). The mode of enforcement varies according to the
nature of the judgment to be carried out: whether it be against property of
the judgment debtor in his hands or in the hands of a third person i e.
money judgment), or for the sale of property, real or personal (i.e.
foreclosure of mortgage) or the delivery thereof, etc. (sec. 8, Rule 39).

Under sec. 15 of the same Rule, the sheriff is empowered to levy on so

much of the judgment debtor's property as may be sufficient to enforce the
money judgment and sell these properties at public auction after due notice

Page 43 of 344
to satisfy the adjudged amount. It is the sheriff who, after the auction sale,
conveys to the purchaser the property thus sold (secs. 25, 26, 27, Rule 39),
and pays the judgment creditor so much of the proceeds as will satisfy the
judgment. When the property sold by him on execution is an immovable
which consequently gives rise to a light of redemption on the part of the
judgment debtor and others (secs. 29, 30, Rule 39), it is to him (or to the
purchaser or redemptioner that the payments may be made by those
declared by law as entitled to redeem (sec. 31, Rule 39); and in this
situation, it becomes his duty to accept payment and execute the certificate
of redemption (Enage v. Vda. y Hijos de Escano, 38 Phil. 657, cited in
Moran, Comments on the Rules of Court, 1979 ed., vol. 2, pp. 326-327). It
is also to the sheriff that "written notice of any redemption must be given
and a duplicate filed with the registrar of deeds of the province, and if any
assessments or taxes are paid by the redemptioner or if he has or acquires
any lien other than that upon which the redemption was made, notice
thereof must in like manner be given to the officer and filed with the
registrar of deeds," the effect of failure to file such notice being that
redemption may be made without paying such assessments, taxes, or liens
(sec. 30, Rule 39).

The sheriff may likewise be appointed a receiver of the property of the

judgment debtor where the appointment of the receiver is deemed
necessary for the execution of the judgment (sec. 32, Rule 39).

At any time before the sale of property on execution, the judgment debtor
may prevent the sale by paying the sheriff the amount required by the
execution and the costs that have been incurred therein (sec. 20, Rule 39).

The sheriff is also authorized to receive payments on account of the

judgment debt tendered by "a person indebted to the judgment debtor," and
his "receipt shall be a sufficient discharge for the amount so paid or
directed to be credited by the judgment creditor on the execution" (sec. 41,
Rule 39).

Now, obviously, the sheriff s sale extinguishes the liability of the judgment
debtor either in fun, if the price paid by the highest bidder is equal to, or
more than the amount of the judgment or pro tanto if the price fetched at
the sale be less. Such extinction is not in any way dependent upon the
judgment creditor's receiving the amount realized, so that the conversion or
embezzlement of the proceeds of the sale by the sheriff does not revive the
judgment debt or render the judgment creditor liable anew therefor.

So, also, the taking by the sheriff of, say, personal property from the
judgment debtor for delivery to the judgment creditor, in fulfillment of the
verdict against him, extinguishes the debtor's liability; and the conversion of
said property by the sheriff, does not make said debtor responsible for
replacing the property or paying the value thereof.

Page 44 of 344
In the instances where the Rules allow or direct payments to be made to
the sheriff, the payments may be made by check, but it goes without saying
that if the sheriff so desires, he may require payment to be made in lawful
money. If he accepts the check, he places himself in a position where he
would be liable to the judgment creditor if any damages are suffered by the
latter as a result of the medium in which payment was made (Javellana v.
Mirasol, et al., 40 Phil. 761). The validity of the payment made by the
judgment debtor, however, is in no wise affected and the latter is
discharged from his obligation to the judgment creditor as of the moment
the check issued to the sheriff is encashed and the proceeds are received
by Id. office. The issuance of the check to a person authorized to receive it
(Art. 1240, Civil Code; See. 46 of the Code of Civil Procedure; Enage v.
Vda y Hijos de Escano, 38 Phil. 657, cited in Javellana v. Mirasol, 40 Phil.
761) operates to release the judgment debtor from any further obligations
on the judgment.

The sheriff is an adjunct of the court; a court functionary whose

competence involves both discretion and personal liability (concurring
opinion of J. Fernando, citing Uy Piaoco v. Osmena, 9 Phil. 299, in
Bagatsing v. Herrera, 65 SCRA 434). Being an officer of the court and
acting within the scope of his authorized functions, the sheriff s receipt of
the checks in payment of the judgment execution, may be deemed, in legal
contemplation, as received by the court itself (Lara v. Bayona, 10 May
1955, No. L- 10919).

That the sheriff functions as a conduit of the court is further underscored by

the fact that one of the requisites for appointment to the office is the
execution of a bond, "conditioned (upon) the faithful performance of his (the
appointee's) duties .. for the delivery or payment to Government, or the
person entitled thereto, of all properties or sums of money that shall
officially come into his hands" (sec. 330, Revised Administrative Code).

There is no question that the checks came into the sheriffs possession in
his official capacity. The court may require of the judgment debtor, in
complying with the judgment, no further burden than his vigilance in
ensuring that the person he is paying money or delivering property to is a
person authorized by the court to receive it. Beyond this, further
expectations become unreasonable. To my mind, a proposal that would
make the judgment debtor unqualifiedly the insurer of the judgment
creditor's entitlement to the judgment amount which is really what this case
is all about begs the question.

That the checks were made out in the sheriffs name (a practice, by the
way, of long and common acceptance) is of little consequence if juxtaposed
with the extent of the authority explicitly granted him by law as the officer
entrusted with the power to execute and implement court judgments. The
sheriffs requirement that the checks in payment of the judgment debt be
issued in his name was simply an assertion of that authority; and PAL's
compliance cannot in the premises be faulted merely because of the

Page 45 of 344
sheriffs subsequent malfeasance in absconding with the payment instead
of turning it over to the judgment creditor.

If payment had been in cash, no question about its validity or of the

authority and duty of the sheriff to accept it in settlement of PAL's judgment
obligation would even have arisen. Simply because it was made by checks
issued in the sheriff s name does not warrant reaching any different
conclusion.

As payment to the court discharges the judgment debtor from his

responsibility on the judgment, so too must payment to the person
designated by such court and authorized to act in its behalf, operate to
produce the same effect.

It is unfortunate and deserving of commiseration that Amelia Tan was

deprived of what was adjudged to her when the sheriff misappropriated the
payment made to him by PAL in dereliction of his sworn duties. But I submit
that her remedy lies, not here and in reviving liability under a judgment
already lawfully satisfied, but elsewhere.

ACCORDINGLY, I vote to grant the petition.

Melencio-Herrera, Gancayco, J., concurs.

FELICIANO, J., dissenting:

I concur in the able dissenting opinions of Narvasa and Padilla, JJ. and
would merely wish to add a few footnotes to their lucid opinions.

1. Narvasa, J. has demonstrated in detail that a sheriff

is authorized by the Rules of Court and our case law to receive either
legal tender or checks from the judgment debtor in satisfaction of the
judgment debt. In addition, Padilla, J. has underscored
the obligation of the sheriff, imposed upon him by the nature of his
office and the law, to turn over such legal tender, checks and
proceeds of execution sales to the judgment creditor. The failure of a
sheriff to effect such turnover and his conversion of the funds (or
goods) held by him to his own uses, do not have the effect of
frustrating payment by and consequent discharge of the judgment
debtor.

To hold otherwise would be to throw the risk of the sheriff faithfully

performing his duty as a public officer upon those members of the
general public who are compelled to deal with him. It seems to me
that a judgment debtor who turns over funds or property to the sheriff
can not reasonably be made an insurer of the honesty and integrity of
the sheriff and that the risk of the sheriff carrying out his duties
honestly and faithfully is properly lodged in the State itself The sheriff,
like all other officers of the court, is appointed and paid and controlled

Page 46 of 344
and disciplined by the Government, more specifically by this Court.
The public surely has a duty to report possible wrongdoing by a
sheriff or similar officer to the proper authorities and, if necessary, to
testify in the appropriate judicial and administrative disciplinary
proceedings. But to make the individual members of the general
community insurers of the honest performance of duty of a sheriff, or
other officer of the court, over whom they have no control, is not only
deeply unfair to the former. It is also a confession of comprehensive
failure and comes too close to an abdication of duty on the part of the
Court itself. This Court should have no part in that.

2. I also feel compelled to comment on the majority opinion written by

Gutierrez, J. with all his customary and special way with words. My
learned and eloquent brother in the Court apparently accepts the
proposition that payment by a judgment debtor of cash to a sheriff
produces the legal effects of payment, the sheriff being authorized to
accept such payment. Thus, in page 10 of his ponencia, Gutierrez, J.
writes:

The receipt of money due on a judgment by an officer authorized by

law to accept it will satisfy the debt. (Citations omitted)

The theory is where payment is made to a person authorized and

recognized by the creditor, the payment to such a person so
authorized is deemed payment to the creditor. Under ordinary
circumstances, payment by the judgment debtor in the case at bar, to
the sheriff would be valid payment to extinguish the judgment debt.

Shortly thereafter, however, Gutierrez, J. backs off from the above

position and strongly implies that payment in cash to the sheriff is
sheer imprudence on the part of the judgment debtor and that
therefore, should the sheriff abscond with the cash, the judgment
debtor has not validly discharged the judgment debt:

It is argued that if PAL had paid in cash to Sheriff Reyes, there would
have been payment in full legal contemplation. The reasoning is
logical but is it valid and proper?

In the first place, PAL did not pay in cash. It paid in checks.

And second, payment in cash always carries with it certain cautions.

Nobody hands over big amounts of cash in a careless and inane
manner. Mature thought is given to the possibility of the cash being
lost, of the bearer being waylaid or running off with what he is
carrying for another. Payment in checks is precisely intended to avoid
the possibility of the money going to the wrong party....

Payment in money or cash to the implementing officer may be

deemed absolute payment of the judgment debt but the court has
never, in the least bit, suggested that judgment debtors should settle
Page 47 of 344
 their obligations by turning over huge amounts of cash or legal tender
to sheriffs and other executing officers. ... (Emphasis in the original)
(Majority opinion, pp. 12-13)

There is no dispute with the suggestion apparently made that maximum

safety is secured where the judgment debtor delivers to the sheriff not cash
but a check made out, not in the name of the sheriff, but in the judgment
creditor's name. The fundamental point that must be made, however, is that
under our law only cash is legal tender and that the sheriff can be
compelled to accept only cash and not checks, even if made out to the
name of the judgment creditor. 1 The sheriff could have quite lawfully
required PAL to deliver to him only cash, i.e., Philippine currency. If the
sheriff had done so, and if PAL had complied with such a requirement, as it
would have had to, one would have to agree that legal payment must be
deemed to have been effected. It requires no particularly acute mind to
note that a dishonest sheriff could easily convert the money and abscond.
The fact that the sheriff in the instant case required, not cash to be
delivered to him, but rather a check made out in his name, does not change
the legal situation. PAL did not thereby become negligent; it did not make
the loss anymore possible or probable than if it had instead delivered plain
cash to the sheriffs.

It seems to me that the majority opinion's real premise is the unspoken one
that the judgment debtor should bear the risk of the fragility of the sheriff s
virtue until the money or property parted with by the judgment debtor
actually reaches the hands of the judgment creditor. This brings me back to
my earlier point that risk is most appropriately borne not by the judgment
debtor, nor indeed by the judgment creditor, but by the State itself. The
Court requires all sheriffs to post good and adequate fidelity bonds before
entering upon the performance of their duties and, presumably, to maintain
such bonds in force and effect throughout their stay in office.2 The
judgment creditor, in circumstances like those of the instant case, could be
allowed to execute upon the absconding sheriff s bond.3

I believe the Petition should be granted and I vote accordingly.

PADILLA, J., Dissenting Opinion

From the facts that appear to be undisputed, I reach a conclusion different

from that of the majority. Sheriff Emilio Z. Reyes, the trial court's authorized
sheriff, armed with a writ of execution to enforce a final money judgment
against the petitioner Philippine Airlines (PAL) in favor of private
respondent Amelia Tan, proceeded to petitioner PAL's office to implement
the writ.

There is no question that Sheriff Reyes, in enforcing the writ of execution,

was acting with full authority as an officer of the law and not in his personal
capacity. Stated differently, PAL had every right to assume that, as an
officer of the law, Sheriff Reyes would perform his duties as enjoined by

Page 48 of 344
law. It would be grossly unfair to now charge PAL with advanced or
constructive notice that Mr. Reyes would abscond and not deliver to the
judgment creditor the proceeds of the writ of execution. If a judgment
debtor cannot rely on and trust an officer of the law, as the Sheriff, whom
else can he trust?

Pursued to its logical extreme, if PAL had delivered to Sheriff Reyes the
amount of the judgment in CASH, i.e. Philippine currency, with the
corresponding receipt signed by Sheriff Reyes, this would have been
payment by PAL in full legal contemplation, because under Article 1240 of
the Civil Code, "payment shall be made to the person in whose favor the
obligation has been constituted or his successor in interest or any person
authorized to receive it." And said payment if made by PAL in cash, i.e.,
Philippine currency, to Sheriff Reyes would have satisfied PAL's judgment
obligation, as payment is a legally recognized mode for extinguishing one's
obligation. (Article 1231, Civil Code).

Under Sec. 15, Rule 39, Rules of Court which provides that-

Sec. 15. Execution of money judgments. — The officer must enforce

an execution of a money judgment by levying on all the property, real
and personal of every name and nature whatsoever, and which may
be disposed of for value, of the judgment debtor not exempt from
execution, or on a sufficient amount of such property, if there be
sufficient, and selling the same, and paying to the judgment creditor,
or his attorney, so much of the proceeds as will satisfy the judgment.
... .(emphasis supplied)

it would be the duty of Sheriff Reyes to pay to the judgment creditor the
proceeds of the execution i.e., the cash received from PAL (under the
above assumption). But, the duty of the sheriff to pay the cash to the
judgment creditor would be a matter separate the distinct from the fact that
PAL would have satisfied its judgment obligation to Amelia Tan, the
judgment creditor, by delivering the cash amount due under the judgment
to Sheriff Reyes.

Did the situation change by PAL's delivery of its two (2) checks totalling
P30,000.00 drawn against its bank account, payable to Sheriff Reyes, for
account of the judgment rendered against PAL? I do not think so, because
when Sheriff Reyes encashed the checks, the encashment was in fact a
payment by PAL to Amelia Tan through Sheriff Reyes, an officer of the law
authorized to receive payment, and such payment discharged PAL'S
obligation under the executed judgment.

If the PAL cheeks in question had not been encashed by Sheriff Reyes,
there would be no payment by PAL and, consequently no discharge or
satisfaction of its judgment obligation. But the checks had been encashed
by Sheriff Reyes giving rise to a situation as if PAL had paid Sheriff Reyes
in cash, i.e., Philippine currency. This, we repeat, is payment, in legal

Page 49 of 344
contemplation, on the part of PAL and this payment legally discharged PAL
from its judgment obligation to the judgment creditor. To be sure, the same
encashment by Sheriff Reyes of PAL's checks delivered to him in his
official capacity as Sheriff, imposed an obligation on Sheriff Reyes to pay
and deliver the proceeds of the encashment to Amelia Tan who is deemed
to have acquired a cause of action against Sheriff Reyes for his failure to
deliver to her the proceeds of the encashment. As held:

Payment of a judgment, to operate as a release or satisfaction,

even pro tanto must be made to the plaintiff or to some person
authorized by him, or by law, to receive it. The payment of money to
the sheriff having an execution satisfies it, and, if the plaintiff fails to
receive it, his only remedy is against the officer (Henderson v.
Planters' and Merchants Bank, 59 SO 493, 178 Ala. 420).

Payment of an execution satisfies it without regard to whether the

officer pays it over to the creditor or misapplies it (340, 33 C.J.S. 644,
citing Elliot v. Higgins, 83 N.C. 459). If defendant consents to the
Sheriff s misapplication of the money, however, defendant is
estopped to claim that the debt is satisfied (340, 33 C.J.S. 644, citing
Heptinstall v. Medlin 83 N.C. 16).

The above rulings find even more cogent application in the case at bar
because, as contended by petitioner PAL (not denied by private
respondent), when Sheriff Reyes served the writ of execution on PAL, he
(Reyes) was accompanied by private respondent's counsel. Prudence
dictated that when PAL delivered to Sheriff Reyes the two (2) questioned
checks (payable to Sheriff Reyes), private respondent's counsel should
have insisted on their immediate encashment by the Sheriff with the
drawee bank in order to promptly get hold of the amount belonging to his
client, the judgment creditor.

ACCORDINGLY, I vote to grant the petition and to quash the court a quo's
alias writ of execution.

Melencio-Herrera, Gancayco, Sarmiento, Cortes, JJ., concurs.

Page 50 of 344
 G.R. No. L-2516 September 25, 1950
ANG TEK LIAN, petitioner,
vs.
THE COURT OF APPEALS, respondent.

Laurel, Sabido, Almario and Laurel for petitioner.

Office of the Solicitor General Felix Bautista Angelo and Solicitor Manuel
Tomacruz for respondent.

BENGZON, J.:

For having issued a rubber check, Ang Tek Lian was convicted of estafa in
the Court of First Instance of Manila. The Court of Appeals affirmed the
verdict.

It appears that, knowing he had no funds therefor, Ang Tek Lian drew on
Saturday, November 16, 1946, the check Exhibits A upon the China
Banking Corporation for the sum of P4,000, payable to the order of "cash".
He delivered it to Lee Hua Hong in exchange for money which the latter
handed in act. On November 18, 1946, the next business day, the check
was presented by Lee Hua Hong to the drawee bank for payment, but it
was dishonored for insufficiency of funds, the balance of the deposit of Ang
Tek Lian on both dates being P335 only.

The Court of Appeals believed the version of Lee Huan Hong who testified
that "on November 16, 1946, appellant went to his (complainant's) office, at
1217 Herran, Paco, Manila, and asked him to exchange Exhibit A — which
he (appellant) then brought with him — with cash alleging that he needed
badly the sum of P4,000 represented by the check, but could not withdraw
it from the bank, it being then already closed; that in view of this request
and relying upon appellant's assurance that he had sufficient funds in the
blank to meet Exhibit A, and because they used to borrow money from
each other, even before the war, and appellant owns a hotel and restaurant
known as the North Bay Hotel, said complainant delivered to him, on the
same date, the sum of P4,000 in cash; that despite repeated efforts to
notify him that the check had been dishonored by the bank, appellant could
not be located any-where, until he was summoned in the City Fiscal's
Office in view of the complaint for estafa filed in connection therewith; and
that appellant has not paid as yet the amount of the check, or any part
thereof."

Inasmuch as the findings of fact of the Court of Appeals are final, the only
question of law for decision is whether under the facts found, estafa had
been accomplished.

Article 315, paragraph (d), subsection 2 of the Revised Penal Code,

punishes swindling committed "By post dating a check, or issuing such
check in payment of an obligation the offender knowing that at the time he
had no funds in the bank, or the funds deposited by him in the bank were

Page 51 of 344
not sufficient to cover the amount of the check, and without informing the
payee of such circumstances".

We believe that under this provision of law Ang Tek Lian was properly held
liable. In this connection, it must be stated that, as explained in People vs.
Fernandez (59 Phil., 615), estafa is committed by issuing either a
postdated check or an ordinary check to accomplish the deceit.

It is argued, however, that as the check had been made payable to "cash"
and had not been endorsed by Ang Tek Lian, the defendant is not guilty of
the offense charged. Based on the proposition that "by uniform practice of
all banks in the Philippines a check so drawn is invariably dishonored," the
following line of reasoning is advanced in support of the argument:

. . . When, therefore, he (the offended party ) accepted the check

(Exhibit A) from the appellant, he did so with full knowledge that it
would be dishonored upon presentment. In that sense, the appellant
could not be said to have acted fraudulently because the
complainant, in so accepting the check as it was drawn, must be
considered, by every rational consideration, to have done so fully
aware of the risk he was running thereby." (Brief for the appellant, p.
11.)

We are not aware of the uniformity of such practice. Instances have

undoubtedly occurred wherein the Bank required the indorsement of the
drawer before honoring a check payable to "cash." But cases there are too,
where no such requirement had been made . It depends upon the
circumstances of each transaction.

Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable
to the order of "cash" is a check payable to bearer, and the bank may pay it
to the person presenting it for payment without the drawer's indorsement.

A check payable to the order of cash is a bearer instrument.

Bacal vs. National City Bank of New York (1933), 146 Misc., 732; 262
N. Y. S., 839; Cleary vs. De Beck Plate Glass Co. (1907), 54 Misc.,
537; 104 N. Y. S., 831; Massachusetts Bonding & Insurance
Co. vs. Pittsburgh Pipe & Supply Co. (Tex. Civ. App., 1939), 135 S.
W. (2d), 818. See also H. Cook & Son vs. Moody (1916), 17 Ga.
App., 465; 87 S. E., 713.

Where a check is made payable to the order of "cash", the word cash
"does not purport to be the name of any person", and hence the
instrument is payable to bearer. The drawee bank need not obtain
any indorsement of the check, but may pay it to the person
presenting it without any indorsement. . . . (Zollmann, Banks and
Banking, Permanent Edition, Vol. 6, p. 494.)

Of course, if the bank is not sure of the bearer's identity or financial

solvency, it has the right to demand identification and /or assurance against
Page 52 of 344
possible complications, — for instance, (a) forgery of drawer's signature,
(b) loss of the check by the rightful owner, (c) raising of the amount
payable, etc. The bank may therefore require, for its protection, that the
indorsement of the drawer — or of some other person known to it — be
obtained. But where the Bank is satisfied of the identity and /or the
economic standing of the bearer who tenders the check for collection, it will
pay the instrument without further question; and it would incur no liability to
the drawer in thus acting.

A check payable to bearer is authority for payment to holder. Where a

check is in the ordinary form, and is payable to bearer, so that no
indorsement is required, a bank, to which it is presented for payment,
need not have the holder identified, and is not negligent in falling to
do so. . . . (Michie on Banks and Banking, Permanent Edition, Vol. 5,
p. 343.)

. . . Consequently, a drawee bank to which a bearer check is

presented for payment need not necessarily have the holder
identified and ordinarily may not be charged with negligence in failing
to do so. See Opinions 6C:2 and 6C:3 If the bank has no reasonable
cause for suspecting any irregularity, it will be protected in paying a
bearer check, "no matter what facts unknown to it may have occurred
prior to the presentment." 1 Morse, Banks and Banking, sec. 393.

Although a bank is entitled to pay the amount of a bearer check

without further inquiry, it is entirely reasonable for the bank to insist
that holder give satisfactory proof of his identity. . . . (Paton's Digest,
Vol. I, p. 1089.)

Anyway, it is significant, and conclusive, that the form of the check Exhibit
A was totally unconnected with its dishonor. The Court of Appeals declared
that it was returned unsatisfied because the drawer had insufficient funds—
not because the drawer's indorsement was lacking.

Wherefore, there being no question as to the correctness of the penalty

imposed on the appellant, the writ of certiorari is denied and the decision of
the Court of Appeals is hereby affirmed, with costs.

Moran, C. J., Ozaeta, Paras, Pablo, Tuason, and Reyes, JJ., concur.

Page 53 of 344
 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, defendants-respondents.

Yngson & Associates for petitioner.

Henry A. Reyes & Associates for Samso Tung & Asian Industrial Plastic
Corporation.
Eduardo G. Castelo for Sima Wei.
Monsod, Tamargo & Associates for Producers Bank.
Rafael S. Santayana for Mary Cheng Uy.

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 DEFENDANTS-RESPONDENTS.

The antecedent facts of this case are as follows:

Page 54 of 344
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:

Page 55 of 344
 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.3Delivery 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 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

Page 56 of 344
(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.

Page 57 of 344
 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,

Page 58 of 344
1959. 10At 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 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

Page 59 of 344
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:

THE LOWER COURT ERRED IN HOLDING THAT THE

DEFENDANT WAS IN DEFAULT.

II

Page 60 of 344
 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

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;
Page 61 of 344
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 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.

Page 62 of 344
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.

Page 63 of 344
 THIRD DIVISION
[G. R. No. 116320. November 29, 1999]
ADALIA FRANCISCO, petitioner, vs. COURT OF APPEALS , HERBY
COMMERCIAL & CONSTRUCTION CORPORATION AND JAIME
C. ONG, respondents.

DECISION
GONZAGA_REYES, J.:

Assailed in this petition for review on certiorari is the decision[1] of the

Court of Appeals affirming the decision[2] rendered by Branch 168 of the
Regional Trial Court of Pasig in Civil Case No. 35231 in favor of private
respondents.
The controversy before this Court finds its origins in a Land
Development and Construction Contract which was entered into on June
23, 1977 by A. Francisco Realty & Development Corporation (AFRDC), of
which petitioner Adalia Francisco (Francisco) is the president, and private
respondent Herby Commercial & Construction Corporation (HCCC),
represented by its President and General Manager private respondent
Jaime C. Ong (Ong), pursuant to a housing project of AFRDC at San Jose
del Monte, Bulacan, financed by the Government Service Insurance
System (GSIS). Under the contract, HCCC agreed to undertake the
construction of 35 housing units and the development of 35 hectares of
land. The payment of HCCC for its services was on a turn-key basis, that
is, HCCC was to be paid on the basis of the completed houses and
developed lands delivered to and accepted by AFRDC and the GSIS. To
facilitate payment, AFRDC executed a Deed of Assignment in favor of
HCCC to enable the latter to collect payments directly from the GSIS.
Furthermore, the GSIS and AFRDC put up an Executive Committee
Account with the Insular Bank of Asia & America (IBAA) in the amount of
P4,000,000.00 from which checks would be issued and co-signed by
petitioner Francisco and the GSIS Vice-President Armando Diaz (Diaz).
On February 10, 1978, HCCC filed a complaint[3] with the Regional Trial
Court of Quezon City against Francisco, AFRDC and the GSIS for the
collection of the unpaid balance under the Land Development and
Construction Contract in the amount of P515,493.89 for completed and
delivered housing units and land development. However, the parties
eventually arrived at an amicable settlement of their differences, which was
embodied in a Memorandum Agreement executed by HCCC and AFRDC
on July 21, 1978. Under the agreement, the parties stipulated that HCCC
had turned over 83 housing units which have been accepted and paid for
by the GSIS. The GSIS acknowledged that it still owed HCCC P520,177.50
representing incomplete construction of housing units, incomplete land
development and 5% retention, which amount will be discharged when the
defects and deficiencies are finally completed by HCCC. It was also
provided that HCCC was indebted to AFRDC in the amount of P180,234.91
which the former agreed would be paid out of the proceeds from the 40
Page 64 of 344
housing units still to be turned over by HCCC or from any amount due to
HCCC from the GSIS. Consequently, the trial court dismissed the case
upon the filing by the parties of a joint motion to dismiss.
Sometime in 1979, after an examination of the records of the GSIS,
Ong discovered that Diaz and Francisco had executed and signed seven
checks[4], of various dates and amounts, drawn against the IBAA and
payable to HCCC for completed and delivered work under the contract.
Ong, however, claims that these checks were never delivered to
HCCC. Upon inquiry with Diaz, Ong learned that the GSIS gave Francisco
custody of the checks since she promised that she would deliver the same
to HCCC. Instead, Francisco forged the signature of Ong, without his
knowledge or consent, at the dorsal portion of the said checks to make it
appear that HCCC had indorsed the checks; Francisco then indorsed the
checks for a second time by signing her name at the back of the checks
and deposited the checks in her IBAA savings account. IBAA credited
Franciscos account with the amount of the checks and the latter withdrew
the amount so credited.
On June 7, 1979, Ong filed complaints with the office of the city fiscal of
Quezon City, charging Francisco with estafa thru falsification of commercial
documents. Francisco denied having forged Ongs signature on the checks,
claiming that Ong himself indorsed the seven checks in behalf of HCCC
and delivered the same to Francisco in payment of the loans extended by
Francisco to HCCC. According to Francisco, she agreed to grant HCCC the
loans in the total amount of P585,000.00 and covered by eighteen
promissory notes in order to obviate the risk of the non-completion of the
project. As a means of repayment, Ong allegedly issued a Certification
authorizing Francisco to collect HCCCs receivables from the
GSIS. Assistant City Fiscal Ramon M. Gerona gave credence to
Franciscos claims and accordingly, dismissed the complaints, which
dismissal was affirmed by the Minister of Justice in a resolution issued on
June 5, 1981.
The present case was brought by private respondents on November 19,
1979 against Francisco and IBAA for the recovery of P370,475.00,
representing the total value of the seven checks, and for damages,
attorneys fees, expenses of litigation and costs. After trial on the merits, the
trial court rendered its decision in favor of private respondents, the
dispositive portion of which provides -

WHEREFORE, premises considered, judgment is hereby rendered in favor

of the plaintiffs and against the defendants INSULAR BANK OF ASIA &
AMERICA and ATTY. ADALIA FRANCISCO, to jointly and severally pay
the plaintiffs the amount of P370.475.00 plus interest thereon at the rate of
12% per annum from the date of the filing of the complaint until the full
amount is paid; moral damages to plaintiff Jaime Ong in the sum of
P50,000.00; exemplary damages of P50,000.00; litigation expenses of
P5,000.00; and attorneys fees of P50,000.00.

Page 65 of 344
With respect to the cross-claim of the defendant IBAA against its co-
defendant Atty. Adalia Francisco, the latter is ordered to reimburse the
former for the sums that the Bank shall pay to the plaintiff on the forged
checks including the interests paid thereon.

Further, the defendants are ordered to pay the costs.

Based upon the findings of handwriting experts from the National

Bureau of Investigation (NBI), the trial court held that Francisco had indeed
forged the signature of Ong to make it appear that he had indorsed the
checks. Also, the court ruled that there were no loans extended, reasoning
that it was unbelievable that HCCC was experiencing financial difficulties
so as to compel it to obtain the loans from AFRDC in view of the fact that
the GSIS had issued checks in favor of HCCC at about the same time that
the alleged advances were made. The trial court stated that it was plausible
that Francisco concealed the fact of issuance of the checks from private
respondents in order to make it appear as if she were accommodating
private respondents, when in truth she was lending HCCC its own money.
With regards to the Memorandum Agreement entered into between
AFRDC and HCCC in Civil Case No. Q-24628, the trial court held that the
same did not make any mention of the forged checks since private
respondents were as of yet unaware of their existence, that fact having
been effectively concealed by Francisco, until private respondents acquired
knowledge of Franciscos misdeeds in 1979.
IBAA was held liable to private respondents for having honored the
checks despite such obvious irregularities as the lack of initials to validate
the alterations made on the check, the absence of the signature of a co-
signatory in the corporate checks of HCCC and the deposit of the checks
on a second indorsement in the savings account of Francisco. However,
the trial court allowed IBAA recourse against Francisco, who was ordered
to reimburse the IBAA for any sums it shall have to pay to private
respondents.[5]
Both Francisco and IBAA appealed the trial courts decision, but the
Court of Appeals dismissed IBAAs appeal for its failure to file its brief within
the 45-day extension granted by the appellate court. IBAAs motion for
reconsideration and petition for review on certiorari filed with this Court
were also similarly denied. On November 21, 1989, IBAA and HCCC
entered into a Compromise Agreement which was approved by the trial
court, wherein HCCC acknowledged receipt of the amount of P370,475.00
in full satisfaction of its claims against IBAA, without prejudice to the right of
the latter to pursue its claims against Francisco.
On June 29, 1992, the Court of Appeals affirmed the trial courts ruling,
hence this petition for review on certiorari filed by petitioner, assigning the
following errors to the appealed decision

1. The respondent Court of Appeals erred in concluding that private

respondents did not owe Petitioner the sum covered by the Promissory

Page 66 of 344
Notes Exh.2-2-A-2-P (FRANCISCO). Such conclusion was based mainly
on conjectures, surmises and speculation contrary to the unrebutted
pleadings and evidence presented by petitioner.

2. The respondent Court of Appeals erred in holding that Petitioner falsified

the signature of private respondent ONG on the checks in question without
any authority therefor which is patently contradictory to the unrebutted
pleading and evidence that petitioner was expressly authorized by
respondent HERBY thru ONG to collect all receivables of HERBY from
GSIS to pay the loans extended to them. (Exhibit 3).

3. That respondent Court of Appeals erred in holding that the seven checks
in question were not taken up in the liquidation and reconciliation of all
outstanding account between AFRDC and HERBY as acknowledged by the
parties in Memorandum Agreement (Exh. 5) is a pure conjecture, surmise
and speculation contrary to the unrebutted evidence presented by
petitioners. It is an inference made which is manifestly mistaken.

4. The respondent Court of Appeals erred in affirming the decision of the

lower court and dismissing the appeal.[6]

The pivotal issue in this case is whether or not Francisco forged the
signature of Ong on the seven checks. In this connection, we uphold the
lower courts finding that the subject matter of the present case, specifically
the seven checks, drawn by GSIS and AFRDC, dated between October to
November 1977, in the total amount of P370,475.00 and payable to HCCC,
was not included in the Memorandum Agreement executed by HCCC and
AFRDC in Civil Case No. Q-24628. As observed by the trial court, aside
from there being absolutely no mention of the checks in the said
agreement, the amounts represented by said checks could not have been
included in the Memorandum Agreement executed in 1978 because private
respondents only discovered Franciscos acts of forgery in 1979. The lower
courts found that Francisco was able to easily conceal from private
respondents even the fact of the issuance of the checks since she was a
co-signatory thereof.[7] We also note that Francisco had custody of the
checks, as proven by the check vouchers bearing her uncontested
signature,[8] by which she, in effect, acknowledged having received the
checks intended for HCCC. This contradicts Franciscos claims that the
checks were issued to Ong who delivered them to Francisco already
indorsed.[9]
As regards the forgery, we concur with the lower courts finding that
Francisco forged the signature of Ong on the checks to make it appear as if
Ong had indorsed said checks and that, after indorsing the checks for a
second time by signing her name at the back of the checks, Francisco
deposited said checks in her savings account with IBAA. The forgery was
satisfactorily established in the trial court upon the strength of the findings
of the NBI handwriting expert.[10] Other than petitioners self-serving denials,
there is nothing in the records to rebut the NBIs findings. Well-entrenched
is the rule that findings of trial courts which are factual in nature, especially
Page 67 of 344
when affirmed by the Court of Appeals, deserve to be respected and
affirmed by the Supreme Court, provided it is supported by substantial
evidence on record,[11] as it is in the case at bench.
Petitioner claims that she was, in any event, authorized to sign Ongs
name on the checks by virtue of the Certification executed by Ong in her
favor giving her the authority to collect all the receivables of HCCC from the
GSIS, including the questioned checks.[12] Petitioners alternative defense
must similarly fail. The Negotiable Instruments Law provides that where
any person is under obligation to indorse in a representative capacity, he
may indorse in such terms as to negative personal liability.[13] An agent,
when so signing, should indicate that he is merely signing in behalf of the
principal and must disclose the name of his principal; otherwise he shall be
held personally liable.[14] Even assuming that Francisco was authorized by
HCCC to sign Ongs name, still, Francisco did not indorse the instrument in
accordance with law. Instead of signing Ongs name, Francisco should have
signed her own name and expressly indicated that she was signing as an
agent of HCCC. Thus, the Certification cannot be used by Francisco to
validate her act of forgery.
Every person who, contrary to law, wilfully or negligently causes
damage to another, shall indemnify the latter for the same.[15] Due to her
forgery of Ongs signature which enabled her to deposit the checks in her
own account, Francisco deprived HCCC of the money due it from the GSIS
pursuant to the Land Development and Construction Contract. Thus, we
affirm respondent courts award of compensatory damages in the amount of
P370,475.00, but with a modification as to the interest rate which shall be
six percent (6%) per annum, to be computed from the date of the filing of
the complaint since the amount of damages was alleged in the
complaint;[16] however, the rate of interest shall be twelve percent (12%) per
annum from the time the judgment in this case becomes final and
executory until its satisfaction and the basis for the computation of this
twelve percent (12%) rate of interest shall be the amount of
P370,475.00. This is in accordance with the doctrine enunciated in Eastern
Shipping Lines, Inc. vs. Court of Appeals, et al.,[17] which was reiterated
in Philippine National Bank vs. Court of Appeals,[18] Philippine Airlines, Inc.
vs. Court of Appeals[19]and in Keng Hua Paper Products Co., Inc. vs. Court
of Appeals,[20] which provides that -
1. When an obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due should
be that which may have been stipulated in writing. Furthermore, the interest
due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per annum to
be computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money,
is breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of six percent (6%) per
annum. No interest, however, shall be adjudged on unliquidated claims or

Page 68 of 344
damages except when or until the demand can be established with
reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim
is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the
court is made (at which time the quantification of damages may be deemed
to have been reasonably ascertained). The actual base for the computation
of legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be twelve percent (12%) per
annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.
We also sustain the award of exemplary damages in the amount of
P50,000.00. Under Article 2229 of the Civil Code, exemplary damages are
imposed by way of example or correction for the public good, in addition to
the moral, temperate, liquidated or compensatory damages. Considering
petitioners fraudulent act, we hold that an award of P50,000.00 would be
adequate, fair and reasonable. The grant of exemplary damages justifies
the award of attorney’s fees in the amount of P50,000.00, and the award of
P5,000.00 for litigation expenses.[21]
The appellate courts award of P50,000.00 in moral damages is
warranted. Under Article 2217 of the Civil Code, moral damages may be
granted upon proof of physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation and similar injury.[22] Ong testified that he suffered sleepless
nights, embarrassment, humiliation and anxiety upon discovering that the
checks due his company were forged by petitioner and that petitioner had
filed baseless criminal complaints against him before the fiscals office of
Quezon City which disrupted HCCCs business operations.[23]
WHEREFORE, we AFFIRM the respondent courts decision
promulgated on June 29, 1992, upholding the February 16, 1988 decision
of the trial court in favor of private respondents, with the modification that
the interest upon the actual damages awarded shall be at six percent (6%)
per annum, which interest rate shall be computed from the time of the filing
of the complaint on November 19, 1979. However, the interest rate shall be
twelve percent (12%) per annum from the time the judgment in this case
becomes final and executory and until such amount is fully paid. The basis
for computation of the six percent and twelve percent rates of interest shall
be the amount of P370,475.00. No pronouncement as to costs.
SO ORDERED.

Page 69 of 344
 FIRST DIVISION
[G.R. No. L – 29432. August 6, 1975]
JAI-ALAI CORPORATION OF THE PHILIPPINES, Petitioner, v. BANK OF
THE PHILIPPINE ISLAND, Respondent.

CASTRO, J.:
This is a petition by the Jai-Alai Corporation of the Philippines (hereinafter
referred to as the petitioner) for review of the decision of the Court of
Appeals in C.A.-G.R. 34042-R dated June 25, 1968 in favor of the Bank of
the Philippine Islands (hereinafter referred to as the respondent).

From April 2, 1959 to May 18, 1959, ten checks with a total face value of
P8,030.58 were deposited by the petitioner in its current account with the
respondent bank. The particulars of these checks are as follows:

1. Drawn by the Delta Engineering Service upon the Pacific Banking

Corporation and payable to the Inter-Island Gas Service Inc. or order:

Date Check Exhibit

Deposited Number Amount Number

4/2/59 B-352680 P500.00 18

4/20/59 A-156907 372.32 19

4/24/59 A-156924 397.82 20

5/4/59 B-364764 250.00 23

5/6/59 B-364775 250.00 24

2. Drawn by the Enrique Cortiz & Co. upon the Pacific Banking Corporation
and payable to the Inter-Island Gas Service, Inc. or bearer:

4/13/59 B-335063 P 2108.70 21

4/27/59 B-335072 P2210.94 22

3. Drawn by the Luzon Tinsmith & Company upon the China Banking
Corporation and payable to the Inter-Island Gas Service, Inc. or bearer:

5/18/59 VN430188 P940.80 25

4. Drawn by the Roxas Manufacturing, Inc. upon the Philippine National

Bank and payable to the Inter-Island Gas Service, Inc. order:

5/14/59 1860160 P 500.00 26

Page 70 of 344
5/18/59 1860660 P 500.00 27

All the foregoing checks, which were acquired by the petitioner from one
Antonio J. Ramirez, a sales agent of the Inter-Island Gas and a regular
bettor at jai-alai games, were, upon deposit, temporarily credited to the
petitioner's account in accordance with the clause printed on the deposit
slips issued by the respondent and which reads:

"Any credit allowed the depositor on the books of the Bank for checks or
drafts hereby received for deposit, is provisional only, until such time as the
proceeds thereof, in current funds or solvent credits, shall have been
actually received by the Bank and the latter reserves to itself the right to
charge back the item to the account of its depositor, at any time before that
event, regardless of whether or not the item itself can be returned."

About the latter part of July 1959, after Ramirez had resigned from the
Inter-Island Gas and after the checks had been submitted to inter-bank
clearing, the Inter-Island Gas discovered that all the indorsements made on
the checks purportedly by its cashiers, Santiago Amplayo and Vicenta
Mucor (who were merely authorized to deposit checks issued payable to
the said company) as well as the rubber stamp impression thereon reading
"Inter-Island Gas Service, Inc.," were forgeries. In due time, the Inter-Island
Gas advised the petitioner, the respondent, the drawers and the drawee-
banks of the said checks about the forgeries, and filed a criminal complaint
against Ramirez with the Office of the City Fiscal of Manila. 1

The respondent's cashier, Ramon Sarthou, upon receipt of the latter of

Inter-Island Gas dated August 31, 1959, called up the petitioner's cashier,
Manuel Garcia, and advised the latter that in view of the circumstances he
would debit the value of the checks against the petitioner's account as soon
as they were returned by the respective drawee-banks.

Meanwhile, the drawers of the checks, having been notified of the

forgeries, demanded reimbursement to their respective accounts from the
drawee-banks, which in turn demanded from the respondent, as collecting
bank, the return of the amounts they had paid on account thereof. When
the drawee-banks returned the checks to the respondent, the latter paid
their value which the former in turn paid to the Inter-Island Gas. The
respondent, for its part, debited the petitioner's current account and
forwarded to the latter the checks containing the forged indorsements,
which the petitioner, however, refused to accept.

On October 8, 1959 the petitioner drew against its current account with the
respondent a check for P135,000 payable to the order of the Mariano
Olondriz y Cia. in payment of certain shares of stock. The check was,
however, dishonored by the respondent as its records showed that as of
October 8, 1959 the current account of the petitioner, after netting out the
value of the checks P8,030.58) with the forged indorsements, had a
balance of only P128,257.65.
Page 71 of 344
The petitioner then filed a complaint against the respondent with the Court
of First Instance of Manila, which was however dismissed by the trial court
after due trial, and as well by the Court of Appeals, on appeal.

Hence, the present recourse.

The issues posed by the petitioner in the instant petition may be briefly
stated as follows:
(a) Whether the respondent had the right to debit the petitioner's current
account in the amount corresponding to the total value of the checks in
question after more than three months had elapsed from the date their
value was credited to the petitioner's account:(b) Whether the respondent is
estopped from claiming that the amount of P8,030.58, representing the
total value of the checks with the forged indorsements, had not been
properly credited to the petitioner's account, since the same had already
been paid by the drawee-banks and received in due course by the
respondent; and(c) On the assumption that the respondent had improperly
debited the petitioner's current account, whether the latter is entitled to
damages.

These three issues interlock and will be resolved jointly.

In our opinion, the respondent acted within legal bounds when it debited
the petitioner's account. When the petitioner deposited the checks with the
respondent, the nature of the relationship created at that stage was one of
agency, that is, the bank was to collect from the drawees of the checks the
corresponding proceeds. It is true that the respondent had already
collected the proceeds of the checks when it debited the petitioner's
account, so that following the rule in Gullas vs. Philippine National Bank 2 it
might be argued that the relationship between the parties had become that
of creditor and debtor as to preclude the respondent from using the
petitioner's funds to make payments not authorized by the latter. It is our
view nonetheless that no creditor-debtor relationship was created between
the parties.

Section 23 of the Negotiable Instruments Law (Act 2031) states that 3 —

"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."

Since under the foregoing provision, a forged signature in a negotiable

instrument is wholly inoperative and no right to discharge it or enforce its
payment can be acquired through or under the forged signature except
against a party who cannot invoke the forgery, it stands to reason, upon the
facts of record, that the respondent, as a collecting bank which indorsed
Page 72 of 344
the checks to the drawee-banks for clearing, should be liable to the latter
for reimbursement, for, as found by the court a quo and by the appellate
court, the indorsements on the checks had been forged prior to their
delivery to the petitioner. In legal contemplation, therefore, the payments
made by the drawee-banks to the respondent on account of the said
checks were ineffective; and, such being the case, the relationship of
creditor and debtor between the petitioner and the respondent had not
been validly effected, the checks not having been properly and legitimately
converted into cash. 4

In Great Eastern Life Ins. Co. vs. Hongkong & Shanghai Bank, 5 the Court
ruled that it is the obligation of the collecting bank to reimburse the drawee-
bank the value of the checks subsequently found to contain the forged
indorsement of the payee. The reason is that the bank with which the check
was deposited has no right to pay the sum stated therein to the forger "or
anyone else upon a forged signature." "It was its duty to know," said the
Court, "that [the payee's] endorsement was genuine before cashing the
check." The petitioner must in turn shoulder the loss of the amounts which
the respondent; as its collecting agent, had to reimburse to the drawee-
banks.

We do not consider material for the purposes of the case at bar that more
than three months had elapsed since the proceeds of the checks in
question were collected by the respondent. The record shows that the
respondent had acted promptly after being informed that the indorsements
on the checks were forged. Moreover, having received the checks merely
for collection and deposit, the respondent cannot he expected to know or
ascertain the genuineness of all prior indorsements on the said checks.
Indeed, having itself indorsed them to the respondent in accordance with
the rules and practices of commercial banks, of which the Court takes due
cognizance, the petitioner is deemed to have given the warranty prescribed
in Section 66 of the Negotiable Instruments Law that every single one of
those checks "is genuine and in all respects what it purports to be.".

The petitioner was, moreover, grossly recreant in accepting the checks in

question from Ramirez. It could not have escaped the attention of the
petitioner that the payee of all the checks was a corporation — the Inter-
Island Gas Service, Inc. Yet, the petitioner cashed these checks to a mere
individual who was admittedly a habitue at its jai-alai games without making
any inquiry as to his authority to exchange checks belonging to the payee-
corporation. In Insular Drug Co. vs. National 6 the Court made the
pronouncement that.

". . . The right of an agent to indorse commercial paper is a very

responsible power and will not be lightly inferred. A salesman with authority
to collect money belonging to his principal does not have the implied
authority to indorse checks received in payment. Any person taking checks
made payable to a corporation, which can act only by agents, does so at
his peril, and must abide by the consequences if the agent who indorses
Page 73 of 344
the same is without authority." (underscoring supplied)

It must be noted further that three of the checks in question are crossed
checks, namely, exhs. 21, 25 and 27, which may only be deposited, but not
encashed; yet, the petitioner negligently accepted them for cash. That two
of the crossed checks, namely, exhs. 21 and 25, are bearer instruments
would not, in our view, exculpate the petitioner from liability with respect to
them. The fact that they are bearer checks and at the same time crossed
checks should have aroused the petitioner's suspicion as to the title of
Ramirez over them and his authority to cash them (apparently to purchase
jai-alai tickets from the petitioner), it appearing on their face that a
corporate entity — the Inter Island Gas Service, Inc. — was the payee
thereof and Ramirez delivered the said checks to the petitioner ostensibly
on the strength of the payee's cashiers' indorsements.

At all events, under Section 67 of the Negotiable Instruments Law, "Where

a person places his indorsement on an instrument negotiable by delivery
he incurs all the liability of an indorser," and under Section 66 of the same
statute a general indorser warrants that the instrument "is genuine and in
all respects what it purports to be." Considering that the petitioner indorsed
the said checks when it deposited them with the respondent, the petitioner
as an indorser guaranteed the genuineness of all prior indorsements
thereon. The respondent which relied upon the petitioner's warranty should
not be held liable for the resulting loss. This conclusion applied similarly to
exh. 22 which is an uncrossed bearer instrument, for under Section 65 of
the Negotiable Instrument Law. "Every person negotiating an instrument by
delivery . . . warrants (a) That the instrument is genuine and in all respects
what it purports to be." Under that same section this warranty "extends in
favor of no holder other than the immediate transferee," which, in the case
at bar, would be the respondent.

The provision in the deposit slip issued by the respondent which stipulates
that it "reserves to itself the right to charge back the item to the account of
its depositor," at any time before "current funds or solvent credits shall have
been actually received by the Bank," would not materially affect the
conclusion we have reached. That stipulation prescribes that there must be
an actual receipt by the bank of current funds or solvent credits; but as we
have earlier indicated the transfer by the drawee-banks of funds to the
respondent on account of the checks in question was ineffectual because
made under the mistaken and valid assumption that the indorsements of
the payee thereon were genuine. Under article 2154 of the New Civil Code
"If something is received when there is no right to demand it and it was
unduly delivered through mistake, the obligation to return it arises." There
was, therefore, in contemplation of law, no valid payment of money made
by the drawee-banks to the respondent on account of the questioned
checks.
ACCORDINGLY, the judgment of the Court of Appeals is affirmed, at
petitioner's cost.

Page 74 of 344
 FIRST DIVISION
G.R. No. L-40796 July 31, 1975
REPUBLIC BANK, plaintiff-appellee,
vs.
MAURICIA T. EBRADA, defendant-appellant.

Sabino de Leon, Jr. for plaintiff-appellee.

Julio Baldonado for defendant-appellant.

MARTIN, J.:

Appeal on a question of law of the decision of the Court of First Instance of

Manila, Branch XXIII in Civil Case No. 69288, entitled "Republic Bank vs.
Mauricia T. Ebrada."

On or about February 27, 1963 defendant Mauricia T. Ebrada, encashed

Back Pay Check No. 508060 dated January 15, 1963 for P1,246.08 at the
main office of the plaintiff Republic Bank at Escolta, Manila. The check was
issued by the Bureau of Treasury.1 Plaintiff Bank was later advised by the
said bureau that the alleged indorsement on the reverse side of the
aforesaid check by the payee, "Martin Lorenzo" was a forgery2 since the
latter had allegedly died as of July 14, 1952.3 Plaintiff Bank was then
requested by the Bureau of Treasury to refund the amount of
P1,246.08.4 To recover what it had refunded to the Bureau of Treasury,
plaintiff Bank made verbal and formal demands upon defendant Ebrada to
account for the sum of P1,246.08, but said defendant refused to do so. So
plaintiff Bank sued defendant Ebrada before the City Court of Manila.

On July 11, 1966, defendant Ebrada filed her answer denying the material
allegations of the complaint and as affirmative defenses alleged that she
was a holder in due course of the check in question, or at the very least,
has acquired her rights from a holder in due course and therefore entitled
to the proceeds thereof. She also alleged that the plaintiff Bank has no
cause of action against her; that it is in estoppel, or so negligent as not to
be entitled to recover anything from her.5

About the same day, July 11, 1966 defendant Ebrada filed a Third-Party
complaint against Adelaida Dominguez who, in turn, filed on September 14,
1966 a Fourth-Party complaint against Justina Tinio.

On March 21, 1967, the City Court of Manila rendered judgment for the
plaintiff Bank against defendant Ebrada; for Third-Party plaintiff against
Third-Party defendant, Adelaida Dominguez, and for Fourth-Party plaintiff
against Fourth-Party defendant, Justina Tinio.

From the judgment of the City Court, defendant Ebrada took an appeal to
the Court of First Instance of Manila where the parties submitted a partial
stipulation of facts as follows:

Page 75 of 344
 COME NOW the undersigned counsel for the plaintiff,
defendant, Third-Party defendant and Fourth-Party plaintiff and
unto this Honorable Court most respectfully submit the
following:

PARTIAL STIPULATION OF FACTS

1. That they admit their respective capacities to sue and be

sued;

2. That on January 15, 1963 the Treasury of the Philippines

issued its Check No. BP-508060, payable to the order of one
MARTIN LORENZO, in the sum of P1,246.08, and drawn on
the Republic Bank, plaintiff herein, which check will be marked
as Exhibit "A" for the plaintiff;

3. That the back side of aforementioned check bears the

following signatures, in this order:

1) MARTIN LORENZO;
2) RAMON R. LORENZO;
3) DELIA DOMINGUEZ; and
4) MAURICIA T. EBRADA;

4. That the aforementioned check was delivered to the

defendant MAURICIA T. EBRADA by the Third-Party defendant
and Fourth-Party plaintiff ADELAIDA DOMINGUEZ, for the
purpose of encashment;

5. That the signature of defendant MAURICIA T. EBRADA was

affixed on said check on February 27, 1963 when she
encashed it with the plaintiff Bank;

6. That immediately after defendant MAURICIA T. EBRADA

received the cash proceeds of said check in the sum of
P1,246.08 from the plaintiff Bank, she immediately turned over
the said amount to the third-party defendant and fourth-party
plaintiff ADELAIDA DOMINGUEZ, who in turn handed the said
amount to the fourth-party defendant JUSTINA TINIO on the
same date, as evidenced by the receipt signed by her which will
be marked as Exhibit "1-Dominguez"; and

7. That the parties hereto reserve the right to present evidence

on any other fact not covered by the foregoing stipulations,

Manila, Philippines, June 6, 1969.

Based on the foregoing stipulation of facts and the documentary evidence

presented, the trial court rendered a decision, the dispositive portion of
which reads as follows:

Page 76 of 344
 WHEREFORE, the Court renders judgment ordering the
defendant Mauricia T. Ebrada to pay the plaintiff the amount of
ONE THOUSAND TWO FORTY-SIX 08/100 (P1,246.08), with
interest at the legal rate from the filing of the complaint on June
16, 1966, until fully paid, plus the costs in both instances
against Mauricia T. Ebrada.

The right of Mauricia T. Ebrada to file whatever claim she may

have against Adelaida Dominguez in connection with this case
is hereby reserved. The right of the estate of Dominguez to file
the fourth-party complaint against Justina Tinio is also reserved.

SO ORDERED.

In her appeal, defendant-appellant presses that the lower court erred:

IN ORDERING THE APPELLANT TO PAY THE APPELLEE

THE FACE VALUE OF THE SUBJECT CHECK AFTER
FINDING THAT THE DRAWER ISSUED THE SUBJECT
CHECK TO A PERSON ALREADY DECEASED FOR 11-½
YEARS AND THAT THE APPELLANT DID NOT BENEFIT
FROM ENCASHING SAID CHECK.

From the stipulation of facts it is admitted that the check in question was
delivered to defendant-appellant by Adelaida Dominguez for the purpose of
encashment and that her signature was affixed on said check when she
cashed it with the plaintiff Bank. Likewise it is admitted that defendant-
appellant was the last indorser of the said check. As such indorser, she
was supposed to have warranted that she has good title to said check; for
under Section 65 of the Negotiable Instruments Law:6

Every person negotiating an instrument by delivery or by

qualified indorsement, warrants:

(a) That the instrument is genuine and in all respects what it

purports to be.
(b) That she has good title to it.

xxx xxx xxx

and under Section 65 of the same Act:

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 sections;
(b) That the instrument is at the time of his indorsement valid
and subsisting.

Page 77 of 344
It turned out, however, that the signature of the original payee of the check,
Martin Lorenzo was a forgery because he was already dead 7 almost 11
years before the check in question was issued by the Bureau of Treasury.
Under action 23 of the Negotiable Instruments Law (Act 2031):

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 instruments, or to give a
discharge 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.

It is clear from the provision that where the signature on a negotiable

instrument if forged, the negotiation of the check is without force or effect.
But does this mean that the existence of one forged signature therein will
render void all the other negotiations of the check with respect to the other
parties whose signature are genuine?

In the case of Beam vs. Farrel, 135 Iowa 670, 113 N.W. 590, where a
check has several indorsements on it, it was held that it is only the
negotiation based on the forged or unauthorized signature which is
inoperative. Applying this principle to the case before Us, it can be safely
concluded that it is only the negotiation predicated on the forged
indorsement that should be declared inoperative. This means that the
negotiation of the check in question from Martin Lorenzo, the original
payee, to Ramon R. Lorenzo, the second indorser, should be declared of
no affect, but the negotiation of the aforesaid check from Ramon R.
Lorenzo to Adelaida Dominguez, the third indorser, and from Adelaida
Dominguez to the defendant-appellant who did not know of the forgery,
should be considered valid and enforceable, barring any claim of forgery.

What happens then, if, after the drawee bank has paid the amount of the
check to the holder thereof, it was discovered that the signature of the
payee was forged? Can the drawee bank recover from the one who
encashed the check?

In the case of State v. Broadway Mut. Bank, 282 S.W. 196, 197, it was held
that the drawee of a check can recover from the holder the money paid to
him on a forged instrument. It is not supposed to be its duty to ascertain
whether the signatures of the payee or indorsers are genuine or not. This is
because the indorser is supposed to warrant to the drawee that the
signatures of the payee and previous indorsers are genuine, warranty not
extending only to holders in due course. One who purchases a check or
draft is bound to satisfy himself that the paper is genuine and that by
indorsing it or presenting it for payment or putting it into circulation before
presentation he impliedly asserts that he has performed his duty and the
drawee who has paid the forged check, without actual negligence on his
part, may recover the money paid from such negligent purchasers. In such

Page 78 of 344
cases the recovery is permitted because although the drawee was in a way
negligent in failing to detect the forgery, yet if the encasher of the check
had performed his duty, the forgery would in all probability, have been
detected and the fraud defeated. The reason for allowing the drawee bank
to recover from the encasher is:

Every one with even the least experience in business knows

that no business man would accept a check in exchange for
money or goods unless he is satisfied that the check is
genuine. He accepts it only because he has proof that it is
genuine, or because he has sufficient confidence in the honesty
and financial responsibility of the person who vouches for it. If
he is deceived he has suffered a loss of his cash or goods
through his own mistake. His own credulity or recklessness, or
misplaced confidence was the sole cause of the loss. Why
should he be permitted to shift the loss due to his own fault in
assuming the risk, upon the drawee, simply because of the
accidental circumstance that the drawee afterwards failed to
detect the forgery when the check was presented?8

Similarly, in the case before Us, the defendant-appellant, upon receiving

the check in question from Adelaida Dominguez, was duty-bound to
ascertain whether the check in question was genuine before presenting it to
plaintiff Bank for payment. Her failure to do so makes her liable for the loss
and the plaintiff Bank may recover from her the money she received for the
check. As reasoned out above, had she performed the duty of ascertaining
the genuineness of the check, in all probability the forgery would have been
detected and the fraud defeated.

In our jurisdiction We have a case of similar import. 9 The Great Eastern

Life Insurance Company drew its check for P2000.00 on the Hongkong and
Shanghai Banking Corporation payable to the order of Lazaro Melicor. A
certain E. M. Maasin fraudulently obtained the check and forged the
signature of Melicor, as an indorser, and then personally indorsed and
presented the check to the Philippine National Bank where the amount of
the check was placed to his (Maasin's) credit. On the next day, the
Philippine National Bank indorsed the cheek to the Hongkong and
Shanghai Banking Corporation which paid it and charged the amount of the
check to the insurance company. The Court held that the Hongkong and
Shanghai Banking Corporation was liable to the insurance company for the
amount of the check and that the Philippine National Bank was in turn liable
to the Hongkong and Shanghai Banking Corporation. Said the Court:

Where a check is drawn payable to the order of one person and

is presented to a bank by another and purports upon its face to
have been duly indorsed by the payee of the check, it is the
duty of the bank to know that the check was duly indorsed by
the original payee, and where the bank pays the amount of the
check to a third person, who has forged the signature of the

Page 79 of 344
 payee, the loss falls upon the bank who cashed the check, and
its only remedy is against the person to whom it paid the
money.

With the foregoing doctrine We are to concede that the plaintiff Bank
should suffer the loss when it paid the amount of the check in question to
defendant-appellant, but it has the remedy to recover from the latter the
amount it paid to her. Although the defendant-appellant to whom the
plaintiff Bank paid the check was not proven to be the author of the
supposed forgery, yet as last indorser of the check, she has warranted that
she has good title to it 10 even if in fact she did not have it because the
payee of the check was already dead 11 years before the check was
issued. The fact that immediately after receiving title cash proceeds of the
check in question in the amount of P1,246.08 from the plaintiff Bank,
defendant-appellant immediately turned over said amount to Adelaida
Dominguez (Third-Party defendant and the Fourth-Party plaintiff) who in
turn handed the amount to Justina Tinio on the same date would not
exempt her from liability because by doing so, she acted as an
accommodation party in the check for which she is also liable under
Section 29 of the Negotiable Instruments Law (Act 2031), thus: .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.

IN VIEW OF THE FOREGOING, the judgment appealed from is hereby

affirmed in toto with costs against defendant-appellant.

SO ORDERED.

Makalintal, C.J, Castro, Makasiar and Esguerra, JJ., concur.

Page 80 of 344
 SECOND DIVISION

G.R. No. L-62943 July 14, 1986

METROPOLITAN WATERWORKS AND SEWERAGE
SYSTEM, petitioner,
vs.
COURT OF APPEALS (Now INTERMEDIATE APPELLATE COURT) and
THE PHILIPPINE NATIONAL BANK, respondents.

Juan J. Diaz and Cesar T. Basa for respondent PNB.

San Juan, Africa, Gonzales & San Agustin Law Offices for respondent
PCIB.

GUTIERREZ, JR., J.:

This petition for review asks us to set aside the October 29, 1982 decision
of the respondent Court of Appeals, now Intermediate Appellate Court
which reversed the decision of the Court of First Instance of Manila, Branch
XL, and dismissed the plaintiff's complaint, the third party complaint, as well
as the defendant's counterclaim.

The background facts which led to the filing of the instant petition are
summarized in the decision of the respondent Court of Appeals:

Metropolitan Waterworks and Sewerage System (hereinafter

referred to as MWSS) is a government owned and controlled
corporation created under Republic Act No. 6234 as the
successor-in- interest of the defunct NWSA. The Philippine
National Bank (PNB for short), on the other hand, is the
depository bank of MWSS and its predecessor-in-interest
NWSA. Among the several accounts of NWSA with PNB is
NWSA Account No. 6, otherwise known as Account No. 381-
777 and which is presently allocated No. 010-500281. The
authorized signature for said Account No. 6 were those of
MWSS treasurer Jose Sanchez, its auditor Pedro Aguilar, and
its acting General Manager Victor L. Recio. Their respective
specimen signatures were submitted by the MWSS to and on
file with the PNB. By special arrangement with the PNB, the
MWSS used personalized checks in drawing from this account.
These checks were printed for MWSS by its printer, F. Mesina
Enterprises, located at 1775 Rizal Extension, Caloocan City.

During the months of March, April and May 1969, twenty-three

(23) checks were prepared, processed, issued and released by
NWSA, all of which were paid and cleared by PNB and debited
by PNB against NWSA Account No. 6, to wit:

Check No. Date Payee Amount Date Paid

By PNB
Page 81 of 344
1. 59546 8-21-69 Deogracias P 3,187.79 4-2-69

Estrella

2. 59548 3-31-69 Natividad 2,848.86 4-23 69

Rosario

3. 59547 3-31-69 Pangilinan 195.00 Unreleased

Enterprises

4. 59549 3-31-69 Natividad 3,239.88 4-23-69

Rosario

5. 59552 4-1-69 Villarama 987.59 5-6-69

& Sons

6. 59554 4-1-69 Gascom 6,057.60 4-16 69

Engineering

7. 59558 4-2-69 The Evening 112.00 Unreleased

News

8. 59544 3-27-69 Progressive 18,391.20 4-18 69

Const.

9. 59564 4-2-69 Ind. Insp. 594.06 4-18 69

Int. Inc.

10. 59568 4-7-69 Roberto 800.00 4-22-69

Marsan

11. 59570 4-7-69 Paz Andres 200.00 4-22-69

12. 59574 4-8-69 Florentino 100,000.00 4-11-69

Santos

13. 59578 4-8-69 Mla. Daily 95.00 Unreleased

Bulletin

14. 59580 4-8-69 Phil. Herald 100.00 5-9-69

Page 82 of 344
15. 59582 4-8-69 Galauran 7,729.09 5-6-69

& Pilar

16. 59581 4-8-69 Manila 110.00 5-12 69

Chronicle

17. 59588 4-8-69 Treago 21,583.00 4-11 69

Tunnel

18. 59587 4-8-69 Delfin 120,000.00 4-11-69

Santiago

19. 59589 4-10-69 Deogracias 1,257.49 4-16 69

Estrella

20. 59594 4-14-69 Philam Ac- 33.03 4-29 69

cident Inc.

21. 59577 4-8-69 Esla 9,429.78 4-29 69

22. 59601 4-16-69 Justino 20,000.00 4-18-69

Torres

23. 59595 4-14-69 Neris Phil. 4,274.00 5-20-69

Inc. --------------------

P 320,636.26

During the same months of March, April and May 1969, twenty-
three (23) checks bearing the same numbers as the
aforementioned NWSA checks were likewise paid and cleared
by PNB and debited against NWSA Account No. 6, to wit:

Check Date Payee Amount Date Paid

No. Issued By PNB

1. 59546 3-6-69 Raul Dizon P 84,401.00 3-16-69

2. 59548 3-11-69 Raul Dizon 104,790.00 4-1-69

3. 59547 3-14-69 Arturo Sison 56,903.00 4-11-69

4. 59549 3-20-69 Arturo Sison 48,903.00 4-15-69

Page 83 of 344
5. 59552 3-24-69 Arturo Sison 63,845.00 4-16-69

6. 59544 3-26-69 Arturo Sison 98,450.00 4-17-69

7. 59558 3-28-69 Arturo Sison 114,840.00 4-21-69

8. 59544 3-16-69 Antonio 38,490.00 4-22-69 Mendoza

9. 59564 3-31-69 Arturo Sison 180,900.00 4-23-69

10.59568 4-2-69 Arturo Sison 134,940.00 4- 5-69

11.59570 4-1-69 Arturo Sison 64,550.00 4-28-69

12.59574 4-2-69 Arturo Sison 148,610.00 4-29-69

13.59578 4-10-69 Antonio 93,950.00 4-29-69

Mendoza

14.59580 4-8-69 Arturo Sison 160,000.00 5-2-69

15.59582 4-10-69 Arturo Sison 155,400.00 5-5-69

16.59581 4-8-69 Antonio 176,580.00 5-6-69

Mendoza

17.59588 4-16-69 Arturo Sison 176,000.00 5-8-69

18.59587 4-16-69 Arturo Sison 300,000.00 5-12-69

19.59589 4-18-69 Arturo Sison 122,000.00 5-14-69

20.59594 4-18-69 Arturo Sison 280,000.00 5-15-69

21.59577 4-14-69 Antonio 260,000.00 5-16-69

Mendoza

22.59601 4-18-69 Arturo Sison 400,000.00 5-19-69

23.59595 4-28-69 Arturo Sison 190,800.00 5-21-69

---------------

P3,457,903.00

The foregoing checks were deposited by the payees Raul

Dizon, Arturo Sison and Antonio Mendoza in their respective
current accounts with the Philippine Commercial and Industrial
Bank (PCIB) and Philippine Bank of Commerce (PBC) in the
months of March, April and May 1969. Thru the Central Bank
Page 84 of 344
 Clearing, these checks were presented for payment by PBC
and PCIB to the defendant PNB, and paid, also in the months
of March, April and May 1969. At the time of their presentation
to PNB these checks bear the standard indorsement which
reads 'all prior indorsement and/or lack of endorsement
guaranteed.'

Subsequent investigation however, conducted by the NBI

showed that Raul Dizon, Arturo Sison and Antonio Mendoza
were all fictitious persons. The respective balances in their
current account with the PBC and/or PCIB stood as follows:
Raul Dizon P3,455.00 as of April 30, 1969; Antonio Mendoza
P18,182.00 as of May 23, 1969; and Arturo Sison Pl,398.92 as
of June 30, 1969.

On June 11, 1969, NWSA addressed a letter to PNB requesting

the immediate restoration to its Account No. 6, of the total sum
of P3,457,903.00 corresponding to the total amount of these
twenty-three (23) checks claimed by NWSA to be forged and/or
spurious checks. "In view of the refusal of PNB to credit back to
Account No. 6 the said total sum of P3,457,903.00 MWSS filed
the instant complaint on November 10, 1972 before the Court of
First Instance of Manila and docketed thereat as Civil Case No.
88950.

In its answer, PNB contended among others, that the checks in

question were regular on its face in all respects, including the
genuineness of the signatures of authorized NWSA signing
officers and there was nothing on its face that could have
aroused any suspicion as to its genuineness and due execution
and; that NWSA was guilty of negligence which was the
proximate cause of the loss.

PNB also filed a third party complaint against the negotiating

banks PBC and PCIB on the ground that they failed to ascertain
the Identity of the payees and their title to the checks which
were deposited in the respective new accounts of the payees
with them.

xxx xxx xxx

On February 6, 1976, the Court of First Instance of Manila rendered

judgment in favor of the MWSS. The dispositive portion of the decision
reads:

WHEREFORE, on the COMPLAINT by a clear preponderance

of evidence and in accordance with Section 23 of the
Negotiable Instruments Law, the Court hereby renders
judgment in favor of the plaintiff Metropolitan Waterworks and
Sewerage System (MWSS) by ordering the defendant
Page 85 of 344
 Philippine National Bank (PNB) to restore the total sum of
THREE MILLION FOUR HUNDRED FIFTY SEVEN
THOUSAND NINE HUNDRED THREE PESOS
(P3,457,903.00) to plaintiff's Account No. 6, otherwise known
as Account No. 010-50030-3, with legal interest thereon
computed from the date of the filing of the complaint and until
as restored in the said Account No. 6.

On the THIRD PARTY COMPLAINT, the Court, for lack of

evidence, hereby renders judgment in favor of the third party
defendants Philippine Bank of Commerce (PBC) and Philippine
Commercial and Industrial Bank (PCIB) by dismissing the Third
Party Complaint.

The counterclaims of the third party defendants are likewise

dismissed for lack of evidence.

No pronouncement as to costs.

As earlier stated, the respondent court reversed the decision of the Court of
First Instance of Manila and rendered judgment in favor of the respondent
Philippine National Bank.

A motion for reconsideration filed by the petitioner MWSS was denied by

the respondent court in a resolution dated January 3, 1983.

The petitioner now raises the following assignments of errors for the grant
of this petition:

I. IN NOT HOLDING THAT AS THE SIGNATURES ON THE

CHECKS WERE FORGED, THE DRAWEE BANK WAS
LIABLE FOR THE LOSS UNDER SECTION 23 OF THE
NEGOTIABLE INSTRUMENTS LAW.

II. IN FAILING TO CONSIDER THE PROXIMATE

NEGLIGENCE OF PNB IN ACCEPTING THE SPURIOUS
CHECKS DESPITE THE OBVIOUS IRREGULARITY OF TWO
SETS OF CHECKS BEARING IdENTICAL NUMBER BEING
ENCASHED WITHIN DAYS OF EACH OTHER.

III. IN NOT HOLDING THAT THE SIGNATURES OF THE

DRAWEE MWSS BEING CLEARLY FORGED, AND THE
CHECKS SPURIOUS, SAME ARE INOPERATIVE AS
AGAINST THE ALLEGED DRAWEE.

The appellate court applied Section 24 of the Negotiable Instruments Law

which provides:

Every negotiable instrument is deemed prima facie to have

been issued for valuable consideration and every person whose

Page 86 of 344
 signature appears thereon to have become a party thereto for
value.

The petitioner submits that the above provision does not apply to the facts
of the instant case because the questioned checks were not those of the
MWSS and neither were they drawn by its authorized signatories. The
petitioner states that granting that Section 24 of the Negotiable Instruments
Law is applicable, the same creates only a prima facie presumption which
was overcome by the following documents, to wit: (1) the NBI Report of
November 2, 1970; (2) the NBI Report of November 21, 1974; (3) the NBI
Chemistry Report No. C-74891; (4) the Memorandum of Mr. Juan Dino, 3rd
Assistant Auditor of the respondent drawee bank addressed to the Chief
Auditor of the petitioner; (5) the admission of the respondent bank's
counsel in open court that the National Bureau of Investigation found the
signature on the twenty-three (23) checks in question to be forgeries; and
(6) the admission of the respondent bank's witness, Mr. Faustino Mesina,
Jr. that the checks in question were not printed by his printing press. The
petitioner contends that since the signatures of the checks were forgeries,
the respondent drawee bank must bear the loss under the rulings of this
Court.

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 obligation funds, and cannot ordinarily
charge the amount so paid to the account of the depositor
whose name was forged.

xxx xxx xxx

The signatures to the checks being forged, under Section 23 of

the Negotiable Instruments Law they are not a charge against
plaintiff nor are the checks of any value to the defendant.

It must therefore be held that the proximate cause of loss was

due to the negligence of the Bank of the Philippine Islands in
honoring and cashing the two forged checks. (San Carlos
Milling Co. v. Bank of the P. I., 59 Phil. 59)

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 the forger. That the Philippine
National Bank then endorsed the chock 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 forged signature. It was its legal duty to
know that Malicor's endorsement was genuine before cashing
the check. Its remedy is against Maasim to whom it paid the
money. (Great Eastern Life Ins. Co. v. Hongkong & Shanghai
Bank, 43 Phil. 678).

Page 87 of 344
We have carefully reviewed the documents cited by the petitioner. There is
no express and categorical finding in these documents that the twenty-
three (23) questioned checks were indeed signed by persons other than
the authorized MWSS signatories. On the contrary, the findings of the
National Bureau of Investigation in its Report dated November 2, 1970
show that the MWSS fraud was an "inside job" and that the petitioner's
delay in the reconciliation of bank statements and the laxity and loose
records control in the printing of its personalized checks facilitated the
fraud. Likewise, the questioned Documents Report No. 159-1074 dated
November 21, 1974 of the National Bureau of Investigation does not
declare or prove that the signatures appearing on the questioned checks
are forgeries. The report merely mentions the alleged differences in the
type face, checkwriting, and printing characteristics appearing in the
standard or submitted models and the questioned typewritings. The NBI
Chemistry Report No. C-74-891 merely describes the inks and pens used
in writing the alleged forged signatures.

It is clear that these three (3) NBI Reports relied upon by the petitioner are
inadequate to sustain its allegations of forgery. These reports did not touch
on the inherent qualities of the signatures which are indispensable in the
determination of the existence of forgery. There must be conclusive
findings that there is a variance in the inherent characteristics of the
signatures and that they were written by two or more different persons.

Forgery cannot be presumed (Siasat, et al. v. Intermediate Appellate Court,

et al, 139 SCRA 238). It must be established by clear, positive, and
convincing evidence. This was not done in the present case.

The cases of San Carlos Milling Co. Ltd. v. Bank of the Philippine Islands,
et al. (59 Phil. 59) and Great Eastern Life Ins., Co. v. Hongkong and
Shanghai Bank (43 Phil. 678) relied upon by the petitioner are inapplicable
in this case because the forgeries in those cases were either clearly
established or admitted while in the instant case, the allegations of forgery
were not clearly established during trial.

Considering the absence of sufficient security in the printing of the checks

coupled with the very close similarities between the genuine signatures and
the alleged forgeries, the twenty-three (23) checks in question could have
been presented to the petitioner's signatories without their knowing that
they were bogus checks. Indeed, the cashier of the petitioner whose
signatures were allegedly forged was unable to ten the difference between
the allegedly forged signature and his own genuine signature. On the other
hand, the MWSS officials admitted that these checks could easily be
passed on as genuine.

The memorandum of Mr. A. T. Tolentino, no, Assistant Chief Accountant of

the drawee Philippine National Bank to Mr. E. Villatuya, Executive Vice-
President of the petitioner dated June 9, 1969 cites an instance where even

Page 88 of 344
the concerned NWSA officials could not ten the differences between the
genuine checks and the alleged forged checks.

At about 12:00 o'clock on June 6, 1969, VP Maramag

requested me to see him in his office at the Cashier's Dept.
where Messrs. Jose M. Sanchez, treasurer of NAWASA and
Romeo Oliva of the same office were present. Upon my arrival I
observed the NAWASA officials questioning the issue of the
NAWASA checks appearing in their own list, xerox copy
attached.

For verification purposes, therefore, the checks were taken from

our file. To everybody there present namely VIP Maramag, the
two abovementioned NAWASA officials, AVP, Buhain, Asst.
Cashier Castelo, Asst. Cashier Tejada and Messrs. A. Lopez
and L. Lechuga, both C/A bookkeepers, no one was able to
point out any difference on the signatures of the NAWASA
officials appearing on the checks compared to their official
signatures on file. In fact 3 checks, one of those under
question, were presented to the NAWASA treasurer for
verification but he could not point out which was his genuine
signature. After intent comparison, he pointed on the
questioned check as bearing his correct signature.

xxx xxx xxx

Moreover, the petitioner is barred from setting up the defense of forgery

under Section 23 of the Negotiable Instruments Law which provides that:

SEC. 23. FORGED SIGNATURE; EFFECT OF.- When the

signature is forged or made without 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.

because it was guilty of negligence not only before the questioned checks
were negotiated but even after the same had already been negotiated.
(See Republic v. Equitable Banking Corporation, 10 SCRA 8) The records
show that at the time the twenty-three (23) checks were prepared,
negotiated, and encashed, the petitioner was using its own personalized
checks, instead of the official PNB Commercial blank checks. In the
exercise of this special privilege, however, the petitioner failed to provide
the needed security measures. That there was gross negligence in the
printing of its personalized checks is shown by the following uncontroverted
facts, to wit:

Page 89 of 344
(1) The petitioner failed to give its printer, Mesina Enterprises, specific
instructions relative to the safekeeping and disposition of excess forms,
check vouchers, and safety papers;

(2) The petitioner failed to retrieve from its printer all spoiled check forms;

(3) The petitioner failed to provide any control regarding the paper used in
the printing of said checks;

(4) The petitioner failed to furnish the respondent drawee bank with
samples of typewriting, cheek writing, and print used by its printer in the
printing of its checks and of the inks and pens used in signing the same;
and

(5) The petitioner failed to send a representative to the printing office during
the printing of said checks.

This gross negligence of the petitioner is very evident from the sworn
statement dated June 19, 1969 of Faustino Mesina, Jr., the owner of the
printing press which printed the petitioner's personalized checks:

xxx xxx xxx

7. Q: Do you have any business transaction with the

National Waterworks and Sewerage Authority
(NAWASA)?

A: Yes, sir. I have a contract with the NAWASA in

printing NAWASA Forms such as NAWASA Check

xxx xxx xxx

15. Q: Were you given any ingtruction by the

NAWASA in connection with the printing of these
check vouchers?

A: There is none, sir. No instruction whatsoever was

given to me.

16. Q: Were you not advised as to what kind of

paper would be used in the check vouchers?

A: Only as per sample, sir.

xxx xxx xxx

20. Q: Where did you buy this Hammermill Safety

check paper?

Page 90 of 344
A: From Tan Chiong, a paper dealer with store
located at Juan Luna, Binondo, Manila. (In front of
the Metropolitan Bank).

xxx xxx xxx

24. Q: Were all these check vouchers printed by

you submitted to NAWASA?

A: Not all, sir. Because we have to make

reservations or allowances for spoilage.

25. Q: Out of these vouchers printed by you, how

many were spoiled and how many were the excess
printed check vouchers?

A: Approximately four hundred (400) sheets, sir. I

cannot determine the proportion of the excess and
spoiled because the final act of perforating these
check vouchers has not yet been done and spoilage
can only be determined after this final act of
printing.

26. Q: What did you do with these excess check

vouchers?

A: I keep it under lock and key in my firing cabinet.

xxx xxx xxx

28. Q: Were you not instructed by the NAWASA

authorities to bum these excess check vouchers?

A: No, sir. I was not instructed.

29. Q: What do you intend to do with these excess

printed check vouchers?

A: I intend to use them for future orders from the

xxx xxx xxx

32. Q: In the process of printing the check vouchers

ordered by the NAWASA, how many sheets were
actually spoiled?

A: I cannot approximate, sir. But there are spoilage

in the process of printing and perforating.

33. Q: What did you do with these spoilages?

Page 91 of 344
 A: Spoiled printed materials are usually thrown out,
in the garbage can.

34. Q: Was there any representative of the

NAWASA to supervise the printing or watch the
printing of these check vouchers?

A: None, sir.

xxx xxx xxx

39. Q: During the period of printing after the days

work, what measures do you undertake to
safeguard the mold and other paraphernalia used in
the printing of these particular orders of NAWASA?

A: Inasmuch as I have an employee who sleeps in

the printing shop and at the same time do the
guarding, we just leave the mold attached to the
machine and the other finished or unfinished work
check vouchers are left in the rack so that the work
could be continued the following day.

The National Bureau of Investigation Report dated November 2, 1970 is

even more explicit. Thus—

xxx xxx xxx

60. We observed also that there is some laxity and

loose control in the printing of NAWASA cheeks.
We gathered from MESINA ENTERPRISES, the
printing firm that undertook the printing of the check
vouchers of NAWASA that NAWASA had no
representative at the printing press during the
process of the printing and no particular security
measure instructions adopted to safeguard the
interest of the government in connection with
printing of this accountable form.

Another factor which facilitated the fraudulent encashment of the twenty-

three (23) checks in question was the failure of the petitioner to reconcile
the bank statements with its own records.

It is accepted banking procedure for the depository bank to furnish its

depositors bank statements and debt and credit memos through the mail.
The records show that the petitioner requested the respondent drawee
bank to discontinue the practice of mailing the bank statements, but instead
to deliver the same to a certain Mr. Emiliano Zaporteza. For reasons known
only to Mr. Zaporteza however, he was unreasonably delayed in taking
prompt deliveries of the said bank statements and credit and debit memos.

Page 92 of 344
As a consequence, Mr. Zaporteza failed to reconcile the bank statements
with the petitioner's records. If Mr. Zaporteza had not been remiss in his
duty of taking the bank statements and reconciling them with the
petitioner's records, the fraudulent encashments of the first checks should
have been discovered, and further frauds prevented. This negligence was,
therefore, the proximate cause of the failure to discover the fraud. Thus,

When a person opens a checking account with a bank, he is

given blank checks which he may fill out and use whenever he
wishes. Each time he issues a check, he should also fill out the
check stub to which the check is usually attached. This stub, if
properly kept, will contain the number of the check, the date of
its issue, the name of the payee and the amount thereof. The
drawer would therefore have a complete record of the checks
he issues. It is the custom of banks to send to its depositors a
monthly statement of the status of their accounts, together with
all the cancelled checks which have been cashed by their
respective holders. If the depositor has filled out his check
stubs properly, a comparison between them and the cancelled
checks will reveal any forged check not taken from his
checkbook. It is the duty of a depositor to carefully examine the
bank's statement, his cancelled checks, his check stubs and
other pertinent records within a reasonable time, and to report
any errors without unreasonable delay. If his negligence should
cause the bank to honor a forged check or prevent it from
recovering the amount it may have already paid on such check,
he cannot later complain should the bank refuse to recredit his
account with the amount of such check. (First Nat. Bank of
Richmond v. Richmond Electric Co., 106 Va. 347, 56 SE 152, 7
LRA, NS 744 [1907]. See also Leather Manufacturers' Bank v.
Morgan, 117 US 96, 6 S. Ct. 657 [1886]; Deer Island Fish and
Oyster Co. v. First Nat. Bank of Biloxi, 166 Miss. 162, 146 So.
116 [1933]). Campos and Campos, Notes and Selected Cases
on Negotiable Instruments Law, 1971, pp. 267-268).

This failure of the petitioner to reconcile the bank statements with its
cancelled checks was noted by the National Bureau of Investigation in its
report dated November 2, 1970:

58. One factor which facilitate this fraud was the delay in the
reconciliation of bank (PNB) statements with the NAWASA
bank accounts. x x x. Had the NAWASA representative come to
the PNB early for the statements and had the bank been
advised promptly of the reported bogus check, the negotiation
of practically all of the remaining checks on May, 1969, totalling
P2,224,736.00 could have been prevented.

The records likewise show that the petitioner failed to provide appropriate
security measures over its own records thereby laying confidential records

Page 93 of 344
open to unauthorized persons. The petitioner's own Fact Finding
Committee, in its report submitted to their General manager underscored
this laxity of records control. It observed that the "office of Mr. Ongtengco
(Cashier No. VI of the Treasury Department at the NAWASA) is quite open
to any person known to him or his staff members and that the check writer
is merely on top of his table."

When confronted with this report at the Anti-Fraud Action Section of the
National Bureau of Investigation. Mr. Ongtengco could only state that:

A. Generally my order is not to allow anybody to

enter my office. Only authorized persons are
allowed to enter my office. There are some cases,
however, where some persons enter my office
because they are following up their checks. Maybe,
these persons may have been authorized by Mr.
Pantig. Most of the people entering my office are
changing checks as allowed by the Resolution of
the Board of Directors of the NAWASA and the
Treasurer. The check writer was never placed on
my table. There is a place for the check write which
is also under lock and key.

Q. Is Mr. Pantig authorized to allow unauthorized

persons to enter your office?

A. No, sir.

Q. Why are you tolerating Mr. Pantig admitting

unauthorized persons in your office?

A. I do not want to embarrass Mr. Pantig. Most of

the people following up checks are employees of
the NAWASA.

Q. Was the authority given by the Board of Directors

and the approval by the Treasurer for employees,
and other persons to encash their checks carry with
it their authority to enter your office?

A. No, sir.

xxx xxx xxx

Q. From the answers that you have given to us we

observed that actually there is laxity and poor
control on your part with regards to the preparations
of check payments inasmuch as you allow
unauthorized persons to follow up their vouchers
inside your office which may leakout confidential

Page 94 of 344
 informations or your books of account. After being
apprised of all the shortcomings in your office, as
head of the Cashiers' Office of the Treasury
Department what remedial measures do you intend
to undertake?

A. Time and again the Treasurer has been calling

our attention not to allow interested persons to hand
carry their voucher checks and we are trying our
best and if I can do it to follow the instructions to the
letter, I will do it but unfortunately the persons who
are allowed to enter my office are my co-employees
and persons who have connections with our higher
ups and I can not possibly antagonize them. Rest
assured that even though that everybody will get
hurt, I win do my best not to allow unauthorized
persons to enter my office.

xxx xxx xxx

Q. Is it not possible inasmuch as your office is in

charge of the posting of check payments in your
books that leakage of payments to the banks came
from your office?

A. I am not aware of it but it only takes us a couple

of minutes to process the checks. And there are
cases wherein every information about the checks
may be obtained from the Accounting Department,
Auditing Department, or the Office of the General
Manager.

Relying on the foregoing statement of Mr. Ongtengco, the National Bureau

of Investigation concluded in its Report dated November 2, 1970 that the
fraudulent encashment of the twenty-three (23)cheeks in question was an
"inside job". Thus-

We have all the reasons to believe that this fraudulent act was
an inside job or one pulled with inside connivance at NAWASA.
As pointed earlier in this report, the serial numbers of these
checks in question conform with the numbers in current use of
NAWASA, aside from the fact that these fraudulent checks
were found to be of the same kind and design as that of
NAWASA's own checks. While knowledge as to such facts may
be obtained through the possession of a NAWASA check of
current issue, an outsider without information from the inside
can not possibly pinpoint which of NAWASA's various accounts
has sufficient balance to cover all these fraudulent checks.

Page 95 of 344
 None of these checks, it should be noted, was dishonored for
insufficiency of funds. . .

Even if the twenty-three (23) checks in question are considered forgeries,

considering the petitioner's gross negligence, it is barred from setting up
the defense of forgery under Section 23 of the Negotiable Instruments Law.

Nonetheless, the petitioner claims that it was the negligence of the

respondent Philippine National Bank that was the proximate cause of the
loss. The petitioner relies on our ruling in Philippine National Bank v. Court
of Appeals (25 SCRA 693) that.

Thus, by not returning the cheek 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.

The argument has no merit. The records show that the respondent drawee
bank, had taken the necessary measures in the detection of forged checks
and the prevention of their fraudulent encashment. In fact, long before the
encashment of the twenty-three (23) checks in question, the respondent
Bank had issued constant reminders to all Current Account Bookkeepers
informing them of the activities of forgery syndicates. The Memorandum of
the Assistant Vice-President and Chief Accountant of the Philippine
National Bank dated February 17, 1966 reads in part:

SUBJECT: ACTIVITIES OF FORGERY SYNDICATE

From reliable information we have gathered that personalized

checks of current account depositors are now the target of the
forgery syndicate. To protect the interest of the bank, you are
hereby enjoined to be more careful in examining said checks
especially those coming from the clearing, mails and window
transactions. As a reminder please be guided with the following:

1. Signatures of drawers should be properly scrutinized and

compared with those we have on file.

2. The serial numbers of the checks should be compared with

the serial numbers registered with the Cashier's Dept.

3. The texture of the paper used and the printing of the checks
should be compared with the sample we have on file with the
Cashier's Dept.

Page 96 of 344
 4. Checks bearing several indorsements should be given a
special attention.

5. Alteration in amount both in figures and words should be

carefully examined even if signed by the drawer.

6. Checks issued in substantial amounts particularly by

depositors who do not usually issue checks in big amounts
should be brought to the attention of the drawer by telephone or
any fastest means of communication for purposes of
confirmation.

and your attention is also invited to keep abreast of previous

circulars and memo instructions issued to bookkeepers.

We cannot fault the respondent drawee Bank for not having detected the
fraudulent encashment of the checks because the printing of the
petitioner's personalized checks was not done under the supervision and
control of the Bank. There is no evidence on record indicating that because
of this private printing the petitioner furnished the respondent Bank with
samples of checks, pens, and inks or took other precautionary measures
with the PNB to safeguard its interests.

Under the circumstances, therefore, the petitioner was in a better position

to detect and prevent the fraudulent encashment of its checks.

WHEREFORE, the petition for review on certiorari is hereby DISMISSED

for lack of merit. The decision of the respondent Court of Appeals dated
October 29, 1982 is AFFIRMED. No pronouncement as to costs.

SO ORDERED.

Feria (Chairman), Fernan, Alampay and Cruz, JJ., concur.

Paras * , J., took no part.

Page 97 of 344
 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

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

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

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
Page 98 of 344
 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.

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, following her usual practice stated above, a total of
eighty-two (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 30-00038-1. Most of the aforementioned checks were for

Page 99 of 344
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 Elcaño branch of the respondent drawee Bank.

Page 100 of 344

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 Elcaño 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)
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
Law4 (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

Page 101 of 344

 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.5For 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

Page 102 of 344

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 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 Elcaño 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,

Page 103 of 344

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 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

Page 104 of 344

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

Page 105 of 344

 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 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

Page 106 of 344

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.

Page 107 of 344

Narvasa, C.J., Feliciano, Regalado and Nocon, JJ., concur.

# Footnotes

* 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.

Page 108 of 344

 SECOND DIVISION

G.R. No. 107382/G.R. No. 107612 January 31, 1996

ASSOCIATED BANK, petitioner,
vs.
HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE
NATIONAL BANK, respondents.
xxxxxxxxxxxxxxxxxxxxx
G.R. No. 107612 January 31, 1996
PHILIPPINE NATIONAL BANK, petitioner,
vs.
HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and
ASSOCIATED BANK, respondents.

DECISION

ROMERO, J.:

Where thirty checks bearing forged endorsements are paid, who bears the
loss, the drawer, the drawee bank or the collecting bank?

This is the main issue in these consolidated petitions for review assailing
the decision of the Court of Appeals in "Province of Tarlac v. Philippine
National Bank v. Associated Bank v. Fausto Pangilinan, et. al." (CA-G.R.
No. CV No. 17962). 1

The facts of the case are as follows:

The Province of Tarlac maintains a current account with the Philippine

National Bank (PNB) Tarlac Branch where the provincial funds are
deposited. Checks issued by the Province are signed by the Provincial
Treasurer and countersigned by the Provincial Auditor or the Secretary of
the Sangguniang Bayan.

A portion of the funds of the province is allocated to the Concepcion

Emergency Hospital. 2 The allotment checks for said government hospital
are drawn to the order of "Concepcion Emergency Hospital, Concepcion,
Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion,
Tarlac." The checks are released by the Office of the Provincial Treasurer
and received for the hospital by its administrative officer and cashier.

In January 1981, the books of account of the Provincial Treasurer were

post-audited by the Provincial Auditor. It was then discovered that the
hospital did not receive several allotment checks drawn by the Province.

On February 19, 1981, the Provincial Treasurer requested the manager of

the PNB to return all of its cleared checks which were issued from 1977 to
1980 in order to verify the regularity of their encashment. After the checks
were examined, the Provincial Treasurer learned that 30 checks amounting

Page 109 of 344

to P203,300.00 were encashed by one Fausto Pangilinan, with the
Associated Bank acting as collecting bank.

It turned out that Fausto Pangilinan, who was the administrative officer and
cashier of payee hospital until his retirement on February 28, 1978,
collected the questioned checks from the office of the Provincial Treasurer.
He claimed to be assisting or helping the hospital follow up the release of
the checks and had official receipts. 3Pangilinan sought to encash the first
check 4 with Associated Bank. However, the manager of Associated Bank
refused and suggested that Pangilinan deposit the check in his personal
savings account with the same bank. Pangilinan was able to withdraw the
money when the check was cleared and paid by the drawee bank, PNB.

After forging the signature of Dr. Adena Canlas who was chief of the payee
hospital, Pangilinan followed the same procedure for the second check, in
the amount of P5,000.00 and dated April 20, 1978, 5 as well as for twenty-
eight other checks of various amounts and on various dates. The last check
negotiated by Pangilinan was for f8,000.00 and dated February 10,
1981. 6 All the checks bore the stamp of Associated Bank which reads "All
prior endorsements guaranteed ASSOCIATED BANK."

Jesus David, the manager of Associated Bank testified that Pangilinan

made it appear that the checks were paid to him for certain projects with
the hospital. 7 He did not find as irregular the fact that the checks were not
payable to Pangilinan but to the Concepcion Emergency Hospital. While he
admitted that his wife and Pangilinan's wife are first cousins, the manager
denied having given Pangilinan preferential treatment on this account. 8

On February 26, 1981, the Provincial Treasurer wrote the manager of the
PNB seeking the restoration of the various amounts debited from the
current account of the Province. 9

In turn, the PNB manager demanded reimbursement from the Associated

Bank on May 15, 1981. 10

As both banks resisted payment, the Province of Tarlac brought suit

against PNB which, in turn, impleaded Associated Bank as third-party
defendant. The latter then filed a fourth-party complaint against Adena
Canlas and Fausto Pangilinan. 11

After trial on the merits, the lower court rendered its decision on March 21,
1988, disposing as follows:

WHEREFORE, in view of the foregoing, judgment is hereby

rendered:

1. On the basic complaint, in favor of plaintiff Province of Tarlac and

against defendant Philippine National Bank (PNB), ordering the latter
to pay to the former, the sum of Two Hundred Three Thousand Three

Page 110 of 344

 Hundred (P203,300.00) Pesos with legal interest thereon from March
20, 1981 until fully paid;

2. On the third-party complaint, in favor of defendant/third-party

plaintiff Philippine National Bank (PNB) and against third-party
defendant/fourth-party plaintiff Associated Bank ordering the latter to
reimburse to the former the amount of Two Hundred Three Thousand
Three Hundred (P203,300.00) Pesos with legal interests thereon from
March 20, 1981 until fully paid;.

3. On the fourth-party complaint, the same is hereby ordered

dismissed for lack of cause of action as against fourth-party
defendant Adena Canlas and lack of jurisdiction over the person of
fourth-party defendant Fausto Pangilinan as against the latter.

4. On the counterclaims on the complaint, third-party complaint and

fourth-party complaint, the same are hereby ordered dismissed for
lack of merit.

SO ORDERED. 12

PNB and Associated Bank appealed to the Court of

Appeals. 13 Respondent court affirmed the trial court's decision in toto on
September 30, 1992.

Hence these consolidated petitions which seek a reversal of respondent

appellate court's decision.

PNB assigned two errors. First, the bank contends that respondent court
erred in exempting the Province of Tarlac from liability when, in fact, the
latter was negligent because it delivered and released the questioned
checks to Fausto Pangilinan who was then already retired as the hospital's
cashier and administrative officer. PNB also maintains its innocence and
alleges that as between two innocent persons, the one whose act was the
cause of the loss, in this case the Province of Tarlac, bears the loss.

Next, PNB asserts that it was error for the court to order it to pay the
province and then seek reimbursement from Associated Bank. According to
petitioner bank, respondent appellate Court should have directed
Associated Bank to pay the adjudged liability directly to the Province of
Tarlac to avoid circuity. 14

Associated Bank, on the other hand, argues that the order of liability should
be totally reversed, with the drawee bank (PNB) solely and ultimately
bearing the loss.

Respondent court allegedly erred in applying Section 23 of the Philippine

Clearing House Rules instead of Central Bank Circular No. 580, which,
being an administrative regulation issued pursuant to law, has the force
and effect of law. 15 The PCHC Rules are merely contractual stipulations

Page 111 of 344

among and between member-banks. As such, they cannot prevail over the
aforesaid CB Circular.

It likewise contends that PNB, the drawee bank, is estopped from asserting
the defense of guarantee of prior indorsements against Associated Bank,
the collecting bank. In stamping the guarantee (for all prior indorsements),
it merely followed a mandatory requirement for clearing and had no choice
but to place the stamp of guarantee; otherwise, there would be no clearing.
The bank will be in a "no-win" situation and will always bear the loss as
against the drawee bank. 16

Associated Bank also claims that since PNB already cleared and paid the
value of the forged checks in question, it is now estopped from asserting
the defense that Associated Bank guaranteed prior indorsements. The
drawee bank allegedly has the primary duty to verify the genuineness of
payee's indorsement before paying the check. 17

While both banks are innocent of the forgery, Associated Bank claims that
PNB was at fault and should solely bear the loss because it cleared and
paid the forged checks.

xxx xxx xxx

The case at bench concerns checks payable to the order of Concepcion

Emergency Hospital or its Chief. They were properly issued and bear the
genuine signatures of the drawer, the Province of Tarlac. The infirmity in
the questioned checks lies in the payee's (Concepcion Emergency
Hospital) indorsements which are forgeries. At the time of their
indorsement, the checks were order instruments.

Checks having forged indorsements should be differentiated from forged

checks or checks bearing the forged signature of the drawer.

Section 23 of the Negotiable Instruments Law (NIL) provides:

Sec. 23. FORGED SIGNATURE, EFFECT OF. — When a signature is

forged or made without 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.

A forged signature, whether it be that of the drawer or the payee, is wholly

inoperative and no one can gain title to the instrument through it. A person
whose signature to an instrument was forged was never a party and never
consented to the contract which allegedly gave rise to such
instrument. 18 Section 23 does not avoid the instrument but only the forged
signature. 19 Thus, a forged indorsement does not operate as the payee's
indorsement.

Page 112 of 344

The exception to the general rule in Section 23 is where "a party against
whom it is sought to enforce a right is precluded from setting up the forgery
or want of authority." Parties who warrant or admit the genuineness of the
signature in question and those who, by their acts, silence or negligence
are estopped from setting up the defense of forgery, are precluded from
using this defense. Indorsers, persons negotiating by delivery and
acceptors are warrantors of the genuineness of the signatures on the
instrument. 20

In bearer instruments, the signature of the payee or holder is unnecessary

to pass title to the instrument. Hence, when the indorsement is a forgery,
only the person whose signature is forged can raise the defense of forgery
against a holder in due course. 21

The checks involved in this case are order instruments, hence, the
following discussion is made with reference to the effects of a forged
indorsement on an instrument payable to order.

Where the instrument is payable to order at the time of the forgery, such as
the checks in this case, the signature of its rightful holder (here, the payee
hospital) is essential to transfer title to the same instrument. When the
holder's indorsement is forged, all parties prior to the forgery may raise the
real defense of forgery against all parties subsequent thereto. 22

An indorser of an order instrument warrants "that the instrument is genuine

and in all respects what it purports to be; that he has a good title to it; that
all prior parties had capacity to contract; and that the instrument is at the
time of his indorsement valid and subsisting." 23 He cannot interpose the
defense that signatures prior to him are forged.

A collecting bank where a check is deposited and which indorses the check
upon presentment with the drawee bank, is such an indorser. So even if the
indorsement on the check deposited by the banks's client is forged, the
collecting bank is bound by his warranties as an indorser and cannot set up
the defense of forgery as against the drawee bank.

The bank on which a check is drawn, known as the drawee bank, is under
strict liability to pay the check to the order of the payee. The drawer's
instructions are reflected on the face and by the terms of the check.
Payment under a forged indorsement is not to the drawer's order. When the
drawee bank pays a person other than the payee, it does not comply with
the terms of the check and violates its duty to charge its customer's (the
drawer) account only for properly payable items. Since the drawee bank did
not pay a holder or other person entitled to receive payment, it has no right
to reimbursement from the drawer. 24 The general rule then is that the
drawee bank may not debit the drawer's account and is not entitled to
indemnification from the drawer. 25 The risk of loss must perforce fall on the
drawee bank.

Page 113 of 344

However, if the drawee bank can prove a failure by the customer/drawer to
exercise ordinary care that substantially contributed to the making of the
forged signature, the drawer is precluded from asserting the forgery.

If at the same time the drawee bank was also negligent to the point of
substantially contributing to the loss, then such loss from the forgery can be
apportioned between the negligent drawer and the negligent bank. 26

In cases involving a forged check, where the drawer's signature is forged,

the drawer can recover from the drawee bank. No drawee bank has a right
to pay a forged check. If it does, it shall have to recredit the amount of the
check to the account of the drawer. The liability chain ends with the drawee
bank whose responsibility it is to know the drawer's signature since the
latter is its customer. 27

In cases involving checks with forged indorsements, such as the present

petition, the chain of liability does not end with the drawee bank. The
drawee bank may not debit the account of the drawer but may generally
pass liability back through the collection chain to the party who took from
the forger and, of course, to the forger himself, if available. 28 In other
words, the drawee bank canseek reimbursement or a return of the amount
it paid from the presentor bank or person. 29 Theoretically, the latter can
demand reimbursement from the person who indorsed the check to it and
so on. The loss falls on the party who took the check from the forger, or on
the forger himself.

In this case, the checks were indorsed by the collecting bank (Associated
Bank) to the drawee bank (PNB). The former will necessarily be liable to
the latter for the checks bearing forged indorsements. If the forgery is that
of the payee's or holder's indorsement, the collecting bank is held liable,
without prejudice to the latter proceeding against the forger.

Since a forged indorsement is inoperative, the collecting bank had no right

to be paid by the drawee bank. The former must necessarily return the
money paid by the latter because it was paid wrongfully. 30

More importantly, by reason of the statutory warranty of a general indorser

in section 66 of the Negotiable Instruments Law, a collecting bank which
indorses a check bearing a forged indorsement and presents it to the
drawee bank guarantees all prior indorsements, including the forged
indorsement. It warrants that the instrument is genuine, and that it is valid
and subsisting at the time of his indorsement. Because the indorsement is
a forgery, the collecting bank commits a breach of this warranty and will be
accountable to the drawee bank. This liability scheme operates without
regard to fault on the part of the collecting/presenting bank. Even if the
latter bank was not negligent, it would still be liable to the drawee bank
because of its indorsement.

The Court has consistently ruled that "the collecting bank or last endorser
generally suffers the loss because it has the duty to ascertain the
Page 114 of 344
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." 31

The drawee bank is not similarly situated as the collecting bank because
the former makes no warranty as to the genuineness. of any
indorsement. 32 The drawee bank's duty is but to verify the genuineness of
the drawer's signature and not of the indorsement because the drawer is its
client.

Moreover, the collecting bank is made liable because it is privy to the

depositor who negotiated the check. The bank knows him, his address and
history because he is a client. It has taken a risk on his deposit. The bank is
also in a better position to detect forgery, fraud or irregularity in the
indorsement.

Hence, the drawee bank can recover the amount paid on the check bearing
a forged indorsement from the collecting bank. However, a drawee bank
has the duty to promptly inform the presentor of the forgery upon discovery.
If the drawee bank delays in informing the presentor of the forgery, thereby
depriving said presentor of the right to recover from the forger, the former is
deemed negligent and can no longer recover from the presentor. 33

Applying these rules to the case at bench, PNB, the drawee bank, cannot
debit the current account of the Province of Tarlac because it paid checks
which bore forged indorsements. However, if the Province of Tarlac as
drawer was negligent to the point of substantially contributing to the loss,
then the drawee bank PNB can charge its account. If both drawee bank-
PNB and drawer-Province of Tarlac were negligent, the loss should be
properly apportioned between them.

The loss incurred by drawee bank-PNB can be passed on to the collecting

bank-Associated Bank which presented and indorsed the checks to it.
Associated Bank can, in turn, hold the forger, Fausto Pangilinan, liable.

If PNB negligently delayed in informing Associated Bank of the forgery,

thus depriving the latter of the opportunity to recover from the forger, it
forfeits its right to reimbursement and will be made to bear the loss.

After careful examination of the records, the Court finds that the Province of
Tarlac was equally negligent and should, therefore, share the burden of
loss from the checks bearing a forged indorsement.

The Province of Tarlac permitted Fausto Pangilinan to collect the checks

when the latter, having already retired from government service, was no
longer connected with the hospital. With the exception of the first check
(dated January 17, 1978), all the checks were issued and released after
Pangilinan's retirement on February 28, 1978. After nearly three years, the
Treasurer's office was still releasing the checks to the retired cashier. In
Page 115 of 344
addition, some of the aid allotment checks were released to Pangilinan and
the others to Elizabeth Juco, the new cashier. The fact that there were now
two persons collecting the checks for the hospital is an unmistakable sign
of an irregularity which should have alerted employees in the Treasurer's
office of the fraud being committed. There is also evidence indicating that
the provincial employees were aware of Pangilinan's retirement and
consequent dissociation from the hospital. Jose Meru, the Provincial
Treasurer, testified:.

ATTY. MORGA:

Q Now, is it true that for a given month there were two releases of
checks, one went to Mr. Pangilinan and one went to Miss Juco?

JOSE MERU:

A Yes, sir.

Q Will you please tell us how at the time (sic) when the authorized
representative of Concepcion Emergency Hospital is and was
supposed to be Miss Juco?

A Well, as far as my investigation show (sic) the assistant cashier told

me that Pangilinan represented himself as also authorized to help in
the release of these checks and we were apparently misled because
they accepted the representation of Pangilinan that he was helping
them in the release of the checks and besides according to them they
were, Pangilinan, like the rest, was able to present an official receipt to
acknowledge these receipts and according to them since this is a
government check and believed that it will eventually go to the hospital
following the standard procedure of negotiating government checks,
they released the checks to Pangilinan aside from Miss Juco.34

The failure of the Province of Tarlac to exercise due care contributed to a

significant degree to the loss tantamount to negligence. Hence, the
Province of Tarlac should be liable for part of the total amount paid on the
questioned checks.

The drawee bank PNB also breached its duty to pay only according to the
terms of the check. Hence, it cannot escape liability and should also bear
part of the loss.

As earlier stated, PNB can recover from the collecting bank.

In the case of Associated Bank v. CA, 35 six crossed checks with forged
indorsements were deposited in the forger's account with the collecting
bank and were later paid by four different drawee banks. The Court found
the collecting bank (Associated) to be negligent and held:

Page 116 of 344

 The Bank should have first verified his right to endorse the crossed
checks, of which he was not the payee, and to deposit the proceeds
of the checks to his own account. The Bank was by reason of the
nature of the checks put upon notice that they were issued for deposit
only to the private respondent's account. . . .

The situation in the case at bench is analogous to the above case, for it
was not the payee who deposited the checks with the collecting bank.
Here, the checks were all payable to Concepcion Emergency Hospital but it
was Fausto Pangilinan who deposited the checks in his personal savings
account.

Although Associated Bank claims that the guarantee stamped on the

checks (All prior and/or lack of endorsements guaranteed) is merely a
requirement forced upon it by clearing house rules, it cannot but remain
liable. The stamp guaranteeing prior indorsements is not an empty rubric
which a bank must fulfill for the sake of convenience. A bank is not required
to accept all the checks negotiated to it. It is within the bank's discretion to
receive a check for no banking institution would consciously or deliberately
accept a check bearing a forged indorsement. When a check is deposited
with the collecting bank, it takes a risk on its depositor. It is only logical that
this bank be held accountable for checks deposited by its customers.

A delay in informing the collecting bank (Associated Bank) of the forgery,

which deprives it of the opportunity to go after the forger, signifies
negligence on the part of the drawee bank (PNB) and will preclude it from
claiming reimbursement.

It is here that Associated Bank's assignment of error concerning C.B.

Circular No. 580 and Section 23 of the Philippine Clearing House
Corporation Rules comes to fore. Under Section 4(c) of CB Circular No.
580, items bearing a forged endorsement shall be returned within twenty-
Sour (24) hours after discovery of the forgery but in no event beyond the
period fixed or provided by law for filing of a legal action by the returning
bank. Section 23 of the PCHC Rules deleted the requirement that items
bearing a forged endorsement should be returned within twenty-four hours.
Associated Bank now argues that the aforementioned Central Bank
Circular is applicable. Since PNB did not return the questioned checks
within twenty-four hours, but several days later, Associated Bank alleges
that PNB should be considered negligent and not entitled to reimbursement
of the amount it paid on the checks.

The Court deems it unnecessary to discuss Associated Bank's assertions

that CB Circular No. 580 is an administrative regulation issued pursuant to
law and as such, must prevail over the PCHC rule. The Central Bank
circular was in force for all banks until June 1980 when the Philippine
Clearing House Corporation (PCHC) was set up and commenced
operations. Banks in Metro Manila were covered by the PCHC while banks
located elsewhere still had to go through Central Bank Clearing. In any

Page 117 of 344

event, the twenty-four-hour return rule was adopted by the PCHC until it
was changed in 1982. The contending banks herein, which are both
branches in Tarlac province, are therefore not covered by PCHC Rules but
by CB Circular No. 580. Clearly then, the CB circular was applicable when
the forgery of the checks was discovered in 1981.

The rule mandates that the checks be returned within twenty-four hours
after discovery of the forgery but in no event beyond the period fixed by law
for filing a legal action. The rationale of the rule is to give the collecting
bank (which indorsed the check) adequate opportunity to proceed against
the forger. If prompt notice is not given, the collecting bank maybe
prejudiced and lose the opportunity to go after its depositor.

The Court finds that even if PNB did not return the questioned checks to
Associated Bank within twenty-four hours, as mandated by the rule, PNB
did not commit negligent delay. Under the circumstances, PNB gave
prompt notice to Associated Bank and the latter bank was not prejudiced in
going after Fausto Pangilinan. After the Province of Tarlac informed PNB of
the forgeries, PNB necessarily had to inspect the checks and conduct its
own investigation. Thereafter, it requested the Provincial Treasurer's office
on March 31, 1981 to return the checks for verification. The Province of
Tarlac returned the checks only on April 22, 1981. Two days later,
Associated Bank received the checks from PNB. 36

Associated Bank was also furnished a copy of the Province's letter of

demand to PNB dated March 20, 1981, thus giving it notice of the forgeries.
At this time, however, Pangilinan's account with Associated had only
P24.63 in it. 37Had Associated Bank decided to debit Pangilinan's account,
it could not have recovered the amounts paid on the questioned checks. In
addition, while Associated Bank filed a fourth-party complaint against
Fausto Pangilinan, it did not present evidence against Pangilinan and even
presented him as its rebuttal witness. 38 Hence, Associated Bank was not
prejudiced by PNB's failure to comply with the twenty-four-hour return rule.

Next, Associated Bank contends that PNB is estopped from requiring

reimbursement because the latter paid and cleared the checks. The Court
finds this contention unmeritorious. Even if PNB cleared and paid the
checks, it can still recover from Associated Bank. This is true even if the
payee's Chief Officer who was supposed to have indorsed the checks is
also a customer of the drawee bank. 39 PNB's duty was to verify the
genuineness of the drawer's signature and not the genuineness of payee's
indorsement. Associated Bank, as the collecting bank, is the entity with the
duty to verify the genuineness of the payee's indorsement.

PNB also avers that respondent court erred in adjudging circuitous liability
by directing PNB to return to the Province of Tarlac the amount of the
checks and then directing Associated Bank to reimburse PNB. The Court
finds nothing wrong with the mode of the award. The drawer, Province of

Page 118 of 344

Tarlac, is a clientor customer of the PNB, not of Associated Bank. There is
no privity of contract between the drawer and the collecting bank.

The trial court made PNB and Associated Bank liable with legal interest
from March 20, 1981, the date of extrajudicial demand made by the
Province of Tarlac on PNB. The payments to be made in this case stem
from the deposits of the Province of Tarlac in its current account with the
PNB. Bank deposits are considered under the law as loans. 40 Central Bank
Circular No. 416 prescribes a twelve percent (12%) interest per annum for
loans, forebearance of money, goods or credits in the absence of express
stipulation. Normally, current accounts are likewise interest-bearing, by
express contract, thus excluding them from the coverage of CB Circular
No. 416. In this case, however, the actual interest rate, if any, for the
current account opened by the Province of Tarlac with PNB was not given
in evidence. Hence, the Court deems it wise to affirm the trial court's use of
the legal interest rate, or six percent (6%) per annum. The interest rate
shall be computed from the date of default, or the date of judicial or
extrajudicial demand. 41 The trial court did not err in granting legal interest
from March 20, 1981, the date of extrajudicial demand.

The Court finds as reasonable, the proportionate sharing of fifty percent -

fifty percent (50%-50%). Due to the negligence of the Province of Tarlac in
releasing the checks to an unauthorized person (Fausto Pangilinan), in
allowing the retired hospital cashier to receive the checks for the payee
hospital for a period close to three years and in not properly ascertaining
why the retired hospital cashier was collecting checks for the payee
hospital in addition to the hospital's real cashier, respondent Province
contributed to the loss amounting to P203,300.00 and shall be liable to the
PNB for fifty (50%) percent thereof. In effect, the Province of Tarlac can
only recover fifty percent (50%) of P203,300.00 from PNB.

The collecting bank, Associated Bank, shall be liable to PNB for fifty (50%)
percent of P203,300.00. It is liable on its warranties as indorser of the
checks which were deposited by Fausto Pangilinan, having guaranteed the
genuineness of all prior indorsements, including that of the chief of the
payee hospital, Dr. Adena Canlas. Associated Bank was also remiss in its
duty to ascertain the genuineness of the payee's indorsement.

IN VIEW OF THE FOREGOING, the petition for review filed by the

Philippine National Bank (G.R. No. 107612) is hereby PARTIALLY
GRANTED. The petition for review filed by the Associated Bank (G.R. No.
107382) is hereby DENIED. The decision of the trial court is MODIFIED.
The Philippine National Bank shall pay fifty percent (50%) of P203,300.00
to the Province of Tarlac, with legal interest from March 20, 1981 until the
payment thereof. Associated Bank shall pay fifty percent (50%) of
P203,300.00 to the Philippine National Bank, likewise, with legal interest
from March 20, 1981 until payment is made.

SO ORDERED.

Page 119 of 344

Footnotes
2 Provincial aid was given irregularly. Hospital staff would often call the provincial
treasurer's office to inquire whether there was an allotment check for the hospital.
The hospital's administrative officer and cashier would then go to the provincial
treasurer's office to pick up the check.
Checks received by the hospital are deposited in the account of the National
Treasury with the PNB. All income of the hospital in excess of the amount which
the National Government has directed it to raise, is excess income. The latter is
given back to the hospital after a supplemental budget is prepared. When the
latter is approved, an advice of allotment is made. Then the hospital requests a
cash disbursement ceiling. When approved, this is brought to the Ministry of
Health. The regional office of said Ministry then prepares a check for the hospital.
The check will be deposited in the hospital's current account at the PNB. (Culled
from the testimony of Dr. Adena Canlas, TSN, October 17, 1983, pp. 8-11;
December 6, 1983, pp. 43-44.)
9 Exhibit FF for Province of Tarlac. On March 20, 1981, the Province of Tarlac

reiterated its request in another letter to PNB. Associated Bank was allegedly
furnished with a copy of this letter. (Records, pp. 246-247) PNB requested the
Province to return the checks in a letter dated March 31, 1981. The checks were
returned to PNB on April 22, 1981. (Exhibit GG) On April 24, 1981, PNB gave the
checks to Associated Bank. (Exhibit 5) Associated Bank returned the checks to
PNB on April 28, 1981, along with a letter stating its refusal to return the money
paid by PNB. (Exhibit 6)
11 Civil Case No. 6227, "Province of Tarlac v. Philippine National Bank; Philippine

National Bank v. Associated Bank; Associated Bank v. Fausto Pangilinan and

Adena G. Canlas," Regional Trial Court Branch 64, Tarlac, Tarlac.
14 Petition, pp. 6-7; Rollo, pp. 13-14, G.R. No. 107612.
15 Citing Antique Sawmills, Inc. v. Zayco, 17 SCRA 316, et al., Petition, p.
25 Great Eastern Life Insurance Co. v. Hongkong and Shanghai Banking Corp.,

43 Phil. 678; Banco de Oro Savings and Mortgage Bank v. Equitable Banking
Corporation G.R. No. L-74917, January 20, 1988, 157 SCRA 188; CAMPOS &
LOPEZ-CAMPOS, op. cit. note 18 at 283, citing La Fayette v. Merchants Bank,
73 Ark 561; Wills v. Barney, 22 Cal 240; Wellington National Bank v. Robbins, 71
Kan 748.
29 Banco de Oro v. Equitable Banking Corp., supra; Great Eastern Life Insurance

Co. v. HSBC, supra.

30 Article 2154 of the Civil Code provides: "If something is received when there is

no right to demand it, and it was unduly delivered through mistake, the obligation
to return it arises." Banco de Oro v. Equitable Banking Corp., supra.
31 Bank of the Phil. Islands v. CA, G.R. No. 102383, November 26, 1992, 216

SCRA 51, 63 citing Banco de Oro v. Equitable Banking Corp., supra; Great
Eastern Life Insurance Co. v. HSBC, supra.
32 CAMPOS & LOPEZ-CAMPOS, op. cit. note 18 at 283 citing Inter-state Trust

Co. v. U.S. National Bank, 185 Pac. 260; Hongkong and Shanghai Banking Corp.
v. People's Bank and Trust Co., supra.
35 G.R. No. 89802, May 7, 1992, 208 SCRA 465.
39 San Carlos Milling Co. Ltd. v. BPI, 59 Phil. 59.
41 Eastern Shipping Lines, Inc. v. CA, G.R. No. 97412, July 12, 1994, 234 SCRA

78.

Page 120 of 344

 SECOND DIVISION

G.R. No. 139130 November 27, 2002

RAMON K. ILUSORIO, petitioner,
vs.
HON. COURT OF APPEALS, and THE MANILA BANKING
CORPORATION, respondents.

DECISION

QUISUMBING, J.:

This petition for review seeks to reverse the decision1 promulgated on

January 28, 1999 by the Court of Appeals in CA-G.R. CV No. 47942,
affirming the decision of the then Court of First Instance of Rizal, Branch
XV (now the Regional Trial Court of Makati, Branch 138) dismissing Civil
Case No. 43907, for damages.

The facts as summarized by the Court of Appeals are as follows:

Petitioner is a prominent businessman who, at the time material to this

case, was the Managing Director of Multinational Investment
Bancorporation and the Chairman and/or President of several other
corporations. He was a depositor in good standing of respondent bank, the
Manila Banking Corporation, under current Checking Account No. 06-
09037-0. As he was then running about 20 corporations, and was going out
of the country a number of times, petitioner entrusted to his secretary,
Katherine2 E. Eugenio, his credit cards and his checkbook with blank
checks. It was also Eugenio who verified and reconciled the statements of
said checking account.3

Between the dates September 5, 1980 and January 23, 1981, Eugenio was
able to encash and deposit to her personal account about seventeen (17)
checks drawn against the account of the petitioner at the respondent bank,
with an aggregate amount of P119,634.34. Petitioner did not bother to
check his statement of account until a business partner apprised him that
he saw Eugenio use his credit cards. Petitioner fired Eugenio immediately,
and instituted a criminal action against her for estafa thru falsification
before the Office of the Provincial Fiscal of Rizal. Private respondent,
through an affidavit executed by its employee, Mr. Dante Razon, also
lodged a complaint for estafa thru falsification of commercial documents
against Eugenio on the basis of petitioner’s statement that his signatures in
the checks were forged.4 Mr. Razon’s affidavit states:

That I have examined and scrutinized the following checks in accordance

with prescribed verification procedures with utmost care and diligence by
comparing the signatures affixed thereat against the specimen signatures
of Mr. Ramon K. Ilusorio which we have on file at our said office on such
dates,

Page 121 of 344

 xxx

That the aforementioned checks were among those issued by Manilabank

in favor of its client MR. RAMON K. ILUSORIO,…

That the same were personally encashed by KATHERINE E. ESTEBAN,

an executive secretary of MR. RAMON K. ILUSORIO in said Investment
Corporation;

That I have met and known her as KATHERINE E. ESTEBAN the attending
verifier when she personally encashed the above-mentioned checks at our
said office;

That MR. RAMON K. ILUSORIO executed an affidavit expressly disowning

his signature appearing on the checks further alleged to have not
authorized the issuance and encashment of the same.…5

Petitioner then requested the respondent bank to credit back and restore to
its account the value of the checks which were wrongfully encashed but
respondent bank refused. Hence, petitioner filed the instant case.6

At the trial, petitioner testified on his own behalf, attesting to the truth of the
circumstances as narrated above, and how he discovered the alleged
forgeries. Several employees of Manila Bank were also called to the
witness stand as hostile witnesses. They testified that it is the bank’s
standard operating procedure that whenever a check is presented for
encashment or clearing, the signature on the check is first verified against
the specimen signature cards on file with the bank.

Manila Bank also sought the expertise of the National Bureau of

Investigation (NBI) in determining the genuineness of the signatures
appearing on the checks. However, in a letter dated March 25, 1987, the
NBI informed the trial court that they could not conduct the desired
examination for the reason that the standard specimens submitted were not
sufficient for purposes of rendering a definitive opinion. The NBI then
suggested that petitioner be asked to submit seven (7) or more additional
standard signatures executed before or about, and immediately after the
dates of the questioned checks. Petitioner, however, failed to comply with
this request.

After evaluating the evidence on both sides, the court a quo rendered
judgment on May 12, 1994 with the following dispositive portion:

WHEREFORE, finding no sufficient basis for plaintiff's cause herein against

defendant bank, in the light of the foregoing considerations and established
facts, this case would have to be, as it is hereby DISMISSED.

Defendant’s counterclaim is likewise DISMISSED for lack of sufficient

basis.

Page 122 of 344

SO ORDERED.7

Aggrieved, petitioner elevated the case to the Court of Appeals by way of a

petition for review but without success. The appellate court held that
petitioner’s own negligence was the proximate cause of his loss. The
appellate court disposed as follows:

WHEREFORE, the judgment appealed from is AFFIRMED. Costs against

the appellant.

SO ORDERED.8

Before us, petitioner ascribes the following errors to the Court of Appeals:

A. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE

RESPONDENT BANK IS ESTOPPED FROM RAISING THE DEFENSE
THAT THERE WAS NO FORGERY OF THE SIGNATURES OF THE
PETITIONER IN THE CHECK BECAUSE THE RESPONDENT FILED A
CRIMINAL COMPLAINT FOR ESTAFA THRU FALSIFICATION OF
COMMERCIAL DOCUMENTS AGAINST KATHERINE EUGENIO USING
THE AFFIDAVIT OF PETITIONER STATING THAT HIS SIGNATURES
WERE FORGED AS PART OF THE AFFIDAVIT-COMPLAINT.9

B. THE COURT OF APPEALS ERRED IN NOT APPLYING SEC. 23,

NEGOTIABLE INSTRUMENTS LAW.10

C. THE COURT OF APPEALS ERRED IN NOT HOLDING THE BURDEN

OF PROOF IS WITH THE RESPONDENT BANK TO PROVE THE DUE
DILIGENCE TO PREVENT DAMAGE, TO THE PETITIONER, AND THAT
IT WAS NOT NEGLIGENT IN THE SELECTION AND SUPERVISION OF
ITS EMPLOYEES.11

D. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT

RESPONDENT BANK SHOULD BEAR THE LOSS, AND SHOULD BE
MADE TO PAY PETITIONER, WITH RECOURSE AGAINST KATHERINE
EUGENIO ESTEBAN.12

Essentially the issues in this case are: (1) whether or not petitioner has a
cause of action against private respondent; and (2) whether or not private
respondent, in filing an estafa case against petitioner’s secretary, is barred
from raising the defense that the fact of forgery was not established.

Petitioner contends that Manila Bank is liable for damages for its
negligence in failing to detect the discrepant checks. He adds that as a
general rule a bank which has obtained possession of a check upon an
unauthorized or forged endorsement of the payee’s signature and which
collects the amount of the check from the drawee is liable for the proceeds
thereof to the payee. Petitioner invokes the doctrine of estoppel, saying that
having itself instituted a forgery case against Eugenio, Manila Bank is now
estopped from asserting that the fact of forgery was never proven.

Page 123 of 344

For its part, Manila Bank contends that respondent appellate court did not
depart from the accepted and usual course of judicial proceedings, hence
there is no reason for the reversal of its ruling. Manila Bank additionally
points out that Section 2313 of the Negotiable Instruments Law is
inapplicable, considering that the fact of forgery was never proven. Lastly,
the bank negates petitioner’s claim of estoppel.14

On the first issue, we find that petitioner has no cause of action against
Manila Bank. To be entitled to damages, petitioner has the burden of
proving negligence on the part of the bank for failure to detect the
discrepancy in the signatures on the checks. It is incumbent upon petitioner
to establish the fact of forgery, i.e., by submitting his specimen signatures
and comparing them with those on the questioned checks. Curiously
though, petitioner failed to submit additional specimen signatures as
requested by the National Bureau of Investigation from which to draw a
conclusive finding regarding forgery. The Court of Appeals found that
petitioner, by his own inaction, was precluded from setting up forgery. Said
the appellate court:

We cannot fault the court a quo for such declaration, considering that the
plaintiff’s evidence on the alleged forgery is not convincing enough. The
burden to prove forgery was upon the plaintiff, which burden he failed to
discharge. Aside from his own testimony, the appellant presented no other
evidence to prove the fact of forgery. He did not even submit his own
specimen signatures, taken on or about the date of the questioned checks,
for examination and comparison with those of the subject checks. On the
other hand, the appellee presented specimen signature cards of the
appellant, taken at various years, namely, in 1976, 1979 and 1981 (Exhibits
"1", "2", "3" and "7"), showing variances in the appellant’s unquestioned
signatures. The evidence further shows that the appellee, as soon as it was
informed by the appellant about his questioned signatures, sought to
borrow the questioned checks from the appellant for purposes of analysis
and examination (Exhibit "9"), but the same was denied by the appellant. It
was also the former which sought the assistance of the NBI for an expert
analysis of the signatures on the questioned checks, but the same was
unsuccessful for lack of sufficient specimen signatures.15

Moreover, petitioner’s contention that Manila Bank was remiss in the

exercise of its duty as drawee lacks factual basis. Consistently, the CA and
the RTC found that Manila Bank employees exercised due diligence in
cashing the checks. The bank’s employees in the present case did not
have a hint as to Eugenio’s modus operandi because she was a regular
customer of the bank, having been designated by petitioner himself to
transact in his behalf. According to the appellate court, the employees of
the bank exercised due diligence in the performance of their duties. Thus, it
found that:

The evidence on both sides indicates that TMBC’s employees exercised

due diligence before encashing the checks. Its verifiers first verified the

Page 124 of 344

drawer’s signatures thereon as against his specimen signature cards, and
when in doubt, the verifier went further, such as by referring to a more
experienced verifier for further verification. In some instances the verifier
made a confirmation by calling the depositor by phone. It is only after taking
such precautionary measures that the subject checks were given to the
teller for payment.

Of course it is possible that the verifiers of TMBC might have made a

mistake in failing to detect any forgery -- if indeed there was. However, a
mistake is not equivalent to negligence if they were honest mistakes. In the
instant case, we believe and so hold that if there were mistakes, the same
were not deliberate, since the bank took all the precautions.16

As borne by the records, it was petitioner, not the bank, who was negligent.
Negligence is the omission to do something which a reasonable man,
guided by those considerations which ordinarily regulate the conduct of
human affairs, would do, or the doing of something which a prudent and
reasonable man would do.17 In the present case, it appears that petitioner
accorded his secretary unusual degree of trust and unrestricted access to
his credit cards, passbooks, check books, bank statements, including
custody and possession of cancelled checks and reconciliation of accounts.
Said the Court of Appeals on this matter:

Moreover, the appellant had introduced his secretary to the bank for
purposes of reconciliation of his account, through a letter dated July 14,
1980 (Exhibit "8"). Thus, the said secretary became a familiar figure in the
bank. What is worse, whenever the bank verifiers call the office of the
appellant, it is the same secretary who answers and confirms the checks.

The trouble is, the appellant had put so much trust and confidence in the
said secretary, by entrusting not only his credit cards with her but also his
checkbook with blank checks. He also entrusted to her the verification and
reconciliation of his account. Further adding to his injury was the fact that
while the bank was sending him the monthly Statements of Accounts, he
was not personally checking the same. His testimony did not indicate that
he was out of the country during the period covered by the checks. Thus,
he had all the opportunities to verify his account as well as the cancelled
checks issued thereunder -- month after month. But he did not, until his
partner asked him whether he had entrusted his credit card to his secretary
because the said partner had seen her use the same. It was only then that
he was minded to verify the records of his account. 18

The abovecited findings are binding upon the reviewing court. We stress
the rule that the factual findings of a trial court, especially when affirmed by
the appellate court, are binding upon us19 and entitled to utmost
respect20 and even finality. We find no palpable error that would warrant a
reversal of the appellate court’s assessment of facts anchored upon the
evidence on record.

Page 125 of 344

Petitioner’s failure to examine his bank statements appears as the
proximate cause of his own damage. Proximate cause is that cause, which,
in natural and continuous sequence, unbroken by any efficient intervening
cause, produces the injury, and without which the result would not have
occurred.21 In the instant case, the bank was not shown to be remiss in its
duty of sending monthly bank statements to petitioner so that any error or
discrepancy in the entries therein could be brought to the bank’s attention
at the earliest opportunity. But, petitioner failed to examine these bank
statements not because he was prevented by some cause in not doing so,
but because he did not pay sufficient attention to the matter. Had he done
so, he could have been alerted to any anomaly committed against him. In
other words, petitioner had sufficient opportunity to prevent or detect any
misappropriation by his secretary had he only reviewed the status of his
accounts based on the bank statements sent to him regularly. In view of
Article 2179 of the New Civil Code,22 when the plaintiff’s own negligence
was the immediate and proximate cause of his injury, no recovery could be
had for damages.

Petitioner further contends that under Section 23 of the Negotiable

Instruments Law a forged check is inoperative, and that Manila Bank had
no authority to pay the forged checks. True, it is a rule that when a
signature is forged or made without the authority of the person whose
signature it purports to be, the check is wholly inoperative. No right to retain
the instrument, or to give a discharge therefor, or to enforce payment
thereof against any party, can be acquired through or under such signature.
However, the rule does provide for an exception, namely: "unless the party
against whom it is sought to enforce such right is precluded from setting up
the forgery or want of authority." In the instant case, it is the exception that
applies. In our view, petitioner is precluded from setting up the forgery,
assuming there is forgery, due to his own negligence in entrusting to his
secretary his credit cards and checkbook including the verification of his
statements of account.

Petitioner’s reliance on Associated Bank vs. Court of Appeals23 and

Philippine Bank of Commerce vs. CA24 to buttress his contention that
respondent Manila Bank as the collecting or last endorser generally suffers
the loss because it has the duty to ascertain the genuineness of all prior
endorsements is misplaced. In the cited cases, the fact of forgery was not
in issue. In the present case, the fact of forgery was not established with
certainty. In those cited cases, the collecting banks were held to be
negligent for failing to observe precautionary measures to detect the
forgery. In the case before us, both courts below uniformly found that
Manila Bank’s personnel diligently performed their duties, having compared
the signature in the checks from the specimen signatures on record and
satisfied themselves that it was petitioner’s.

On the second issue, the fact that Manila Bank had filed a case for estafa
against Eugenio would not estop it from asserting the fact that forgery has
not been clearly established. Petitioner cannot hold private respondent in

Page 126 of 344

estoppel for the latter is not the actual party to the criminal action. In a
criminal action, the State is the plaintiff, for the commission of a felony is an
offense against the State.25 Thus, under Section 2, Rule 110 of the Rules of
Court the complaint or information filed in court is required to be brought in
the name of the "People of the Philippines." 26

Further, as petitioner himself stated in his petition, respondent bank filed

the estafa case against Eugenio on the basis of petitioner’s own
affidavit,27 but without admitting that he had any personal knowledge of the
alleged forgery. It is, therefore, easy to understand that the filing of the
estafa case by respondent bank was a last ditch effort to salvage its ties
with the petitioner as a valuable client, by bolstering the estafa case which
he filed against his secretary.

All told, we find no reversible error that can be ascribed to the Court of
Appeals.

WHEREFORE, the instant petition is DENIED for lack of merit. The

assailed decision of the Court of Appeals dated January 28, 1999 in CA-
G.R. CV No. 47942, is AFFIRMED.

Costs against petitioner.

SO ORDERED.

Footnotes
13Sec. 23. Forged signature, effect of. 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.
17Bank of the Philippine Islands vs. Court of Appeals, 326 SCRA 641, 657
(2000).
19 Lorenzana vs. People, 353 SCRA 396, 403 (2001).
20 Ong vs. CA, 272 SCRA 725, 730 (1997).
22Art. 2179. When the plaintiff's own negligence was the immediate and
proximate cause of his injury, he cannot recover damages. …
23 252 SCRA 620, 633 (1996).
24 269 SCRA 695, 703-710 (1997).
25 Binay vs. Sandiganbayan, 316 SCRA 65, 100 (1999).
26 SEC. 2. The complaint or information. – The complaint or information shall be
in writing, in the name of the People of the Philippines and against all persons
who appear to be responsible for the offense involved.

Page 127 of 344

 SECOND DIVISION

G.R. No. 129015 August 13, 2004

SAMSUNG CONSTRUCTION COMPANY PHILIPPINES, INC., petitioner,
vs.
FAR EAST BANK AND TRUST COMPANY AND COURT OF
APPEALS, respondents.

DECISION

TINGA, J.:

Called to fore in the present petition is a classic textbook question – if a

bank pays out on a forged check, is it liable to reimburse the drawer from
whose account the funds were paid out? The Court of Appeals, in reversing
a trial court decision adverse to the bank, invoked tenuous reasoning to
acquit the bank of liability. We reverse, applying time-honored principles of
law.

The salient facts follow.

Plaintiff Samsung Construction Company Philippines, Inc. ("Samsung

Construction"), while based in Biñan, Laguna, maintained a current account
with defendant Far East Bank and Trust Company1 ("FEBTC") at the latter’s
Bel-Air, Makati branch.2 The sole signatory to Samsung Construction’s
account was Jong Kyu Lee ("Jong"), its Project Manager,3 while the checks
remained in the custody of the company’s accountant, Kyu Yong Lee
("Kyu").4

On 19 March 1992, a certain Roberto Gonzaga presented for payment

FEBTC Check No. 432100 to the bank’s branch in Bel-Air, Makati. The
check, payable to cash and drawn against Samsung Construction’s current
account, was in the amount of Nine Hundred Ninety Nine Thousand Five
Hundred Pesos (P999,500.00). The bank teller, Cleofe Justiani, first
checked the balance of Samsung Construction’s account. After
ascertaining there were enough funds to cover the check,5 she compared
the signature appearing on the check with the specimen signature of Jong
as contained in the specimen signature card with the bank. After comparing
the two signatures, Justiani was satisfied as to the authenticity of the
signature appearing on the check. She then asked Gonzaga to submit
proof of his identity, and the latter presented three (3) identification cards. 6

At the same time, Justiani forwarded the check to the branch Senior
Assistant Cashier Gemma Velez, as it was bank policy that two bank
branch officers approve checks exceeding One Hundred Thousand Pesos,
for payment or encashment. Velez likewise counterchecked the signature
on the check as against that on the signature card. He too concluded that
the check was indeed signed by Jong. Velez then forwarded the check and
signature card to Shirley Syfu, another bank officer, for approval. Syfu then
noticed that Jose Sempio III ("Sempio"), the assistant accountant of
Page 128 of 344
Samsung Construction, was also in the bank. Sempio was well-known to
Syfu and the other bank officers, he being the assistant accountant of
Samsung Construction. Syfu showed the check to Sempio, who vouched
for the genuineness of Jong’s signature. Confirming the identity of
Gonzaga, Sempio said that the check was for the purchase of equipment
for Samsung Construction. Satisfied with the genuineness of the signature
of Jong, Syfu authorized the bank’s encashment of the check to Gonzaga.

The following day, the accountant of Samsung Construction, Kyu,

examined the balance of the bank account and discovered that a check in
the amount of Nine Hundred Ninety Nine Thousand Five Hundred Pesos
(P999,500.00) had been encashed. Aware that he had not prepared such a
check for Jong’s signature, Kyu perused the checkbook and found that the
last blank check was missing.7 He reported the matter to Jong, who then
proceeded to the bank. Jong learned of the encashment of the check, and
realized that his signature had been forged. The Bank Manager reputedly
told Jong that he would be reimbursed for the amount of the check.8 Jong
proceeded to the police station and consulted with his
lawyers.9 Subsequently, a criminal case for qualified theft was filed against
Sempio before the Laguna court.10

In a letter dated 6 May 1992, Samsung Construction, through counsel,

demanded that FEBTC credit to it the amount of Nine Hundred Ninety Nine
Thousand Five Hundred Pesos (P999,500.00), with interest.11 In response,
FEBTC said that it was still conducting an investigation on the matter.
Unsatisfied, Samsung Construction filed a Complaint on 10 June 1992 for
violation of Section 23 of the Negotiable Instruments Law, and prayed for
the payment of the amount debited as a result of the questioned check plus
interest, and attorney’s fees.12 The case was docketed as Civil Case No.
92-61506 before the Regional Trial Court ("RTC") of Manila, Branch 9.13

During the trial, both sides presented their respective expert witnesses to
testify on the claim that Jong’s signature was forged. Samsung
Corporation, which had referred the check for investigation to the NBI,
presented Senior NBI Document Examiner Roda B. Flores. She testified
that based on her examination, she concluded that Jong’s signature had
been forged on the check. On the other hand, FEBTC, which had sought
the assistance of the Philippine National Police (PNP),14 presented Rosario
C. Perez, a document examiner from the PNP Crime Laboratory. She
testified that her findings showed that Jong’s signature on the check was
genuine.15

Confronted with conflicting expert testimony, the RTC chose to believe the
findings of the NBI expert. In a Decisiondated 25 April 1994, the RTC held
that Jong’s signature on the check was forged and accordingly directed the
bank to pay or credit back to Samsung Construction’s account the amount
of Nine Hundred Ninety Nine Thousand Five Hundred Pesos
(P999,500.00), together with interest tolled from the time the complaint was

Page 129 of 344

filed, and attorney’s fees in the amount of Fifteen Thousand Pesos
(P15,000.00).

FEBTC timely appealed to the Court of Appeals. On 28 November 1996,

the Special Fourteenth Division of the Court of Appeals rendered
a Decision,16 reversing the RTC Decision and absolving FEBTC from any
liability. The Court of Appeals held that the contradictory findings of the NBI
and the PNP created doubt as to whether there was forgery.17 Moreover,
the appellate court also held that assuming there was forgery, it occurred
due to the negligence of Samsung Construction, imputing blame on the
accountant Kyu for lack of care and prudence in keeping the checks, which
if observed would have prevented Sempio from gaining access
thereto.18 The Court of Appeals invoked the ruling in PNB v. National City
Bank of New York19 that, if a loss, which must be borne by one or two
innocent persons, can be traced to the neglect or fault of either, such loss
would be borne by the negligent party, even if innocent of intentional
fraud.20

Samsung Construction now argues that the Court of Appeals had seriously
misapprehended the facts when it overturned the RTC’s finding of forgery.
It also contends that the appellate court erred in finding that it had been
negligent in safekeeping the check, and in applying the equity principle
enunciated in PNB v. National City Bank of New York.

Since the trial court and the Court of Appeals arrived at contrary findings on
questions of fact, the Court is obliged to examine the record to draw out the
correct conclusions. Upon examination of the record, and based on the
applicable laws and jurisprudence, we reverse the Court of Appeals.

Section 23 of the Negotiable Instruments Law states:

When a signature is forged or made without the authority of the

person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to give a discharge therefor,
or to enforce payment thereof against any party thereto, can be
acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority. (Emphasis supplied)

The general rule is to the effect that a forged signature is "wholly

inoperative," and payment made "through or under such signature" is
ineffectual or does not discharge the instrument.21 If payment is made, the
drawee cannot charge it to the drawer’s account. The traditional justification
for the result is that the drawee is in a superior position to detect a forgery
because he has the maker’s signature and is expected to know and
compare it.22 The rule has a healthy cautionary effect on banks by
encouraging care in the comparison of the signatures against those on the
signature cards they have on file. Moreover, the very opportunity of the

Page 130 of 344

drawee to insure and to distribute the cost among its customers who use
checks makes the drawee an ideal party to spread the risk to insurance.23

Brady, in his treatise The Law of Forged and Altered Checks, elucidates:

When a person deposits money in a general account in a bank,

against which he has the privilege of drawing checks in the ordinary
course of business, the relationship between the bank and the
depositor is that of debtor and creditor. So far as the legal relationship
between the two is concerned, the situation is the same as though
the bank had borrowed money from the depositor, agreeing to repay
it on demand, or had bought goods from the depositor, agreeing to
pay for them on demand. The bank owes the depositor money in the
same sense that any debtor owes money to his creditor. Added to
this, in the case of bank and depositor, there is, of course, the bank’s
obligation to pay checks drawn by the depositor in proper form and
presented in due course. When the bank receives the deposit, it
impliedly agrees to pay only upon the depositor’s order. When the
bank pays a check, on which the depositor’s signature is a forgery, it
has failed to comply with its contract in this respect. Therefore, the
bank is held liable.

The fact that the forgery is a clever one is immaterial. The forged
signature may so closely resemble the genuine as to defy detection
by the depositor himself. And yet, if a bank pays the check, it is
paying out its own money and not the depositor’s.

The forgery may be committed by a trusted employee or confidential

agent. The bank still must bear the loss. Even in a case where the
forged check was drawn by the depositor’s partner, the loss was
placed upon the bank. The case referred to is Robinson v. Security
Bank, Ark., 216 S. W. Rep. 717. In this case, the plaintiff brought suit
against the defendant bank for money which had been deposited to
the plaintiff’s credit and which the bank had paid out on checks
bearing forgeries of the plaintiff’s signature.

xxx

It was held that the bank was liable. It was further held that the fact
that the plaintiff waited eight or nine months after discovering the
forgery, before notifying the bank, did not, as a matter of law,
constitute a ratification of the payment, so as to preclude the plaintiff
from holding the bank liable. xxx

This rule of liability can be stated briefly in these words: "A bank is
bound to know its depositors’ signature." The rule is variously
expressed in the many decisions in which the question has been
considered. But they all sum up to the proposition that a bank must
know the signatures of those whose general deposits it carries.24

Page 131 of 344

By no means is the principle rendered obsolete with the advent of modern
commercial transactions. Contemporary texts still affirm this well-
entrenched standard. Nickles, in his book Negotiable Instruments and
Other Related Commercial Paper wrote, thus:

The deposit contract between a payor bank and its customer

determines who can draw against the customer’s account by
specifying whose signature is necessary on checks that are
chargeable against the customer’s account. Therefore, a check
drawn against the account of an individual customer that is signed by
someone other than the customer, and without authority from her, is
not properly payable and is not chargeable to the customer’s account,
inasmuch as any "unauthorized signature on an instrument is
ineffective" as the signature of the person whose name is signed.25

Under Section 23 of the Negotiable Instruments Law, forgery is a real or

absolute defense by the party whose signature is forged.26 On the premise
that Jong’s signature was indeed forged, FEBTC is liable for the loss since
it authorized the discharge of the forged check. Such liability attaches even
if the bank exerts due diligence and care in preventing such faulty
discharge. Forgeries often deceive the eye of the most cautious experts;
and when a bank has been so deceived, it is a harsh rule which compels it
to suffer although no one has suffered by its being deceived.27 The forgery
may be so near like the genuine as to defy detection by the depositor
himself, and yet the bank is liable to the depositor if it pays the check.28

Thus, the first matter of inquiry is into whether the check was indeed
forged. A document formally presented is presumed to be genuine until it is
proved to be fraudulent. In a forgery trial, this presumption must be
overcome but this can only be done by convincing testimony and effective
illustrations.29

In ruling that forgery was not duly proven, the Court of Appeals held:

[There] is ground to doubt the findings of the trial court sustaining the
alleged forgery in view of the conflicting conclusions made by
handwriting experts from the NBI and the PNP, both agencies of the
government.

xxx

These contradictory findings create doubt on whether there was

indeed a forgery. In the case of Tenio-Obsequio v. Court of Appeals,
230 SCRA 550, the Supreme Court held that forgery cannot be
presumed; it must be proved by clear, positive and convincing
evidence.

This reasoning is pure sophistry. Any litigator worth his or her salt would
never allow an opponent’s expert witness to stand uncontradicted, thus the
spectacle of competing expert witnesses is not unusual. The trier of fact will
Page 132 of 344
have to decide which version to believe, and explain why or why not such
version is more credible than the other. Reliance therefore cannot be
placed merely on the fact that there are colliding opinions of two experts,
both clothed with the presumption of official duty, in order to draw a
conclusion, especially one which is extremely crucial. Doing so is
tantamount to a jurisprudential cop-out.

Much is expected from the Court of Appeals as it occupies the penultimate

tier in the judicial hierarchy. This Court has long deferred to the appellate
court as to its findings of fact in the understanding that it has the
appropriate skill and competence to plough through the minutiae that
scatters the factual field. In failing to thoroughly evaluate the evidence
before it, and relying instead on presumptions haphazardly drawn, the
Court of Appeals was sadly remiss. Of course, courts, like humans, are
fallible, and not every error deserves a stern rebuke. Yet, the appellate
court’s error in this case warrants special attention, as it is absurd and even
dangerous as a precedent. If this rationale were adopted as a governing
standard by every court in the land, barely any actionable claim would
prosper, defeated as it would be by the mere invocation of the existence of
a contrary "expert" opinion.

On the other hand, the RTC did adjudge the testimony of the NBI expert as
more credible than that of the PNP, and explained its reason behind the
conclusion:

After subjecting the evidence of both parties to a crucible of analysis,

the court arrived at the conclusion that the testimony of the NBI
document examiner is more credible because the testimony of the
PNP Crime Laboratory Services document examiner reveals that
there are a lot of differences in the questioned signature as compared
to the standard specimen signature. Furthermore, as testified to by
Ms. Rhoda Flores, NBI expert, the manner of execution of the
standard signatures used reveals that it is a free rapid continuous
execution or stroke as shown by the tampering terminal stroke of the
signatures whereas the questioned signature is a hesitating slow
drawn execution stroke. Clearly, the person who executed the
questioned signature was hesitant when the signature was made.30

During the testimony of PNP expert Rosario Perez, the RTC bluntly noted
that "apparently, there [are] differences on that questioned signature and
the standard signatures."31 This Court, in examining the signatures, makes
a similar finding. The PNP expert excused the noted "differences" by
asserting that they were mere "variations," which are normal deviations
found in writing.32 Yet the RTC, which had the opportunity to examine the
relevant documents and to personally observe the expert witness, clearly
disbelieved the PNP expert. The Court similarly finds the testimony of the
PNP expert as unconvincing. During the trial, she was confronted several
times with apparent differences between strokes in the questioned
signature and the genuine samples. Each time, she would just blandly

Page 133 of 344

assert that these differences were just "variations,"33 as if the mere
conjuration of the word would sufficiently disquiet whatever doubts about
the deviations. Such conclusion, standing alone, would be of little or no
value unless supported by sufficiently cogent reasons which might amount
almost to a demonstration.34

The most telling difference between the questioned and genuine signatures
examined by the PNP is in the final upward stroke in the signature, or "the
point to the short stroke of the terminal in the capital letter ‘L,’" as referred
to by the PNP examiner who had marked it in her comparison chart as
"point no. 6." To the plain eye, such upward final stroke consists of a
vertical line which forms a ninety degree (90º) angle with the previous
stroke. Of the twenty one (21) other genuine samples examined by the
PNP, at least nine (9) ended with an upward stroke.35 However, unlike the
questioned signature, the upward strokes of eight (8) of these signatures
are looped, while the upward stroke of the seventh36 forms a severe forty-
five degree (45º) with the previous stroke. The difference is glaring, and
indeed, the PNP examiner was confronted with the inconsistency in point
no. 6.

Q: Now, in this questioned document point no. 6, the "s" stroke is

directly upwards.

A: Yes, sir.

Q: Now, can you look at all these standard signature (sic) were (sic)
point 6 is repeated or the last stroke "s" is pointing directly upwards?

A: There is none in the standard signature, sir.37

Again, the PNP examiner downplayed the uniqueness of the final stroke in
the questioned signature as a mere variation,38 the same excuse she
proffered for the other marked differences noted by the Court and the
counsel for petitioner.39

There is no reason to doubt why the RTC gave credence to the testimony
of the NBI examiner, and not the PNP expert’s. The NBI expert, Rhoda
Flores, clearly qualifies as an expert witness. A document examiner for
fifteen years, she had been promoted to the rank of Senior Document
Examiner with the NBI, and had held that rank for twelve years prior to her
testimony. She had placed among the top five examinees in the
Competitive Seminar in Question Document Examination, conducted by the
NBI Academy, which qualified her as a document examiner.40She had
trained with the Royal Hongkong Police Laboratory and is a member of the
International Association for Identification.41 As of the time she testified, she
had examined more than fifty to fifty-five thousand questioned documents,
on an average of fifteen to twenty documents a day.42 In comparison, PNP
document examiner Perez admitted to having examined only around five
hundred documents as of her testimony.43

Page 134 of 344

In analyzing the signatures, NBI Examiner Flores utilized the scientific
comparative examination method consisting of analysis, recognition,
comparison and evaluation of the writing habits with the use of instruments
such as a magnifying lense, a stereoscopic microscope, and varied lighting
substances. She also prepared enlarged photographs of the signatures in
order to facilitate the necessary comparisons.44 She compared the
questioned signature as against ten (10) other sample signatures of Jong.
Five of these signatures were executed on checks previously issued by
Jong, while the other five contained in business letters Jong had
signed.45 The NBI found that there were significant differences in the
handwriting characteristics existing between the questioned and the
sample signatures, as to manner of execution, link/connecting strokes,
proportion characteristics, and other identifying details.46

The RTC was sufficiently convinced by the NBI examiner’s testimony, and
explained her reasons in its Decisions. While the Court of Appeals
disagreed and upheld the findings of the PNP, it failed to convincingly
demonstrate why such findings were more credible than those of the NBI
expert. As a throwaway, the assailed Decision noted that the PNP, not the
NBI, had the opportunity to examine the specimen signature card signed by
Jong, which was relied upon by the employees of FEBTC in authenticating
Jong’s signature. The distinction is irrelevant in establishing forgery.
Forgery can be established comparing the contested signatures as against
those of any sample signature duly established as that of the persons
whose signature was forged.

FEBTC lays undue emphasis on the fact that the PNP examiner did
compare the questioned signature against the bank signature cards. The
crucial fact in question is whether or not the check was forged, not
whether the bank could have detected the forgery. The latter issue
becomes relevant only if there is need to weigh the comparative
negligence between the bank and the party whose signature was
forged.

At the same time, the Court of Appeals failed to assess the effect of Jong’s
testimony that the signature on the check was not his.47 The assertion may
seem self-serving at first blush, yet it cannot be ignored that Jong was in
the best position to know whether or not the signature on the check was
his. While his claim should not be taken at face value, any averments he
would have on the matter, if adjudged as truthful, deserve primacy in
consideration. Jong’s testimony is supported by the findings of the NBI
examiner. They are also backed by factual circumstances that support the
conclusion that the assailed check was indeed forged. Judicial notice can
be taken that is highly unusual in practice for a business establishment to
draw a check for close to a million pesos and make it payable to cash or
bearer, and not to order. Jong immediately reported the forgery upon its
discovery. He filed the appropriate criminal charges against Sempio, the
putative forger.48

Page 135 of 344

Now for determination is whether Samsung Construction was precluded
from setting up the defense of forgery under Section 23 of the Negotiable
Instruments Law. The Court of Appeals concluded that Samsung
Construction was negligent, and invoked the doctrines that "where a loss
must be borne by one of two innocent person, can be traced to the neglect
or fault of either, it is reasonable that it would be borne by him, even if
innocent of any intentional fraud, through whose means it has
succeeded49 or who put into the power of the third person to perpetuate the
wrong."50 Applying these rules, the Court of Appeals determined that it was
the negligence of Samsung Construction that allowed the encashment of
the forged check.

In the case at bar, the forgery appears to have been made possible
through the acts of one Jose Sempio III, an assistant accountant
employed by the plaintiff Samsung [Construction] Co. Philippines, Inc.
who supposedly stole the blank check and who presumably is
responsible for its encashment through a forged signature of Jong
Kyu Lee. Sempio was assistant to the Korean accountant who was in
possession of the blank checks and who through negligence, enabled
Sempio to have access to the same. Had the Korean accountant
been more careful and prudent in keeping the blank checks Sempio
would not have had the chance to steal a page thereof and to effect
the forgery. Besides, Sempio was an employee who appears to have
had dealings with the defendant Bank in behalf of the plaintiff
corporation and on the date the check was encashed, he was there to
certify that it was a genuine check issued to purchase equipment for
the company.51

We recognize that Section 23 of the Negotiable Instruments Law bars a

party from setting up the defense of forgery if it is guilty of
negligence.52 Yet, we are unable to conclude that Samsung Construction
was guilty of negligence in this case. The appellate court failed to explain
precisely how the Korean accountant was negligent or how more care and
prudence on his part would have prevented the forgery. We cannot sustain
this "tar and feathering" resorted to without any basis.

The bare fact that the forgery was committed by an employee of the party
whose signature was forged cannot necessarily imply that such party’s
negligence was the cause for the forgery. Employers do not possess the
preternatural gift of cognition as to the evil that may lurk within the hearts
and minds of their employees. The Court’s pronouncement in PCI Bank v.
Court of Appeals53 applies in this case, to wit:

[T]he mere fact that the forgery was committed by a drawer-payor’s

confidential employee or agent, who by virtue of his position had
unusual facilities for perpetrating the fraud and imposing the forged
paper upon the bank, does not entitle the bank to shift the loss to the
drawer-payor, in the absence of some circumstance raising estoppel
against the drawer.54

Page 136 of 344

Admittedly, the record does not clearly establish what measures Samsung
Construction employed to safeguard its blank checks. Jong did testify that
his accountant, Kyu, kept the checks inside a "safety box,"55 and no
contrary version was presented by FEBTC. However, such testimony
cannot prove that the checks were indeed kept in a safety box, as Jong’s
testimony on that point is hearsay, since Kyu, and not Jong, would have the
personal knowledge as to how the checks were kept.

Still, in the absence of evidence to the contrary, we can conclude that there
was no negligence on Samsung Construction’s part. The presumption
remains that every person takes ordinary care of his concerns,56 and that
the ordinary course of business has been followed.57 Negligence is not
presumed, but must be proven by him who alleges it.58 While the complaint
was lodged at the instance of Samsung Construction, the matter it had to
prove was the claim it had alleged - whether the check was forged. It
cannot be required as well to prove that it was not negligent, because the
legal presumption remains that ordinary care was employed.

Thus, it was incumbent upon FEBTC, in defense, to prove the negative fact
that Samsung Construction was negligent. While the payee, as in this case,
may not have the personal knowledge as to the standard procedures
observed by the drawer, it well has the means of disputing the presumption
of regularity. Proving a negative fact may be "a difficult office,"59 but
necessarily so, as it seeks to overcome a presumption in law. FEBTC was
unable to dispute the presumption of ordinary care exercised by Samsung
Construction, hence we cannot agree with the Court of Appeals’ finding of
negligence.

The assailed Decision replicated the extensive efforts which FEBTC

devoted to establish that there was no negligence on the part of the bank in
its acceptance and payment of the forged check. However, the degree of
diligence exercised by the bank would be irrelevant if the drawer is not
precluded from setting up the defense of forgery under Section 23 by his
own negligence. The rule of equity enunciated in PNB v. National City Bank
of New York, 60 as relied upon by the Court of Appeals, deserves careful
examination.

The point in issue has sometimes been said to be that of

negligence. The drawee who has paid upon the forged signature
is held to bear the loss, because he has been negligent in failing
to recognize that the handwriting is not that of his customer. But
it follows obviously that if the payee, holder, or presenter of the forged
paper has himself been in default, if he has himself been guilty of a
negligence prior to that of the banker, or if by any act of his own he
has at all contributed to induce the banker's negligence, then he may
lose his right to cast the loss upon the banker.61 (Emphasis supplied)

Quite palpably, the general rule remains that the drawee who has paid
upon the forged signature bears the loss. The exception to this rule arises

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only when negligence can be traced on the part of the drawer whose
signature was forged, and the need arises to weigh the comparative
negligence between the drawer and the drawee to determine who should
bear the burden of loss. The Court finds no basis to conclude that
Samsung Construction was negligent in the safekeeping of its checks. For
one, the settled rule is that the mere fact that the depositor leaves his
check book lying around does not constitute such negligence as will free
the bank from liability to him, where a clerk of the depositor or other
persons, taking advantage of the opportunity, abstract some of the check
blanks, forges the depositor’s signature and collect on the checks from the
bank.62 And for another, in point of fact Samsung Construction was not
negligent at all since it reported the forgery almost immediately upon
discovery.63

It is also worth noting that the forged signatures in PNB v. National City
Bank of New York were not of the drawer, but of indorsers. The same
circumstance attends PNB v. Court of Appeals,64 which was also cited by
the Court of Appeals. It is accepted that a forged signature of the drawer
differs in treatment than a forged signature of the indorser.

The justification for the distinction between forgery of the signature of

the drawer and forgery of an indorsement is that the drawee is in a
position to verify the drawer’s signature by comparison with one in his
hands, but has ordinarily no opportunity to verify an indorsement.65

Thus, a drawee bank is generally liable to its depositor in paying a

check which bears either a forgery of the drawer’s signature or a
forged indorsement. But the bank may, as a general rule, recover
back the money which it has paid on a check bearing a forged
indorsement, whereas it has not this right to the same extent with
reference to a check bearing a forgery of the drawer’s signature.66

The general rule imputing liability on the drawee who paid out on the
forgery holds in this case.

Since FEBTC puts into issue the degree of care it exercised before paying
out on the forged check, we might as well comment on the bank’s
performance of its duty. It might be so that the bank complied with its own
internal rules prior to paying out on the questionable check. Yet, there are
several troubling circumstances that lead us to believe that the bank itself
was remiss in its duty.

The fact that the check was made out in the amount of nearly one million
pesos is unusual enough to require a higher degree of caution on the part
of the bank. Indeed, FEBTC confirms this through its own internal
procedures. Checks below twenty-five thousand pesos require only the
approval of the teller; those between twenty-five thousand to one hundred
thousand pesos necessitate the approval of one bank officer; and should

Page 138 of 344

the amount exceed one hundred thousand pesos, the concurrence of two
bank officers is required.67

In this case, not only did the amount in the check nearly total one million
pesos, it was also payable to cash. That latter circumstance should have
aroused the suspicion of the bank, as it is not ordinary business practice for
a check for such large amount to be made payable to cash or to bearer,
instead of to the order of a specified person.68Moreover, the check was
presented for payment by one Roberto Gonzaga, who was not designated
as the payee of the check, and who did not carry with him any written proof
that he was authorized by Samsung Construction to encash the check.
Gonzaga, a stranger to FEBTC, was not even an employee of Samsung
Construction.69 These circumstances are already suspicious if taken
independently, much more so if they are evaluated in concurrence. Given
the shadiness attending Gonzaga’s presentment of the check, it was not
sufficient for FEBTC to have merely complied with its internal procedures,
but mandatory that all earnest efforts be undertaken to ensure the validity
of the check, and of the authority of Gonzaga to collect payment therefor.

According to FEBTC Senior Assistant Cashier Gemma Velez, the bank

tried, but failed, to contact Jong over the phone to verify the check.70 She
added that calling the issuer or drawer of the check to verify the same was
not part of the standard procedure of the bank, but an "extra effort."71 Even
assuming that such personal verification is tantamount to extraordinary
diligence, it cannot be denied that FEBTC still paid out the check despite
the absence of any proof of verification from the drawer. Instead, the bank
seems to have relied heavily on the say-so of Sempio, who was present at
the bank at the time the check was presented.

FEBTC alleges that Sempio was well-known to the bank officers, as he had
regularly transacted with the bank in behalf of Samsung Construction. It
was even claimed that everytime FEBTC would contact Jong about
problems with his account, Jong would hand the phone over to
Sempio.72 However, the only proof of such allegations is the testimony of
Gemma Velez, who also testified that she did not know Sempio
personally,73 and had met Sempio for the first time only on the day the
check was encashed.74 In fact, Velez had to inquire with the other officers
of the bank as to whether Sempio was actually known to the employees of
the bank.75 Obviously, Velez had no personal knowledge as to the past
relationship between FEBTC and Sempio, and any averments of her to that
effect should be deemed hearsay evidence. Interestingly, FEBTC did not
present as a witness any other employee of their Bel-Air branch, including
those who supposedly had transacted with Sempio before.

Even assuming that FEBTC had a standing habit of dealing with Sempio,
acting in behalf of Samsung Construction, the irregular circumstances
attending the presentment of the forged check should have put the bank on
the highest degree of alert. The Court recently emphasized that the highest
degree of care and diligence is required of banks.

Page 139 of 344

 Banks are engaged in a business impressed with public interest, and
it is their duty to protect in return their many clients and depositors
who transact business with them. They have the obligation to treat
their client’s account meticulously and with the highest degree of
care, considering the fiduciary nature of their relationship. The
diligence required of banks, therefore, is more than that of a good
father of a family.76

Given the circumstances, extraordinary diligence dictates that FEBTC

should have ascertained from Jong personally that the signature in the
questionable check was his.

Still, even if the bank performed with utmost diligence, the drawer whose
signature was forged may still recover from the bank as long as he or she
is not precluded from setting up the defense of forgery. After all, Section 23
of the Negotiable Instruments Law plainly states that no right to enforce the
payment of a check can arise out of a forged signature. Since the drawer,
Samsung Construction, is not precluded by negligence from setting up the
forgery, the general rule should apply. Consequently, if a bank pays a
forged check, it must be considered as paying out of its funds and cannot
charge the amount so paid to the account of the depositor.77 A bank is
liable, irrespective of its good faith, in paying a forged check.78

WHEREFORE, the Petition is GRANTED. The Decision of the Court of

Appeals dated 28 November 1996 is REVERSED, and the Decision of the
Regional Trial Court of Manila, Branch 9, dated 25 April 1994 is
REINSTATED. Costs against respondent.

SO ORDERED.

Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario,

JJ., concur.

Footnotes
12 Act No. 2031.
19 63 Phil 711 (1936).
21 Bank
of Philippine Islands v. Court of Appeals,, G.R. No. 102383, 26
November 1992, 216 SCRA 51, 65.
26 Gempesaw v. Court of Appeals, G.R. No. 92244, 9 February 1993, 218 SCRA
682, 689.
27 Philippine
National Bank v. National City Bank of New York, 63 Phil. 711, 743-
744 (1936); citing 17 A. L. R., 891; 5 R. C. L., 559.
49 Rollo,
p. 38, citing PNB v. National City Bank of New York, 63 Phil. 711, 733
(1936), which in turn cites Gloucester Bank v. Salem Bank, 17 Mass., 33; First
Nat. Bank of Danvers vs. First National Bank of Salem, 151 Mass., 280; and B.B.
Ford & Co. v. People’s Bank of Orangeburg, 74 S.C., 180.

Page 140 of 344

50 Ibid.,
citing PNB v. CA, 134 Phil. 829, 834 (1968), which in turn cites Blondeau
v. Nano, 61 Phil. 625, 631, 632.
52 MWSS v. Court of Appeals, G.R. No. L-62943, 14 July 1986, 143 SCRA 20,
31.
53 G.R. Nos. 121413, 121479 and 128604, 29 January 2001, 350 SCRA 446.
58 Taylorv. Manila Electric Railroad, 16 Phil. 8, 28 (1910), citing Scaevola,
Jurisprudencia del Codigo Civil, vol. 6, 551, 552.
59 US v. Tria, 17 Phil. 303, 307 (1910).
60 63 Phil. 711 (1936).
61 Id.
at 740; citing 2 Morse on Banks and Banking, 5th ed., secs. 464 and 466,
pp. 82-85 and 86, 87.
62 Brady, J.E., The Law of Forged and Altered Checks, supra, note 24, at 24-
27; citing MacIntosh v. Bank, 123 Mass. 393; East St. Louis Cotton Oil Co. v.
Bank of Steele, Mo., 205 S.W. Rep. 96.
63 "For his failure or negligence 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 the forged indorsement." Gempesaw v. Court of
Appeals, G.R. No. 92244, 9 February 1993, 218 SCRA 682, 690; citing American
jurisprudence. "A bank may escape liability where the depositor’s negligence
consists of failure to properly examine his bank statements and cancelled checks
and failure to notify the bank of forgery within a reasonable time." H.
Bailey, supra, note 28, at 477. But see note 24.

64 G.R. No. L-26001, 29 October 1968, 25 SCRA 693.

68 "When the instrument is payable to order the payee must be named or
otherwise indicated therein with reasonable certainty." Sec. 8, Act No. 2031
(Negotiable Instruments Law). Worthy of note is the fact that a check payable to
bearer is more likely to be forged than one that is payable to order. The unofficial
essence of bearer check is that anyone who possesses or holds it can indorse or
receive payment for it which implies that payment is not limited to a particular
person. See Nickles, S.H., Matheson, J.H., and Adams, E.S., Modern
Commercial Paper: The New Law of Negotiable Instruments and Related
Commercial Paper (1994), at 61.
76 Westmont Bank v. Ong, G.R. No. 132560, 30 January 2002, 375 SCRA 212,
220-221.
77 Traders
Royal Bank v. Radio Philippines Network, Inc., G.R. No. 138510, 10
October 2002, 390 SCRA 608, 614.

Page 141 of 344

 FIRST DIVISION

G.R. No. 107508 April 25, 1996

PHILIPPINE NATIONAL BANK, petitioner,
vs.
COURT OF APPEALS, CAPITOL CITY DEVELOPMENT BANK,
PHILIPPINE BANK OF COMMUNICATIONS, and F. ABANTE
MARKETING, respondents.

KAPUNAN, J.:p

This is a petition for review on certiorari under Rule 45 of the Rules of Court
assailing the decision dated April 29, 1992 of respondent Court of Appeals
in CA-G.R. CV No. 24776 and its resolution dated September 16, 1992,
denying petitioner Philippine National Bank's motion for reconsideration of
said decision.

The facts of the case are as follows.

A check with serial number 7-3666-223-3, dated August 7, 1981 in the

amount of P97,650.00 was issued by the Ministry of Education and Culture
(now Department of Education, Culture and Sports [DECS]) payable to F.
Abante Marketing. This check was drawn against Philippine National Bank
(herein petitioner).

On August 11, 1981, F. Abante Marketing, a client of Capitol City

Development Bank (Capitol), deposited the questioned check in its savings
account with said bank. In turn, Capitol deposited the same in its account
with the Philippine Bank of Communications (PBCom) which, in turn, sent
the check to petitioner for clearing.

Petitioner cleared the check as good and, thereafter, PBCom credited

Capitol's account for the amount stated in the check. However, on October
19, 1981, petitioner returned the check to PBCom and debited PBCom's
account for the amount covered by the check, the reason being that there
was a "material alteration" of the check number.

PBCom, as collecting agent of Capitol, then proceeded to debit the latter's

account for the same amount, and subsequently, sent the check back to
petitioner. Petitioner, however, returned the check to PBCom.

On the other hand, Capitol could not, in turn, debit F. Abante Marketing's
account since the latter had already withdrawn the amount of the check as
of October 15, 1981. Capitol sought clarification from PBCom and
demanded the re-crediting of the amount. PBCom followed suit by
requesting an explanation and re-crediting from petitioner.

Since the demands of Capitol were not heeded, it filed a civil suit with the
Regional Trial Court of Manila against PBCom which, in turn, filed a third-
party complaint against petitioner for reimbursement/indemnity with respect

Page 142 of 344

to the claims of Capitol. Petitioner, on its part, filed a fourth-party complaint
against F. Abante Marketing.

On October 3, 1989; the Regional Trial Court rendered its decision the
dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered as follows:

1.) On plaintiffs complaint, defendant Philippine Bank of

Communications is ordered to re-credit or reimburse plaintiff
Capitol City Development Bank the amount of P97,650.00, plus
interest of 12 percent thereto from October 19, 1981 until the
amount is fully paid;

2.) On Philippine Bank of Communications third-party complaint

third-party defendant PNB is ordered to reimburse and
indemnify Philippine Bank of Communications for whatever
amount PBCom pays to plaintiff;

3.) On Philippine National Bank's fourth-party complaint, F.

Abante Marketing is ordered to reimburse and indemnify PNB
for whatever amount PNB pays to PBCom;

4.) On attorney's fees, Philippine Bank of Communications is

ordered to pay Capitol City Development Bank attorney's fees
in the amount of Ten Thousand (P10,000.00) Pesos; but
PBCom is entitled to reimbursement/indemnity from PNB; and
Philippine National Bank to be, in turn reimbursed or
indemnified by F. Abante Marketing for the same amount;

5.) The Counterclaims of PBCom and PNB are hereby

dismissed;

6.) No pronouncement as to costs.

SO ORDERED.1

An appeal was interposed before the respondent Court of Appeals which

rendered its decision on April 29, 1992, the decretal portion of which reads:

WHEREFORE, the judgment appealed from is modified by

exempting PBCom from liability to plaintiff-appellee for
attorney's fees and ordering PNB to honor the check for
P97,650.00, with interest as declared by the trial court, and pay
plaintiff-appellee attorney's fees of P10,000.00. After the check
shall have been honored by PNB, PBCom shall re-credit
plaintiff-appellee's account with it with the amount. No
pronouncement as to costs.

SO ORDERED.2

Page 143 of 344

A motion for reconsideration of the decision was denied by the respondent
Court in its resolution dated September 16, 1992 for lack of merit.3

Hence, petitioner filed the instant petition which raises the following issues:

WHETHER OR NOT AN ALTERATION OF THE SERIAL

NUMBER OF A CHECK IS A MATERIAL ALTERATION
UNDER THE NEGOTIABLE INSTRUMENTS LAW.

II

WHETHER OR NOT A CERTIFICATION HEREIN ISSUED BY

THE MINISTRY OF EDUCATION CAN BE GIVEN WEIGHT IN
EVIDENCE.

III

WHETHER OR NOT A DRAWEE BANK WHO FAILED TO

RETURN A. CHECK WITHIN THE TWENTY FOUR (24) HOUR
CLEARING PERIOD MAY RECOVER THE VALUE OF THE
CHECK FROM THE COLLECTING BANK.

IV

WHETHER OR NOT IN THE ABSENCE OF MALICE OR ILL

WILL PETITIONER PNB MAY BE HELD LIABLE FOR
ATTORNEY'S FEES.4

We find no merit in the petition.

We shall first deal with the effect of the alteration of the serial number on
the negotiability of the check in question.

Petitioner anchors its position on Section 125 of the Negotiable Instruments

Law (ACT No. 2031)5 which provides:

Sec. 225. What constitutes a material alteration. Any alteration

which changes:

(a) The date;

(b) The sum payable, either for principal or interest;

(c) The time or place of payment;

(d) The number or the relations of the parties;

(e) The medium or currency in which payment is to be made;

Page 144 of 344

 (f) Or which adds a place of payment where no place of
payment is specified, or any other change or addition which
alters the effect of the instrument in any respect, is a material
alteration.

Petitioner alleges that there is no hard and fast rule in the interpretation of
the aforequoted provision of the Negotiable Instruments Law. It maintains
that under Section 125(f), any change that alters the effect of the
instrument is a material alteration.6

We do not agree.

An alteration is said to be material if it alters the effect of the

instrument.7 It means an unauthorized change in an instrument that
purports to modify in any respect the obligation of a party or an
unauthorized addition of words or numbers or other change to an
incomplete instrument relating to the obligation of a party.8 In other words,
a material alteration is one which changes the items which are required to
be stated under Section 1 of the Negotiable Instruments Law.

Section 1 of the Negotiable Instruments Law provides:

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.

In his book entitled "Pandect of Commercial Law and Jurisprudence,"

Justice Jose C. Vitug opines that "an innocent alteration (generally,
changes on items other than those required to be stated under Sec. 1,
N.I.L.) and spoliation (alterations done by a stranger) will not avoid the
instrument, but the holder may enforce it only according to its original
tenor."9

Reproduced hereunder are some examples of material and immaterial

alterations:

A. Material Alterations:

(1) Substituting the words "or bearer" for "order."

Page 145 of 344
(2) Writing "protest waived" above blank indorsements.

(3) A change in the date from which interest is to run.

(4) A check was originally drawn as follows: "Iron County Bank,

Crystal Falls, Mich. Aug. 5, 1901. Pay to G.L. or order $9 fifty
cents CTR" The insertion of the figure 5 before the figure 9, the
instrument being otherwise unchanged.

(5) Adding the words "with interest" with or without a fixed rate.

(6) An alteration in the maturity of a note, whether the time for

payment is thereby curtailed or extended.

(7) An instrument was payable "First Nat'l Bank" the plaintiff

added the word "Marion."

(8) Plaintiff, without consent of the defendant, struck out the

name of the defendant as payee and inserted the name of the
maker of the original note.

(9) Striking out the name of the payee and substituting that of
the person who actually discounted the note.

(10) Substituting the address of the maker for the name of a co-
maker.10

B. Immaterial Alterations:

(1) Changing "I promise to pay" to "We promise to pay", where

there are two makers.

(2) Adding the word "annual" after the interest clause.

(3) Adding the date of maturity as a marginal notation.

(4) Filling in the date of actual delivery where the makers of a

note gave it with the date in blank, "July ____."

(5) An alteration of the marginal figures of a note where the

sum stated in words in the body remained unchanged.

(6) The insertion of the legal rate of interest where the note had
a provision for "interest at _______ per cent."

(7) A printed form of promissory note had on the margin the

printed words, "Extended to ________." The holder on or after
maturity wrote in the blank space the words "May 1, 1913," as a
reference memorandum of a promise made by him to the
principal maker at the time the words were written to extend the
time of payment.
Page 146 of 344
 (8) Where there was a blank for the place of payment, filling in
the blank with the place desired.

(9) Adding to an indorsee's name the abbreviation "Cash" when

it had been agreed that the draft should be discounted by the
trust company of which the indorsee was cashier.

(10) The indorsement of a note by a stranger after its delivery to

the payee at the time the note was negotiated to the plaintiff.

(11) An extension of time given by the holder of a note to the

principal maker, without the consent of a surety co-maker.11

The case at bench is unique in the sense that what was altered is the serial
number of the check in question, an item which, it can readily be observed,
is not an essential requisite for negotiability under Section 1 of the
Negotiable Instruments Law. The aforementioned alteration did not change
the relations between the parties. The name of the drawer and the drawee
were not altered. The intended payee was the same. The sum of money
due to the payee remained the same. Despite these findings, however,
petitioner insists, that:

xxx xxx xxx

It is an accepted concept, besides being a negotiable

instrument itself, that a TCAA check by its very nature is the
medium of exchange of governments (sic) instrumentalities of
agencies. And as (a) safety measure, every government office
o(r) agency (is) assigned TCAA checks bearing different
number series.

A concrete example is that of the disbursements of the Ministry

of Education and Culture. It is issued by the Bureau of Treasury
sizeable bundles of checks in booklet form with serial numbers
different from other government office or agency. Now, for
fictitious payee to succeed in its malicious intentions to defraud
the government, all it need do is to get hold of a TCAA Check
and have the serial numbers of portion (sic) thereof changed or
altered to make it appear that the same was issued by the
MEG.

Otherwise, stated, it is through the serial numbers that (a)

TCAA Check is determined to have been issued by a particular
office or agency of the government.12

xxx xxx xxx

Petitioner's arguments fail to convince. The check's serial number is not the
sole indication of its origin.. As succinctly found by the Court of Appeals,
the name of the government agency which issued the subject check was

Page 147 of 344

prominently printed therein. The check's issuer was therefore sufficiently
identified, rendering the referral to the serial number redundant and
inconsequential. Thus, we quote with favor the findings of the respondent
court:

xxx xxx xxx

If the purpose of the serial number is merely to identify the

issuing government office or agency, its alteration in this case
had no material effect whatsoever on the integrity of the check.
The identity of the issuing government office or agency was not
changed thereby and the amount of the check was not charged
against the account of another government office or agency
which had no liability under the check. The owner and issuer of
the check is boldly and clearly printed on its face, second line
from the top: "MINISTRY OF EDUCATION AND
CULTURE," and below the name of the payee are the rubber-
stamped words: "Ministry of Educ. & Culture." These words are
not alleged to have been falsely or fraudulently intercalated into
the check. The ownership of the check is established without
the necessity of recourse to the serial number. Neither there
any proof that the amount of the check was erroneously
charged against the account of a government office or agency
other than the Ministry of Education and Culture. Hence, the
alteration in the number of the check did not affect or change
the liability of the Ministry of Education and Culture under the
check and, therefore, is immaterial. The genuineness of the
amount and the signatures therein of then Deputy Minister of
Education Hermenegildo C. Dumlao and of the resident Auditor,
Penomio C. Alvarez are not challenged. Neither is the
authenticity of the different codes appearing therein questioned
. . .13(Emphasis ours.)

Petitioner, thus cannot refuse to accept the check in question on the

ground that the serial number was altered, the same being an immaterial or
innocent one.

We now go to the second issue. It is petitioner's submission that the

certification issued by Minrado C. Batonghinog, Cashier III of the MEC
clearly shows that the check was altered. Said certification reads:

TO WHOM IT MAY CONCERN:

This is to certify that according to the records of this Office,

TCAA PNB Check Mo. SN7-3666223-3 dated August 7, 1981
drawn in favor of F. Abante Marketing in the amount of NINETY
Page 148 of 344
 (S)EVEN THOUSAND SIX HUNDRED FIFTY PESOS ONLY
(P97,650.00) was not issued by this Office nor released to the
payee concerned. The series number of said check was not
included among those requisition by this Office from the Bureau
of Treasury.

(SGD.) MINRADO C. BATONGHINOG

Petitioner claims that even if the author of the certification issued by the
Ministry of Education and Culture (MEG) was not presented, still the best
evidence of the material alteration would be the disputed check itself and
the serial number thereon. Petitioner thus assails the refusal of respondent
court to give weight to the certification because the author thereof was not
presented to identify it and to be cross-examined thereon.15

We agree with the respondent court.

The one who signed the certification was not presented before the trial
court to prove that the said document was really the document he prepared
and that the signature below the said document is his own signature.
Neither did petitioner present an eyewitness to the execution of the
questioned document who could possibly identify it. 16 Absent this proof, we
cannot rule on the authenticity of the contents of the certification. Moreover,
as we previously emphasized, there was no material alteration on the
check, the change of its serial number not being substantial to its
negotiability.

Anent the third issue — whether or not the drawee bank may still recover
the value of the check from the collecting bank even if it failed to return the
check within the twenty-four (24) hour clearing period because the check
was tampered — suffice it to state that since there is no material alteration
in the check, petitioner has no right to dishonor it and return it to PBCom,
the same being in all respects negotiable.

However, the amount of P10,000.00 as attorney's fees is hereby deleted. In

their respective decisions, the trial court and the Court of Appeals failed to
explicitly state the rationale for the said award. The trial court merely ruled
as follows:

With respect to Capitol's claim for damages consisting of

alleged loss of opportunity, this Court finds that Capitol failed to
adequately substantiate its claim. What Capitol had presented
was a self-serving, unsubstantiated and speculative
computation of what it allegedly could have earned or realized
were it not for the debit made by PBCom which was triggered
by the return and debit made by PNB. However, this Court finds
that it would be fair and reasonable to impose interest at
12% per annum on the principal amount of the check computed
Page 149 of 344
 from October 19, 1981 (the date PBCom debited Capitol's
account) until the amount is fully paid and reasonable attorney's
fees.17 (Emphasis ours.)

And contrary to the Court of Appeal's resolution, petitioner unambiguously

questioned before it the award of attorney's fees, assigning the latter as
one of the errors committed by the trial court.18

The foregoing is in conformity with the guiding principles laid down in a long
line of cases and reiterated recently in Consolidated Bank & Trust
Corporation (Solidbank) v. Court of Appeals:19

The award of attorney's fees lies within the discretion of the

court and depends upon the circumstances of each case.
However, the discretion of the court to award attorney's fees
under Article 2208 of the Civil Code of the Philippines demands
factual, legal and equitable justification, without which the
award is a conclusion without a premise and improperly left to
speculation and conjecture. It becomes a violation of the
proscription against the imposition of a penalty on the right to
litigate (Universal Shipping Lines, Inc. v. Intermediate Appellate
Court, 188 SCRA 170 [1990]). The reason for the award must
be stated in the text of the court's decision. If it is stated only in
the dispositive portion of the decision, the same shall be
disallowed. As to the award of attorney's fees being an
exception rather than the rule, it is necessary for the court to
make findings of fact and law that would bring the case within
the exception and justify the grant of the award (Refractories
Corporation of the Philippines v. Intermediate Appellate Court,
176 SCRA 539 [176 SCRA 539]).

WHEREFORE, premises considered, except for the deletion of the award

of attorney's fees, the decision of the Court of Appeals is hereby
AFFIRMED.

SO ORDERED.

Padilla, Bellosillo, Vitug and Hermosisima, Jr., JJ., concur.

Footnotes

5 The Negotiable Instruments Law of the Philippines was patterned after the draft
approved by the Commissioner on Uniform State Laws in the United States.
(Agbayani, Commentaries and Jurisprudence on the COMMERCIAL LAWS OF
THE PHILIPPINES, Vol. 1, p. 99-100.)

7 Agbayani, Commentaries and Jurisprudence on the COMMERCIAL LAWS OF

THE PHILIPPINES, Vol. 1, 1992 ed., p. 403.

19 246 SCRA 193 (1995); See also, Toyota Shaw, Inc. v. CA, 244 SCRA 320
(1995).

Page 150 of 344

 G.R. No. L-2861 February 26, 1951
ENRIQUE P. MONTINOLA, plaintiff-appellant,
vs.
THE PHILIPPINE NATIONAL BANK, ET AL., defendants-appellees.

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

Page 151 of 344

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:

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 ¹/8 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."

Page 152 of 344

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 2/3portion has
been similarly cut off and severed, and to keep and attach this triangular
portion and the rectangular ¹/3 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

Page 153 of 344

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 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.

Page 154 of 344

(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 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.

Page 155 of 344

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.

Page 156 of 344

 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. 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".

Page 157 of 344

 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.

Page 158 of 344

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 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

Page 159 of 344

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".

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
Page 160 of 344
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 ½ 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

Page 161 of 344

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 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 plaintiff-appellant 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 premise.

Page 162 of 344

 G.R. No. L-17845 April 27, 1967

INTESTATE ESTATE OF VICTOR SEVILLA. SIMEON SADAYA,

petitioner,
vs.
FR ANCISCO SEVILLA, respondent.

Belen Law Offices for petitioner.

Poblador, Cruz &Nazareno for r espondent.

SANCHEZ, J.:

On March 28, 1949, Victor Sevilla, Oscar Varona and Simeon Sadaya
executed, jointly and severally, in favor of theBank of the Philippine Islands,
or its order, a promissory note for P15,000.00 with interest at 8% per
annum, payable on demand. The entire, amount of P15,000.00, proceeds
of the promissory note, was received from the bank by Oscar Varona
alone. Victor Sevilla and Simeon Sadaya signed the promissory note as co-
makers only as a favor to Oscar Varona. Payments were made on account.
As of June 15, 1950, the outstanding balance stood P4,850.00. No
payment thereafter made.

On October 6, 1952, the bank collected from Sadaya the foregoing balance
which, together with interest, totaled P5,416.12. Varona failed to reimburse
Sadaya despite repeated demands.

Victor Sevilla died. Intestate estate proceedings were started in the Court of
First Instance of Rizal, Special
Proceeding No. 1518. Francisco Sevilla was named administrator.

In Special Proceeding No. 1518, Sadaya filed a creditor's claim for the
above sum of P5,746.12, plus attorneys fees in the sum of P1,500.00. The
administrator resisted the claim upon the averment that the deceased
Victor Sevilla"did not receive any amount as consideration for the
promissory note," but signed it only "as surety for Oscar Varona".

On June 5, 1957, the trial court issued an order admitting the claim of
Simeon Sadaya in the amount of P5,746.12, and directing the administrator
to pay the same from any available funds belonging to the estate of the
deceased Victor Sevilla.

The motion to reconsider having been overruled, the administrator

appealed.1 The Court of Appeals, in a decision promulgated on July, 15,
1960, voted to set aside the order appealed from and to disapprove and
disallow"appellee's claim of P5,746.12 against the intestate estate."

The case is now before this Court on certiorari to review the judgment of
the Court of Appeals.

Page 163 of 344

Sadaya's brief here seeks reversal of the appellate court's decision and
prays that his claim "in the amount of 50% of P5,746.12, or P2,873.06,
against the intestate estate of the deceased Victor Sevilla," be approved.

1. That Victor Sevilla and Simeon Sadaya were joint and several
accommodation makers of the 15,000.00-peso promissory note in favor of
the Bank of the Philippine Islands, need not be essayed. As such
accommodation the makers, the individual obligation of each of them to the
bank is no different from, and no greater and no less than, that contract by
Oscar Varona. For, while these two did not receive value on the promissory
note, they executed the same with, and for the purpose of lending their
names to, Oscar Varona. Their liability to the bank upon the explicit terms
of the promissory note is joint and several.2 Better yet, the bank could have
pursued its right to collect the unpaid balance against either Sevilla or
Sadaya. And the fact is that one of the last two, Simeon Sadaya, paid
thatbalance.

2. It is beyond debate that Simeon Sadaya could have sought

reimbursement of the total amount paid from Oscar Varona. This is but
right and just. Varona received full value of the promissory note.3Sadaya
received nothing therefrom. He paid the bank because he was a joint and
several obligor. The least that can be said is that, as between Varona and
Sadaya, there is an implied contract of indemnity. And Varona is bound by
the obligation to reimburse Sadaya.4

3. The common creditor, the Bank of the Philippine Islands, now out of the
way, we first look into the relations interse amongst the three consigners of
the promissory note. Their relations vis-a-vis the Bank, we repeat, is that of
joint and several obligors. But can the same thing be said about the
relations of the three consigners, in respect to each other?

Surely enough, as amongst the three, the obligation of Varona and Sevilla
to Sadaya who paid can not be joint and several. For, indeed, had payment
been made by Oscar Varona, instead of Simeon Sadaya, Varona could not
have had reason to seek reimbursement from either Sevilla or Sadaya, or
both. After all, the proceeds of the loan went to Varona and the other two
received nothing therefrom.

4. On principle, a solidary accommodation maker — who made payment —

has the right to contribution, from his co accommodation maker, in the
absence of agreement to the contrary between them, and subject to
conditions imposed by law. This right springs from an implied promise
between the accommodation makers to share equallythe burdens that may
ensue from their having consented to stamp their signatures on the
promissory note.5For having lent their signatures to the principal debtor,
they clearly placed themselves — in so far as payment made by one may
create liability on the other — in the category of mere joint grantors of the
former.6This is as it should be.

Page 164 of 344

Not one of them benefited by the promissory note. They stand on the same
footing. In misfortune, their burdens should be equally spread.

Manresa, commenting on Article 1844 of the Civil Code of Spain,7 which is

substantially reproduced in Article 20738 of our Civil Code, on this point
stated:

Otros, comoPothier, entienden que, sibien el principio

esevidenteenestrictoconceptojuridico, se
hanextremadosusconsecuencias hasta el punto de que estas son
contrarias, no solo a la logica, sinotambien ala equidad, que debeser
el alma del Derecho, como ha dicho Laurent.

Esaaccion — sostienen — no nace de la fianza, pues, enefecto, el

hecho de afianzarunamismadeudanocreaningunvinculojuridico,
niningunarazon de obligar entre losfiadores, sino que trae, por el
contrario, suorigen de unaacto posterior, cuales el pago de toda la
deudarealizadoporuno de ellos, y la equdad, nopermite que
losdeniasfiadores, que igualmenteestabanestabanobligos a
dichopago, se aprovenchendeeseactoenperjuico del que lo realozo.

Lo ciertoes que esaaccionconcedida al fiadornace, si, del hecho del

pago, peroesconsecuencia del beneficioo del derecho de division,
comotenemosyadicho. Enefecto, porvirtud de estatodoslos
cofiadoresvienenobligados a contribuir al pago de parte que a
cadaunocorresponde. De ese obligacion,contraidaportodosellos, se
libranlos que no hanpagadoporconsecuencia del actorealizadopor el
que pago, y sibieneste no hizomas que cumplir el deber que el
contracto de fianza le imponia de responder detodo el
debitocuandonolimitosuobligacion a parte alguna del mismo,
dichoactoredundaenbeneficiodelosotroscofiadoresloscuales se
aprovechan de el para quedardesligados de todocompromiso con
elacreedor.9

5. And now, to the requisites before one accommodation maker can seek
reimbursement from a co-accommodationmaker.

By Article 18 of the Civil Code in matters not covered by the special laws,
"their deficiency shall be supplied by the provisions of this Code". Nothing
extant in the Negotiable Instruments Law would define the right of one
accommodation maker to seek reimbursement from another. Perforce, we
must go to the Civil Code.

Because Sevilla and Sadaya, in themselves, are but co-guarantors of

Varona, their case comes within the ambit of Article 2073 of the Civil Code
which reads:

ART. 2073. When there are two or more guarantors of the same
debtor and for the same debt, the one amongthem who has paid may
Page 165 of 344
 demand of each of the others the share which is proportionally owing
from him.

If any of the guarantors should be insolvent, his share shall be borne

by the others, including the payer, in thesame proportion.

The provisions of this article shall not be applicable, unless the

payment has been made in virtue of a judicial demand or unless the
principal debtor is insolvent.

As Mr. Justice Street puts it: "[T]hat article deals with the situation which
arises when one surety has paid the debt to the creditor and is seeking
contribution from his cosureties."11

Not that the requirements in paragraph 3, Article 2073, just quoted, are
devoid of cogent reason. Says Manresa:12

c) Requisitos para el ejercicio del derecho de reintegro o de

reembolsoderivado de la corresponsabilidad deloscofiadores.

— La tercera de las prescripciones que comprende el articulo se refiere a

losrequisitos que debenconcurrirpara que puedatenerlugar lo dispuestoen
el mismo. Ese derecho que concede al fiador para
reintegrarsedirectamente de losfiadores de lo que pagoporellosenvez de
dirigirsureclamacion contra el deudor, es un beneficiootorgadopor la ley
solo ell dos casosdeterminados,
cuyajustificacionresultaevidenciadadesdeluego; y
esalimitacionestedebidamenteaconsejadaporunarazon de prudenciaque no
puededesconocerse, cuales la de evitar que por la meravoluntad de uno de
loscofiadorespuedahacersesurgir la accion de reintegro contra
losdemasenprejuicio de losmismos.

El perjuicio que con talmotivopuedeinferirse a loscofiadoresesbiennotorio,

puesteniendoen primer
termino el fiador que pagapor el deudorel derecho de
indemnizacioncontraeste, sancionadopor el art.
1,838, es de todopuntoindudable que
ejercitandoestaaccionpuedenquedarlibresdetodaresponsabilidad
losdemascofiadoressi, a consecuencia de ella, indemniza el fiado a
aquelenlosterminosestablecidosen
el expresadoarticulo. Por el contrario de prescindir de dicho derecho el
fiador, reclamando de losconfiadoresen primer lugar el oportunoreintegro,
estosentendrian mas remedio que satisfacersusductares
respectivas, repitiendodespuesporellas contra el deudor con la imposicion
de las molestias y gastosconsiguientes.

No esaventuradoasegurar que si el fiador que

pagapudieralibrementeutilizaruno u otro de dichosderechos, el de
indemnizacionpor el deudor y el del reintegroporloscofiadores,
Page 166 of 344
indudablementeoptaria siempreyentodocasopor el segundo, puesto que
mucha mas garantias de solvencia y mucha mas seguridad del cobro ha
de encontrarenlosfiadores que en el deudor; y en la
practicaquedariareducido el primero a la indemnizacionpor el deudor a
losconfiadores que hubieranhecho el reintegro, obligando a estos, sin
excepcionalguna, a soportarsiemprelosgastos y las molestias que
anteriormente homos indicado. Y para evitarestosperjuicios, la ley no ha
podidomenos de reducir el ejercicio de ese derecho a loscasosen que
absolutamente sea indispensable.13

6. All of the foregoing postulate the following rules: (1) A joint and several
accommodation maker of a negotiable promissory note may demand from
the principal debtor reimbursement for the amount that he paid to the
payee; and (2) a joint and several accommodation maker who pays on the
said promissory note may directly demand reimbursement from his co-
accommodation maker without first directing his action against the principal
debtor provided that (a) he made the payment by virtue of a judicial
demand, or (b) a principal debtor is insolvent.

The Court of Appeals found that Sadaya's payment to the bank "was made
voluntarily and without any judicial demand," and that "there is an absolute
absence of evidence showing that Varona is insolvent". This combination of
fact and lack of fact epitomizes the fatal distance between payment by
SadayaandSadaya's right to demand of Sevilla "the share which is
proportionately owing from him."

For the reasons given, the judgment of the Court of Appeals under review
is hereby affirmed. No costs.
So ordered.

Page 167 of 344

 SECOND DIVISION

G.R. No. 80599 September 15, 1989

ERNESTINA CRISOLOGO-JOSE, petitioner,
vs.
CO URT OF APPEALS and RICARDO S. SANTOS, JR. in his own
behalf and as Vice-President for Sales of Mover Enterprises, Inc.,
respondents.

Melquiades P. de Leon for petitioner.

Rogelio A. Ajes for private respondent.

REGALADO, J.:

Petitioner seeks the annulment of the decision 1 of respondent Court of

Appeals, promulgated on September 8, 1987, which reversed the decision
of the trial Court 2 dismissing the complaint for consignation filed by therein
plaintiff Ricardo S. Santos, Jr.

The parties are substantially agreed on the following facts as found by both
lower courts:

In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president of

Mover Enterprises, Inc. in-charge ofmarketing and sales; and the
president of the said corporation was Atty. Oscar Z. Benares. On
April 30,1980, Atty. Benares, in accommodation of his clients, the
spouses Jaime and Clarita Ong, issued Check No. 093553 drawn
against Traders Royal Bank, dated June 14, 1980, in the amount of
P45,000.00 (Exh- 'I') payable to defendant Ernestina Crisologo-Jose.
Since the check was under the account of Mover Enterprises, Inc.,
the same was to be signed by its president, Atty. Oscar Z. Benares,
and the treasurer of the said corporation. However, since at that time,
the treasurer of MoverEnterprises was not available, Atty. Benares
prevailed upon the plaintiff, Ricardo S. Santos, Jr., to sign the
aforesaid check as an alternate story. Plaintiff Ricardo S. Santos, Jr.
did sign the check.

It appears that the check (Exh. '1') was issued to defendant Ernestina
Crisologo-Jose in considerationof the waiver or quitclaim by said
defendant over a certain property which the Government
ServiceInsurance System (GSIS) agreed to sell to the clients of Atty.
Oscar Benares, the spouses Jaime and Clarita Ong, with the
understanding that upon approval by the GSIS of the compromise
agreement with the spouses Ong, the check will be encashed
accordingly. However, since the compromise agreement was not
approved within the expected period of time, the aforesaid check for
P45,000.00 (Exh. '1') was replaced by Atty. Benares with another
Traders Royal Bank cheek bearing No. 379299 dated August 10,
1980, in the same amount of P45,000.00 (Exhs. 'A' and '2'), also
Page 168 of 344
 payable to the defendant Jose. This replacement check was also
signed by Atty. Oscar Z. Benares and by the plaintiff Ricardo S.
Santos, Jr. When defendant deposited this replacement check (Exhs.
'A' and '2') with her account at Family Savings Bank, Mayon Branch,
it was dishonored for insufficiency of funds. A subsequent
redepositing of the said check was likewise dishonored by the bank
for the same reason. Hence, defendant through counsel was
constrained to file a criminal complaint for violation of Batas
PambansaBlg. 22 with the Quezon City Fiscal's Office against Atty.
Oscar Z. Benares and plaintiff Ricardo S. Santos, Jr. The
investigating Assistant City Fiscal, Alfonso Llamas, accordingly filed
an amended information with the court charging both Oscar Benares
and Ricardo S. Santos, Jr., for violation of Batas PambansaBlg. 22
docketed as Criminal Case No. Q-14867 of then Court of First
Instance of
Rizal, Quezon City.

Meanwhile, during the preliminary investigation of the criminal charge

against Benares and the plaintiffherein, before Assistant City Fiscal
Alfonso T. Llamas, plaintiff Ricardo S. Santos, Jr. tendered cashier's
check No. CC 160152 for P45,000.00 dated April 10, 1981 to the
defendant Ernestina Crisologo-Jose,the complainant in that criminal
case. The defendant refused to receive the cashier's check in
paymentof the dishonored check in the amount of P45,000.00.
Hence, plaintiff encashed the aforesaid cashier's check and
subsequently deposited said amount of P45,000.00 with the Clerk of
Court on August 14, 1981 (Exhs. 'D' and 'E'). Incidentally, the
cashier's check adverted to above was purchased by Atty.Oscar Z.
Benares and given to the plaintiff herein to be applied in payment of
the dishonored check.

After trial, the court a quo, holding that it was "not persuaded to believe that
consignation referred to in Article 1256 of the Civil Code is applicable to
this case," rendered judgment dismissing plaintiff s complaint and
defendant's counterclaim. 4

As earlier stated, respondent court reversed and set aside said judgment of
dismissal and revived the complaint for consignation, directing the trial
court to give due course thereto.

Hence, the instant petition, the assignment of errors wherein are prefatorily
stated and discussed seriatim.

1. Petitioner contends that respondent Court of Appeals erred in holding

that private respondent, one of the signatories of the check issued under
the account of Mover Enterprises, Inc., is an accommodation party under
the Negotiable Instruments Law and a debtor of petitioner to the extent of
the amount of said check.

Page 169 of 344

Petitioner avers that the accommodation party in this case is Mover
Enterprises, Inc. and not private respondentwho merely signed the check in
question in a representative capacity, that is, as vice-president of said
corporation,hence he is not liable thereon under the Negotiable Instruments
Law.

The pertinent provision of said law referred to provides:

Sec. 29. Liability of 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
aholder for value, notwithstanding such holder, at the time of taking the
instrument, knew him to be onlyan accommodation party.

Consequently, to be considered an accommodation party, a person must

(1) be a party to the instrument, signing asmaker, drawer, acceptor, or
indorser, (2) not receive value therefor, and (3) sign for the purpose of
lending his namefor the credit of some other person.

Based on the foregoing requisites, it is not a valid defense that the

accommodation party did not receive anyvaluable consideration when he
executed the instrument. From the standpoint of contract law, he differs
from theordinary concept of a debtor therein in the sense that he has not
received any valuable consideration for theinstrument he signs.
Nevertheless, he is liable to a holder for value as if the contract was not for
accommodation 5 inwhatever capacity such accommodation party signed
the instrument, whether primarily or secondarily. Thus, it hasbeen held that
in lending his name to the accommodated party, the accommodation party
is in effect a surety for thelatter. 6

Assuming arguendo that Mover Enterprises, Inc. is the accommodation

party in this case, as petitioner suggests, theinevitable question is whether
or not it may be held liable on the accommodation instrument, that is, the
checkissued in favor of herein petitioner.

We hold in the negative.

The aforequoted provision of the Negotiable Instruments Law which holds

an accommodation party liable on theinstrument to a holder for value,
although such holder at the time of taking the instrument knew him to be
only anaccommodation party, does not include nor apply to corporations
which are accommodation parties. 7 This isbecause the issue or
indorsement of negotiable paper by a corporation without consideration and
for theaccommodation of another is ultra vires. 8 Hence, one who has
taken the instrument with knowledge of theaccommodation nature thereof
cannot recover against a corporation where it is only an accommodation
party. If theform of the instrument, or the nature of the transaction, is such
as to charge the indorsee with knowledge that theissue or indorsement of

Page 170 of 344

the instrument by the corporation is for the accommodation of another, he
cannot recoveragainst the corporation thereon. 9

By way of exception, an officer or agent of a corporation shall have the

power to execute or indorse a negotiablepaper in the name of the
corporation for the accommodation of a third person only if specifically
authorized to do so.10 Corollarily, corporate officers, such as the president
and vice-president, have no power to execute for mereaccommodation a
negotiable instrument of the corporation for their individual debts or
transactions arising from or inrelation to matters in which the corporation
has no legitimate concern. Since such accommodation paper cannotthus
be enforced against the corporation, especially since it is not involved in
any aspect of the corporate businessor operations, the inescapable
conclusion in law and in logic is that the signatories thereof shall be
personally liabletherefor, as well as the consequences arising from their
acts in connection therewith.

The instant case falls squarely within the purview of the aforesaid
decisional rules. If we indulge petitioner in heraforesaid postulation, then
she is effectively barred from recovering from Mover Enterprises, Inc. the
value of thecheck. Be that as it may, petitioner is not without recourse.

The fact that for lack of capacity the corporation is not bound by an
accommodation paper does not thereby absolve,but should render
personally liable, the signatories of said instrument where the facts show
that the accommodationinvolved was for their personal account,
undertaking or purpose and the creditor was aware thereof.

Petitioner, as hereinbefore explained, was evidently charged with the

knowledge that the cheek was issued at theinstance and for the personal
account of Atty. Benares who merely prevailed upon respondent Santos to
act as cosignatoryin accordance with the arrangement of the corporation
with its depository bank. That it was a personalundertaking of said
corporate officers was apparent to petitioner by reason of her personal
involvement in thefinancial arrangement and the fact that, while it was the
corporation's check which was issued to her for the amountinvolved, she
actually had no transaction directly with said corporation.

There should be no legal obstacle, therefore, to petitioner's claims being

directed personally against Atty. Oscar Z.Benares and respondent Ricardo
S. Santos, Jr., president and vice-president, respectively, of Mover
Enterprises,Inc.

2. On her second assignment of error, petitioner argues that the

Court of Appeals erred in holding thatthe consignation of the sum of
P45,000.00, made by private respondent after his tender of
paymentwas refused by petitioner, was proper under Article 1256 of
the Civil Code.

Page 171 of 344

Petitioner's submission is that no creditor-debtor relationship exists
between the parties, hence consignation is notproper. Concomitantly, this
argument was premised on the assumption that private respondent Santos
is not anaccommodation party.

As previously discussed, however, respondent Santos is an

accommodation party and is, therefore, liable for thevalue of the check. The
fact that he was only a co-signatory does not detract from his personal
liability. A co-makeror co-drawer under the circumstances in this case is as
much an accommodation party as the other co-signatory or,for that matter,
as a lone signatory in an accommodation instrument. Under the doctrine in
Philippine Bank ofCommerce vs. Aruego, supra, he is in effect a co-surety
for the accommodated party with whom he and his cosignatory,as the other
co-surety, assume solidary liability ex lege for the debt involved. With the
dishonor of thecheck, there was created a debtor-creditor relationship, as
between Atty. Benares and respondent Santos, on theone hand, and
petitioner, on the other. This circumstance enables respondent Santos to
resort to an action ofconsignation where his tender of payment had been
refused by petitioner.

We interpose the caveat, however, that by holding that the remedy of

consignation is proper under the givencircumstances, we do not thereby
rule that all the operative facts for consignation which would produce the
effect ofpayment are present in this case. Those are factual issues that are
not clear in the records before us and which arefor the Regional Trial Court
of Quezon City to ascertain in Civil Case No. Q-33160, for which reason it
has advisedly been directed by respondent court to give due course to the
complaint for consignation, and which would be subjectto such issues or
claims as may be raised by defendant and the counterclaim filed therein
which is hereby orderedsimilarly revived.

3. That respondent court virtually prejudged Criminal Case No. Q-

14687 of the Regional Trial

Court ofQuezon City filed against private respondent for violation of

Batas PambansaBlg. 22, by holding thatno criminal liability had yet
attached to private respondent when he deposited with the court the
amountof P45,000.00 is the final plaint of petitioner.

We sustain petitioner on this score.

Indeed, respondent court went beyond the ratiocination called for in the
appeal to it in CA-G.R. CV. No. 05464. In itsown decision therein, it
declared that "(t)he lone issue dwells in the question of whether an
accommodation partycan validly consign the amount of the debt due with
the court after his tender of payment was refused by thecreditor." Yet, from
the commercial and civil law aspects determinative of said issue, it
digressed into the merits ofthe aforesaid Criminal Case No. Q-14867, thus:

Page 172 of 344

 Section 2 of B.P. 22 establishes the prima facie evidence of
knowledge of such insufficiency of funds orcredit. Thus, the making,
drawing and issuance of a check, payment of which is refused by the
draweebecause of insufficient funds in or credit with such bank is
prima facie evidence of knowledge ofinsufficiency of funds or credit,
when the check is presented within 90 days from the date of the
check.

It will be noted that the last part of Section 2 of B.P. 22 provides that
the element of knowledge ofinsufficiency of funds or credit is not
present and, therefore, the crime does not exist, when the
drawerpays the holder the amount due or makes arrangements for
payment in full by the drawee of suchcheck within five (5) banking
days after receiving notice that such check has not been paid by
thedrawee.

Based on the foregoing consideration, this Court finds that the

plaintiff-appellant acted within Ms legalrights when he consigned the
amount of P45,000.00 on August 14, 1981, between August 7, 1981,
thedate when plaintiff-appellant receive (sic) the notice of non-
payment, and August 14, 1981, the datewhen the debt due was
deposited with the Clerk of Court (a Saturday and a Sunday which
are notbanking days) intervened. The fifth banking day fell on August
14, 1981. Hence, no criminal liability hasyet attached to plaintiff-
appellant when he deposited the amount of P45,000.00 with the
Court a quo onAugust 14, 1981. 11

That said observations made in the civil case at bar and the intrusion into
the merits of the criminal case pending inanother court are improper do not
have to be belabored. In the latter case, the criminal trial court has to
grapple withsuch factual issues as, for instance, whether or not the period
of five banking days had expired, in the processdetermining whether notice
of dishonor should be reckoned from any prior notice if any has been given
or fromreceipt by private respondents of the subpoena therein with
supporting affidavits, if any, or from the first day ofactual preliminary
investigation; and whether there was a justification for not making the
requisite arrangements forpayment in full of such check by the drawee
bank within the said period. These are matters alien to the
presentcontroversy on tender and consignation of payment, where no such
period and its legal effects are involved.

These are aside from the considerations that the disputed period involved
in the criminal case is only a presumptiverule, juris tantumat that, to
determine whether or not there was knowledge of insufficiency of funds in
or credit withthe drawee bank; that payment of civil liability is not a mode
for extinguishment of criminal liability; and that therequisite quantum of
evidence in the two types of cases are not the same.

Page 173 of 344

To repeat, the foregoing matters are properly addressed to the trial court in
Criminal Case No. Q-14867, theresolution of which should not be interfered
with by respondent Court of Appeals at the present posture of said
case,much less preempted by the inappropriate and unnecessary holdings
in the aforequoted portion of the decision ofsaid respondent court.
Consequently, we modify the decision of respondent court in CA-G.R. CV
No. 05464 bysetting aside and declaring without force and effect its
pronouncements and findings insofar as the merits ofCriminal Case No. Q-
14867 and the liability of the accused therein are concerned.

WHEREFORE, subject to the aforesaid modifications, the judgment of

respondent Court of Appeals is AFFIRMED.

SO ORDERED.

5 AngTiong vs. Ting, et al., 22 SCRA 713 (1968).

6 Philipine Bank of Commerce vs. Aruego, 102 SCRA 530 (1981).
9 Oppenheim vs. Simon Reigel Cigar Co., 90 N.Y.S. 355, cited in 11 C.J.S.
309.
10 In re Wrentham Mfg. Co., 2 Low. 119; Hall vs. Auburn Turnp. Co., 27
Cal. 255, cited in 14A C.J. 461.

Page 174 of 344

 SECOND DIVISION

G.R. No. 96160 June 17, 1992

STELCO MARKETING CORPORATION, petitioner,

vs.
HO N. 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 PambansaBilang 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

Page 175 of 344

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 NegotiableInstruments 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
STEELWELDfor 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 MetrobankCheck 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. . . .;

3) nevertheless, the check "is wholly inoperative since . . . Steelweld. . . did

not issue it for any valuable consideration either to R. Lim o r 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
Page 176 of 344
 There is no question, then, that as far as any commercial transaction
is concerned between plaintiffand defendant Steelweld no such
transaction ever occurred. Ordinarily, under civil law rules,
therehaving been no transaction between them involving the
purchase of certain merchandise there wouldbe 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 anaccommodation 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 isliable 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
saidpronouncement 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 followingconditions:

(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 ordefect 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
Page 177 of 344
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

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 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
Page 178 of 344
before it was 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

Page 179 of 344

 THIRD DIVISION

G.R. No. L-56169 June 26, 1992

TRAVEL-ON, INC., petitioner,

vs.
CO URT OF APPEALS and ARTURO S. MIRANDA, respondents.

RESOLUTION

FELICIANO, J.:

Petitioner Travel-On. Inc. ("Travel-On") is a travel agency selling airline

tickets on commission basis for and in behalfof different airline companies.
Private respondent Arturo S. Miranda had a revolving credit line with
petitioner. He procured tickets from petitioner on behalf of airline
passengers and derived commissions therefrom.

On 14 June 1972, Travel-On filed suit before the Court of First Instance
("CFI") of Manila to collect on six (6) checks issued by private respondent
with a total face amount of P115,000.00. The complaint, with a prayer for
the issuance of a writ of preliminary attachment and attorney's fees,
averred that from 5 August 1969 to 16 January 1970, petitioner sold and
delivered various airline tickets to respondent at a total price of
P278,201.57; that to settle said account, private respondent paid various
amounts in cash and in kind, and thereafter issued six (6) postdated checks
amounting to P115,000.00 which were all dishonored by the drawee banks.
Travel-On further alleged that in March 1972, private respondent made
another payment of P10,000.00 reducing his indebtedness to P105,000.00.
The writ of attachment was granted by the court a quo.

In his answer, private respondent admitted having had transactions with

Travel-On during the period stipulated in the complaint. Private respondent,
however, claimed that he had already fully paid and even overpaid his
obligations and that refunds were in fact due to him. He argued that he had
issued the postdated checks for purposes of accommodation, as he had in
the past accorded similar favors to petitioner. During the proceedings,
private respondent contested several tickets alleged to have been
erroneously debited to his account. He claimed reimbursement of his
alleged over payments, plus litigation expenses, and exemplary and moral
damages by reason of the allegedly improper attachment of his properties.

In support of his theory that the checks were issued for accommodation,
private respondent testified that he badissued the checks in the name of
Travel-On in order that its General Manager, ElitaMontilla, could show to
Travel-On's Board of Directors that the accounts receivable of the company
were still good. He further stated that ElitaMontilla tried to encash the

Page 180 of 344

same, but that these were dishonored and were subsequently returned to
him after the accommodation purpose had been attained.

Travel-On's witness, ElitaMontilla, on the other hand explained that the

"accommodation" extended to Travel-On byprivate respondent related to
situations where one or more of its passengers needed money in
Hongkong, and upon request of Travel-On respondent would contact his
friends in Hongkong to advance Hongkong money to the passenger. The
passenger then paid Travel-On upon his return to Manila and which
payment would be credited by Travel-On to respondent's running account
with it.

In its decision dated 31 January 1975, the court a quo ordered Travel-On to
pay private respondent the amount of P8,894.91 representing net
overpayments by private respondent, moral damages of P10,000.00 for the
wrongfulissuance of the writ of attachment and for the filing of this case,
P5,000.00 for attorney's fees and the costs of thesuit.
The trial court ruled that private respondent's indebtedness to petitioner
was not satisfactorily established and that the postdated checks were
issued not for the purpose of encashment to pay his indebtedness but to
accommodate the General Manager of Travel-On to enable her to show to
the Board of Directors that Travel-On was financially stable.

Petitioner filed a motion for reconsideration that was, however, denied by

the trial court, which in fact then increased the award of moral damages to
P50,000.00.

On appeal, the Court of Appeals affirmed the decision of the trial court, but
reduced the award of moral damages to P20,000.00, with interest at the
legal rate from the date of the filing of the Answer on 28 August 1972.

Petitioner moved for reconsideration of the Court of Appeal's' decision,

without success.

In the instant Petition for Review, it is urged that the postdated checks are
per se evidence of liability on the part of private respondent. Petitioner
further argues that even assuming that the checks were for
accommodation, private respondent is still liable thereunder considering
that petitioner is a holder for value.

Both the trial and appellate courts had rejected the checks as evidence of
indebtedness on the ground that the various statements of account
prepared by petitioner did not show that Private respondent had an
outstanding balance of P115,000.00 which is the total amount of the
checks he issued. It was pointed out that while the various exhibits of
petitioner showed various accountabilities of private respondent, they did
not satisfactorily establish the amount of the outstanding indebtedness of
private respondent. The appellate court made much of the fact that the
figures representing private respondent's unpaid accounts found in the
Page 181 of 344
"Schedule of Outstanding Account" dated 31 January 1970 did not tally
with the figures found in the statement which showed private respondent's
transactionswith petitioner for the years 1969 and 1970; that there was no
satisfactory explanation as to why the totaloutstanding amount of
P278,432.74 was still used as basis in the accounting of 7 April 1972
considering that according to the table of transactions for the year 1969
and 1970, the total unpaid account of private respondent amounted to
P239,794.57.

We have, however, examined the record and it shows that the 7 April 1972
Statement of Account had simply not been updated; that if we use as basis
the figure as of 31 January 1970 which is P278,432.74 and from it
deductP38,638.17 which represents some of the payments subsequently
made by private respondent, the figure —P239,794.57 will be obtained.

Also, the fact alone that the various statements of account had variances in
figures, simply did not mean that private respondent had no more financial
obligations to petitioner. It must be stressed that private respondent's
account with petitioner was a running or open one, which explains the
varying figures in each of the statements rendered as of a given date.

The appellate court erred in considering only the statements of account in

determining whether private respondent was indebted to petitioner under
the checks. By doing so, it failed to give due importance to the most telling
piece of evidence of private respondent's indebtedness — the checks
themselves which he had issued.

Contrary to the view held by the Court of Appeals, this Court finds that the
checks are the all important evidence of petitioner's case; that these checks
clearly established private respondent's indebtedness to petitioner; that
private respondent was liable thereunder.

It is important to stress that a check which is regular on its face is deemed

prima facie to have been issued for a valuable consideration and every
person whose signature appears thereon is deemed to have become a
party thereto for value. 1 Thus, the mere introduction of the instrument
sued on in evidence prima facie entitles the plaintiff to recovery. Further,
the rule is quite settled that a negotiable instrument is presumed to have
been given or indorsed for a sufficient consideration unless otherwise
contradicted and overcome by other competent evidence. 2

In the case at bar, the Court of Appeals, contrary to these established

rules, placed the burden of
proving theexistence of valuable consideration upon petitioner. This cannot
be countenanced; it was up
to private respondent to show that he had indeed issued the checks without
sufficient consideration. The Court considers that Private respondent was
unable to rebut satisfactorily this legal presumption. It must also be noted

Page 182 of 344

that those checks were issued immediately after a letter demanding
payment had been sent to private respondent by petitioner Travel-On.

The fact that all the checks issued by private respondent to petitioner were
presented for payment by the latter would lead to no other conclusion than
that these checks were intended for encashment. There is nothing in the
checks themselves (or in any other document for that matter) that states
otherwise.

We are unable to accept the Court of Appeals' conclusion that the checks
here involved were issued for
"accommodation" and that accordingly private respondent maker of those
checks was not liable thereon to petitioner payee of those checks.

In the first place, while the Negotiable Instruments Law does refer to
accommodation transactions, no such transaction was here shown. Section
29 of the Negotiable Instruments Law provides as follows:

Sec. 29. Liability of accommodation party. — An

accommodation party is one who has signed theinstrument 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 aholder for
value, notwithstanding such holder, at the time of taking the
instrument, knew him to be onlyan accommodation party.

In accommodation transactions recognized by the Negotiable

Instruments Law, an accommodating partylends his credit to the
accommodated party, by issuing or indorsing a check which is held
by a payee or indorsee as a holder in due course, who gave full value
therefor to the accommodated party. The latter, inother words,
receives or realizes full value which the accommodated party then
must repay to the accommodating party, unless of course the
accommodating party intended to make a donation to the
accommodated party. But the accommodating party is bound on the
check to the holder in due course who isnecessarily a third party and
is not the accommodated party. Having issued or indorsed the check,
the accommodating party has warranted to the holder in due course
that he will pay the same according to its tenor.

In the case at bar, Travel-On was payee of all six (6) checks, it presented
these checks for payment at the drawee bank but the checks bounced.
Travel-On obviously was not an accommodated party; it realized no value
on thechecks which bounced.

Travel-On was entitled to the benefit of the statutory presumption that it

was a holder in due course, 4 that the checks were supported by valuable
consideration. 5 Private respondent maker of the checks did not
successfully rebut these presumptions. The only evidence aliundethat
Page 183 of 344
private respondent offered was his own self-serving uncorroborated
testimony. He claimed that he had issued the checks to Travel-On as
payee to "accommodate" its General Manager who allegedly wished to
show those checks to the Board of Directors of Travel-On to "prove" that
Travel-On's account receivables were somehow "still good." It will be seen
that this claim was in fact a claim that the checks were merely simulated,
that private respondent did not intend to bind himself thereon. Only
evidence of the clearest and most convincing kind will suffice for that
purpose; 6 no such evidence was submitted by private
respondent. The latter's explanation was denied by Travel-On's General
Manager; that explanation, in any case, appears merely contrived and quite
hollow to us. Upon the other hand, the "accommodation" or assistance
extended to Travel-On's passengers abroad as testified by petitioner's
General Manager involved, not the accommodation transactions
recognized by the NIL, but rather the circumvention of then existing foreign
exchange regulations by passengers booked by Travel-On, which
incidentally involved receipt of full consideration by private respondent.

Thus, we believe and so hold that private respondent must be held liable
on the six (6) checks here involved. Those checks in themselves
constituted evidence of indebtedness of private respondent, evidence not
successfully overturned or rebutted by private respondent.

Since the checks constitute the best evidence of private respondent's

liability to petitioner Travel-On, the amount ofsuch liability is the face
amount of the checks, reduced only by the P10,000.00 which Travel-On
admitted in itscomplaint to have been paid by private respondent sometime
in March 1992.

The award of moral damages to Private respondent must be set aside, for
the reason that Petitioner's application for the writ of attachment rested on
sufficient basis and no bad faith was shown on the part of Travel-On. If
anyone wasin bad faith, it was private respondent who issued bad checks
and then pretended to have "accommodated" petitioner's General Manager
by assisting her in a supposed scheme to deceive petitioner's Board of
Directors and to misrepresent Travel-On's financial condition.

ACCORDINGLY, the Court Resolved to GRANT due course to the Petition

for Review on Certiorari and to REVERSE and SET ASIDE the Decision
dated 22 October 1980 and the Resolution of 23 January 1981 of the Court
of Appeals, as well as the Decision dated 31 January 1975 of the trial court,
and to enter a new decision requiring private respondent Arturo S. Miranda
to pay to petitioner Travel-On the amount of P105,000.00 with legal interest
thereon from 14 June 1972, plus ten percent (10%) of the total amount due
as attorney's fees. Costs against Private respondent.

Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.

Page 184 of 344

Footnotes
1 Section 24 of the Negotiable Instruments Law provides:
Section 24. Presumption of consideration. — Every negotiable instrument is deemed
prima facie to
have been issued for a valuable consideration; and every person whose signature
appears thereon to
have become a party thereto for value.
Section 5(s) of Rule 131 also establishes the presumption "[t]hat a negotiable
instrument was given or
indorsed for a sufficient consideration; . . ."
2 Pineda vs. dela Rama, 121 SCRA 671 (1983); Bank of Philippine Islands vs. Laguna
Coconut Oil
Co., 48 Phil. 5 (1925).
3 Section 60 of the Negotiable Instruments Law provides:
Section 60. Liability of maker. — 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.
Further, Section 61 provides:
Section 61. Liability of drawer. — The drawer by drawing the instrument admits the
existence of the
payee and his then capacity to indorse; and engages that, on due presentment, the
instrument will be
accepted or paid, or both, according to its tenor, 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. . . .
Finally, Section 66 provides:
Section 66. Liability of general indorser. — Every indorser who indorses without
qualification, warrants
to all subsequent holders in due course:
xxx xxxxxx
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.
4 Section 59 of the Negotiable Instruments Law provides:
Section 59. — Who is deemed holder in due course. — Every holder is deemed prima
facie to be a
holder in due course; . . .
See Also Fossum v. Fernandez Hermanos, 44 Phil. 713 (1923).
5 Section 24, Negotiable Instruments Law, supra; A similar provision is found in Article
1354, Civil Code
of the Philippines:
Art. 1354. Although the cause is not stated in the contract, it is presumed that it exists
and is lawful,
unless the debtor proves the contrary.
Also Penaco v. Ruaya, 110 SCRA 46 (1981).
6 See generally Cuyugan v. Santos, 34 Phil. 100 (1916); Tolentino v. Gonzales, 50 Phil.
558 (1927).

Page 185 of 344

 SECOND DIVISION

G.R. No. 117660. December 18, 2000]

AGRO CONGLOMERATES, INC. and MARIO SORIANO, petitioners,

vs.
THE HON. COURT OF APPEALS and REGENT SAVINGS and LOAN
BANK, INC.,respondents.

DECISION

QUISUMBING, J.:

This is a petition for review challenging the decision[1] dated October 17,
1994 of the Court of Appeals in CA-G.R. No. 32933, which affirmed in toto
the judgment of the Manila Regional Trial Court, Branch 27, in consolidated
Cases Nos. 86-37374, 86-37388, 86-37543.

This petition springs from three complaints for sums of money filed by
respondent bank against herein petitioners. In the decision of the Court of
Appeals, petitioners were ordered to pay respondent bank, as follows:

Wherefore, judgment is hereby rendered in favor of plaintiff and against

defendants, as follows:

1.) In Civil Case No. 86-37374, defendants [petitioners, herein] are

ordered jointly and severally, to pay to plaintiff the amount of
P78,212.29, together with interest and service charge thereon, at the
rates of 14% and 3% per annum, respectively, computed from
November 10, 1982, until fully paid, plus stipulated penalty on unpaid
principal at the rate of 6% per annum, computed from November 10,
1982, plus 15% as liquidated damage plus 10% of the total amount
due, as attorneys fees, plus costs;

2) In Civil Case No. 86-37388, defendant is ordered to pay plaintiff

the amount of P632,911.39, together with interest and service charge
thereon at the rate of 14% and 3% per annum, respectively,
computed from January 15, 1983, until fully paid, plus stipulated
penalty on unpaid principal at the rate of 6% per annum, computed
from January 15, 1983, plus liquidated damages equivalent to 15% of
the total amount due, plus attorneys fees equivalent to 10% of the
total amount due, plus costs; and

3) In Civil Case No. 86-37543, defendant is ordered to pay plaintiff,

on the first cause of action, the amount of P510,000.00, together with
interest and service charge thereon, at the rates of 14% and 2% per
annum, respectively, computed from March 13, 1983, until fully paid,
plus a penalty of 6% per annum, based on the outstanding principal
of the loan, computed from March 13, 1983, until fully paid; and on
Page 186 of 344
 the second cause of action, the amount of P494,936.71, together with
interest and service charge thereon at the rates of 14% and 2%, per
annum, respectively, computed from March 30, 1983, until fully paid,
plus a penalty charge of 6% per annum, based on the unpaid
principal, computed from March 30, 1983, until fully paid, plus (on
both causes of action) an amount equal to 15% of the total amounts
due, as liquidated damages, plus attorneys fees equal to 10% of the
totalamounts due, plus costs.[2]

Based on the records, the following are the factual antecedents.

On July 17, 1982, petitioner Agro Conglomerates, Inc. as vendor, sold two
parcels of land to Wonderland Food Industries, Inc. In their Memorandum
of Agreement,[3] the parties covenanted that the purchase price of Five
Million (P5,000,000.00) Pesos would be settled by the vendee, under the
following terms and conditions: (1) One Million (P1,000,000.00) Pesos shall
be paid in cash upon the signing of the agreement; (2) Two Million
(P2,000,000.00) Pesos worth of common shares of stock of the
Wonderland Food Industries, Inc.; and (3) The balance of P2,000,000.00
shall be paid in four equal installments, the first installment falling due, 180
days after the signing of the agreement and every six months thereafter,
with an interest rate of 18% per annum, to be advanced by the vendee
upon the signing of the agreement.

On July 19, 1982, the vendor, the vendee, and the respondent bank
Regent Savings & Loan Bank (formerly Summa Savings & Loan
Association), executed an Addendum[4]to the previous Memorandum of
Agreement. The new arrangement pertained to the revision of settlement of
the initial payments of P1,000,000.00 and prepaid interest of P360,000.00
(18% of P2,000,000.00) as follows:

Whereas, the parties have agreed to qualify the stipulated terms for the
payment of the said ONE MILLION THREE HUNDRED SIXTY
THOUSAND (P1,360,000.00) PESOS.

WHEREFORE, in consideration of the mutual covenant and agreement of

the parties, they do further covenant and agree as follows:

1.That the VENDEE instead of paying the amount of ONE MILLION

THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS in
cash, hereby authorizes the VENDOR to obtain a loan from Summa
Savings and Loan Association with office address at Valenzuela,
Metro Manila, being represented herein by its President, Mr. Jaime
Cario and referred to hereafter as Financier; in the amount of ONE
MILLION THREE HUNDRED SIXTY THOUSAND
(P1,360,000.00)PESOS, plus interest thereon at such rate as the
VENDEE and the Financier may agree, which amount shall cover the
ONE MILLION (P1,000,000.00) PESOS cash which was agreed to be
paid upon signing of the Memorandum of Agreement, plus 18%
Page 187 of 344
 interest on the balance of two million pesos stipulated upon in Item
No. 1(c) of the said agreement; provided however, that said loan shall
be made for and in the name of the VENDOR.

2. The VENDEE also agrees that the full amount of ONE MILLION
THREE HUNDRED SIXTY THOUSAND (P1,360,000.00) PESOS be
paid directly to the VENDOR; however, the VENDEE hereby
undertakes to pay the full amount of the said loan to the Financier on
such terms and conditions agreed upon by the Financier and the
VENDOR, it being understood that while the loan will be secured from
and in the name of the VENDOR, the VENDEE will be the one liable
to pay the entire proceeds thereof including interest and other
charges.[5]

This addendum was not notarized.

Consequently, petitioner Mario Soriano signed as maker several

promissory notes,[6] payable to the respondent bank. Thereafter, the bank
released the proceeds of the loan to petitioners. However, petitioners failed
to meet their obligations as they fell due. During that time, the bank was
experiencing financial turmoil and was under the supervision of the Central
Bank. Central Bank examiner and liquidator Cordula de Jesus, endorsed
the subject promissory notes to the banks counsel for collection. The bank
gave petitioners opportunity to settle their account by extending payment
due dates. Mario Soriano manifested his intention to re-structure the loan,
yet did not show up nor submit his formal written request.

Respondent bank filed three separate complaints before the Regional Trial
Court of Manila for Collection of Sums of money. The corresponding case
histories are illustrated in the table below:
Date of Loan Amount Payment Due Payment Extension
Date Dates
Civil Case 86-
37374 P78,212.29 Nov. 10, 1982 Feb. 8, 1983
August 12, 1982 May 9, 1983
Aug. 7, 1983
Civil Case 86-
37388 P632,911.39 Jan. 15, 1983 May 16, 1983
July 19, 1982 Aug. 14, 1983
Civil Case 86-
37543 P510,000.00 March 13, 1983 June 11, 1983
September 14, Sept. 9, 1983
1982
P494,936.71 March 30, 1983 June 28, 1983
Sept. 26, 1983
October 1, 1982
In their answer, petitioners interposed the defense of novation and insisted
there was a valid substitution of debtor. They alleged that the addendum

Page 188 of 344

specifically states that although the promissory notes were in their names,
Wonderland shall be responsible for the payment thereof.

The trial court held that petitioners are liable, to wit:

The evidences, however, disclose that Wonderland did not comply with its
obligation under said Addendum (Exh. S) as the agreement to turn over the
farmland to it, did not materialize (57 tsn, May 29, 1990), and there was,
actually no sale of the land (58 tsn, ibid). Hence, Wonderland is not
answerable. And since the loans obtained under the four promissory notes
(Exhs. A, C, G, and E) have not been paid, despite opportunities given by
plaintiff to defendants to make payments, it stands to reason that
defendants are liable to pay their obligations thereunder to plaintiff. In fact,
defendants failed to file a third-party complaint against Wonderland, which
shows the weakness of its stand that Wonderland is answerable to make
said payments.[7]

Petitioners appealed to the Court of Appeals. The trial courts decision was
affirmed by the
appellate court.

Hence, this recourse, wherein petitioners raise the sole issue of:

WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT

THE ADDENDUM, SIGNED BY THE PETITIONERS, RESPONDENT
BANK AND WONDERLAND INC., CONSTITUTES A NOVATION OF THE
CONTRACT BY SUBSTITUTION OF DEBTOR, WHICH EXEMPTS THE
PETITIONERS FROM ANY LIABILITY OVER THE PROMISSORY
NOTES.

Revealed by the facts on record, the conflict among the parties started from
a contract of sale of a farmland between petitioners and Wonderland Food
Industries, Inc. As found by the trial court, no such sale materialized.

A contract of sale is a reciprocal transaction. The obligation or promise of

each party is the cause or consideration for the obligation or promise by the
other. The vendee is obliged to pay the price, while the vendor must deliver
actual possession of the land. In the instant case the original plan was that
the initial payments would be paid in cash. Subsequently, the parties (with
the participation of respondent bank) executed an addendum providing
instead, that the petitioners would secure a loan in the name of Agro
Conglomerates Inc. for the total amount of the initial payments, while the
settlement of said loan would be assumed by Wonderland. Thereafter,
petitioner Soriano signed several promissory notes and received the
proceeds in behalf of petitioner-company.

By this time, we note a subsidiary contract of suretyship had taken effect

since petitioners signed the promissory notes as maker and
accommodation party for the benefit of Wonderland. Petitioners became
Page 189 of 344
liable as accommodation party. An accommodation party is a person who
has signed the instrument as maker, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to some
other person and is liable on the instrument to a holder for value,
notwithstanding such holder at the time of taking the instrument knew (the
signatory) to be an accommodation party.[8] He has the right, after paying
the holder, to obtain reimbursement from the party accommodated, since
the relation between them has in effect become one of principal and surety,
the accommodation party being the surety.[9] Suretyship is defined as the
relation which exists
where one person has undertaken an obligation and another person is also
under the obligation or other duty to the obligee, who is entitled to but one
performance, and as between the two who are bound, one rather than the
other should perform.[10] The suretys liability to the creditor or promisee of
the principal is said to be direct, primary and absolute; in other words, he is
directly and equally bound with the principal.[11] And the creditor may
proceed against any one of the solidary debtors.[12]

We do not give credence to petitioners assertion that, as provided by the

addendum, their obligation to pay the promissory notes was novated by
substitution of a new debtor, Wonderland. Contrary to petitioners
contention, the attendant facts herein do not make a case of novation.

Novation is the extinguishment of an obligation by the substitution or

change of the obligation by a subsequent one which extinguishes or
modifies the first, either by changing the object or principal conditions, or by
substituting another in place of the debtor, or by subrogating a third person
in the rights of the creditor.[13] In order that a novation can take place, the
concurrence of the following requisites[14] are indispensable:

1) There must be a previous valid obligation;

2) There must be an agreement of the parties concerned to a new contract;

3) There must be the extinguishment of the old contract; and

4) There must be the validity of the new contract.

In the instant case, the first requisite for a valid novation is lacking. There
was no novation by substitution of debtor because there was no prior
obligation which was substituted by a new contract. It will be noted that the
promissory notes, which bound the petitioners to pay, were executed after
the addendum. The addendum modified the contract of sale, not the
stipulations in the promissory notes which pertain to the surety contract. At
this instance, Wonderland apparently assured the payment of future debts
to be incurred by the petitioners. Consequently, only a contract of surety
arose. It was wrong for petitioners to presume a novation had taken place.
The well-settled rule is that novation is never presumed,[15] it must be
clearly and unequivocally shown.[16]
Page 190 of 344
As it turned out, the contract of surety between Wonderland and the
petitioners was extinguished by the rescission of the contract of sale of the
farmland. With the rescission, there was confusion or merger in the
persons of the principal obligor and the surety, namely the petitioners
herein. The addendum which was dependent thereon likewise lost its
efficacy.

It is true that the basic and fundamental rule in the interpretation of contract
is that, if the terms thereof are clear and leave no doubt as to the intention
of the contracting parties, the literal meaning shall control. However, in
order to judge the intention of the parties, their contemporaneous and
subsequent acts should be considered.[17]

The contract of sale between Wonderland and petitioners did not

materialize. But it was admitted that petitioners received the proceeds of
the promissory notes obtained from respondent bank.

Sec. 22 of the Civil Code provides:

Every person who through an act of performance by another, or any other

means, acquires or comes into possession of something at the expense of
the latter without just or legal ground, shall return the

Petitioners had no legal or just ground to retain the proceeds of the loan at
the expense of private respondent. Neither could petitioners excuse
themselves and hold Wonderland still liable to pay the loan upon the
rescission of their sales contract. If petitioners sustained damages as a
result of the rescission, they should have impleaded Wonderland and
asked damages. The non-inclusion of a necessary party does not prevent
the court from proceeding in the action, and the judgment rendered therein
shall be without prejudice to the rights of such necessary party.[18] But
respondent appellate court did not err in holding that petitioners are duty-
bound under the law to pay the claims of respondent bank from whom they
had obtained the loan proceeds.

WHEREFORE, the petition is DENIED for lack of merit. The assailed

decision of the Court of Appeals dated October 17, 1994 is AFFIRMED.
Costs against petitioners.

SO ORDERED.

Page 191 of 344

 G.R. No. L-15126 November 30, 1961

VICENTE R. DE OCAMPO & CO., plaintiff-appellee,

vs.
AN ITA GATCHALIAN, ET AL., defendants-appellants.

Vicente Formoso, Jr. for plaintiff-appellee.

Reyes and Pangalañgan for defendants-a ppellants.

LABRADOR, J.:

Appeal from a judgment of the Court of First Instance of Manila, Hon.

Conrado M. Velasquez, presiding, sentencing the defendants to pay the
plaintiff the sum of P600, with legal interest from September 10, 1953 until
paid, and to pay the costs.

The action is for the recovery of the value of a check for P600 payable to
the plaintiff and drawn by defendant Anita C. Gatchalian. The complaint
sets forth the check and alleges that plaintiff received it in payment of the
indebtedness of one Matilde Gonzales; that upon receipt of said check,
plaintiff gave Matilde Gonzales P158.25, the difference between the face
value of the check and Matilde Gonzales' indebtedness. The defendants
admit the execution of the check but they allege in their answer, as
affirmative defense, that it was issued subject to a condition, which was not
fulfilled, and that plaintiff was guilty of gross negligence in not taking steps
to protect itself.

At the time of the trial, the parties submitted a stipulation of facts, which
reads as follows:

Plaintiff and defendants through their respective undersigned

attorney's respectfully submit the following Agreed Stipulation of
Facts;

First. — That on or about 8 September 1953, in the evening,

defendant Anita C. Gatchalian who was then interested in looking for
a car for the use of her husband and the family, was shown and
offered a car by Manuel Gonzales who was accompanied by Emil
Fajardo, the latter being personally known to defendant Anita C.
Gatchalian;

Second. — That Manuel Gonzales represented to defend Anita C.

Gatchalian that he was duly authorized by the owner of the car,
Ocampo Clinic, to look for a buyer of said car and to negotiate for and
accomplish said sale, but which facts were not known to plaintiff;

Third. — That defendant Anita C. Gatchalian, finding the price of the

car quoted by Manuel
Page 192 of 344
 Gonzales to her satisfaction, requested Manuel Gonzales to bring the
car the day following together with the certificate of registration of the car,
so that her husband would be able to see
same; that on this request of defendant Anita C. Gatchalian, Manuel
Gonzales advised her that the owner of the car will not be willing to
give the certificate of registration unless there is a showing that the
party interested in the purchase of said car is ready and willing to
make such purchase and that for this purpose Manuel Gonzales
requested defendant Anita C. Gatchalian to give him (Manuel
Gonzales) a check which will be shown to the owner as evidence of
buyer's good faith in the intention to purchase the said car, the said
check to be for safekeeping only of Manuel Gonzales and to be
returned to defendant Anita C. Gatchalian the following day when
Manuel Gonzales brings the car and the certificate of registration, but
which facts were not known to plaintiff;

Fourth. — That relying on these representations of Manuel Gonzales

and with his assurance that said check will be only for safekeeping
and which will be returned to said defendant the following day when
the car and its certificate of registration will be brought by Manuel
Gonzales to defendants, but which facts were not known to plaintiff,
defendant Anita C. Gatchalian drew and issued a check, Exh. "B";
that Manuel Gonzales executed and issued a receipt for said check,
Exh. "1";

Fifth. — That on the failure of Manuel Gonzales to appear the day

following and on his failure to bring the car and its certificate of
registration and to return the check, Exh. "B", on the following day as
previously agreed upon, defendant Anita C. Gatchalian issued a
"Stop Payment Order" on the check, Exh. "3", with the drawee bank.
Said "Stop Payment Order" was issued without previous notice on
plaintiff not being know to defendant,qAnita C. Gatchalian and who
furthermore had no reason to know check was given to plaintiff;

` Sixth. — That defendants, both or either of them, did not know

personally Manuel Gonzales or
any member of his family at any time prior to September 1953, but
that defendant Hipolito Gatchalian is personally acquainted with V. R.
de Ocampo;

Seventh. — That defendants, both or either of them, had no

arrangements or agreement with the Ocampo Clinic at any time prior
to, on or after 9 September 1953 for the hospitalization of the wife of
Manuel Gonzales and neither or both of said defendants had
assumed, expressly or impliedly, with the Ocampo Clinic, the
obligation of Manuel Gonzales or his wife for the hospitalization of the
latter;

Page 193 of 344

 Eight. — That defendants, both or either of them, had no obligation or
liability, directly or indirectly with the Ocampo Clinic before, or on 9
September 1953;

Ninth. — That Manuel Gonzales having received the check Exh. "B"
from defendant Anita C. Gatchalian under the representations and
conditions herein above specified, delivered the same to the Ocampo
Clinic, in payment of the fees and expenses arising from the
hospitalization of his wife;

Tenth. — That plaintiff for and in consideration of fees and expenses

of hospitalization and the release of the wife of Manuel Gonzales
from its hospital, accepted said check, applying P441.75 (Exhibit "A")
thereof to payment of said fees and expenses and delivering to
Manuel Gonzales the amount of P158.25 (as per receipt, Exhibit "D")
representing the balance on the amount of the said check, Exh. "B";

Eleventh. — That the acts of acceptance of the check and application

of its proceeds in the manner specified above were made without
previous inquiry by plaintiff from defendants:

Twelfth. — That plaintiff filed or caused to be filed with the Office of

the City Fiscal of Manila, a complaint for estafa against Manuel
Gonzales based on and arising from the acts of said Manuel
Gonzales in paying his obligations with plaintiff and receiving the
cash balance of the check, Exh. "B" and that said complaint was
subsequently dropped;

Thirteenth. — That the exhibits mentioned in this stipulation and the

other exhibits submitted previously, be considered as parts of this
stipulation, without necessity of formally offering them in evidence;

WHEREFORE, it is most respectfully prayed that this agreed

stipulation of facts be admittedand that the parties hereto be given
fifteen days from today within which to submit simultaneously their
memorandum to discuss the issues of law arising from the facts,
reserving to either party the right to submit reply memorandum, if
necessary, within ten days from receipt of their main memoranda.
(pp. 21-25, Defendant's Record on Appeal).

No other evidence was submitted and upon said stipulation the court
rendered the judgment already alluded above.

In their appeal defendants-appellants contend that the check is not a

negotiable instrument, under the facts and circumstances stated in the
stipulation of facts, and that plaintiff is not a holder in due course.

In support of the first contention, it is argued that defendant Gatchalian had

no intention to transfer her property in the instrument as it was for
Page 194 of 344
safekeeping merely and, therefore, there was no delivery required by law
(Section 16, Negotiable Instruments Law); that assuming for the sake of
argument that delivery was not for safekeeping merely, delivery was
conditional and the condition was not fulfilled. In support of the contention
that plaintiff-appellee is not a holder in due course, the appellant argues
that plaintiffappellee cannot be a holder in due course because there was
no negotiation prior to plaintiff-appellee's acquiring the possession of the
check; that a holder in due course presupposes a prior party from whose
hands negotiation proceeded, and in the case at bar, plaintiff-appellee is
the payee, the maker and the payee being original parties. It is also
claimed that the plaintiff-appellee is not a holder in due course because it
acquired the check with notice of defect in the title of the holder, Manuel
Gonzales, and because under the circumstances stated in the stipulation of
facts there were circumstances that brought suspicion about Gonzales'
possession and negotiation, which circumstances should have placed the
plaintiff-appellee under the duty, to inquire into the title of the holder. The
circumstances are as follows:

The check is not a personal check of Manuel Gonzales. (Paragraph Ninth,

Stipulation of Facts). Plaintiff could have inquired why a person would use
the check of another to pay his own debt. Furthermore, plaintiff had the
"means of knowledge" inasmuch as defendant Hipolito Gatchalian is
personally acquainted with V. R. de Ocampo (Paragraph Sixth, Stipulation
of Facts.).

The maker Anita C. Gatchalian is a complete stranger to Manuel Gonzales

and Dr. V. R. de Ocampo (Paragraph Sixth, Stipulation of Facts).

The maker is not in any manner obligated to Ocampo Clinic nor to Manuel
Gonzales. (Par. 7, Stipulation of Facts.)

The check could not have been intended to pay the hospital fees
which amounted only to P441.75. The check is in the amount of
P600.00, which is in excess of the amount due plaintiff. (Par. 10,
Stipulation of Facts). It was necessary for plaintiff to give Manuel
Gonzales change in the sum P158.25 (Par. 10, Stipulation of Facts).
Since Manuel Gonzales is the party obliged to pay, plaintiff should
have been more cautious and wary in accepting a piece of paper and
disbursing cold cash. The check is payable to bearer. Hence, any
person who holds it should have been subjected to inquiries. EVEN
IN A BANK, CHECKS ARE NOT CASHED WITHOUT INQUIRY
FROM THE BEARER. The same inquiries should have been made
by plaintiff. (Defendants-appellants' brief, pp. 52-53)

Answering the first contention of appellant, counsel for plaintiff-appellee

argues that in accordance with the best authority on the Negotiable
Instruments Law, plaintiff-appellee may be considered as a holder in due
course, citing Brannan's Negotiable Instruments Law, 6th edition, page

Page 195 of 344

252. On this issue Brannan holds that a payee may be a holder in due
course and says that to this effect is the greater weight of authority, thus:

Whether the payee may be a holder in due course under the N. I. L.,
as he was at common law, is a question upon which the courts are in
serious conflict. There can be no doubt that a proper interpretation of
the act read as a whole leads to the conclusion that a payee may be
a holder in due course under any circumstance in which he meets the
requirements of Sec. 52.

The argument of Professor Brannan in an earlier edition of this work

has never been successfully answered and is here repeated.

Section 191 defines "holder" as the payee or indorsee of a bill or

note, who is in possession of it, or the bearer thereof. Sec. 52
defendants defines a holder in due course as "a holder who has
taken the instrument under the following conditions: 1. That it is
complete and regular on its face. 2. That he became the holder of it
before it was overdue, and without notice that it had been previously
dishonored, if such was the fact. 3. That he took it in good faith and
for value. 4. That at the time it was negotiated to him he had no
notice of any infirmity in the instrument or defect in the title of the
person negotiating it."

Since "holder", as defined in sec. 191, includes a payee who is in

possession the word holder in the first clause of sec. 52 and in the
second subsection may be replaced by the definition in sec. 191 so
as to read "a holder in due course is a payee or indorsee who is in
possession," etc. (Brannan's on Negotiable Instruments Law, 6th ed.,
p. 543).

The first argument of the defendants-appellants, therefore, depends upon

whether or not the plaintiff-
appellee is a holder in due course. If it is such a holder in due course, it is
immaterial that it was the
payee and an immediate party to the instrument.

The other contention of the plaintiff is that there has been no negotiation of
the instrument, because the drawer did not deliver the instrument to
Manuel Gonzales with the intention of negotiating the same, or for the
purpose of giving effect thereto, for as the stipulation of facts declares the
check was to remain in the possession Manuel Gonzales, and was not to
be negotiated, but was to serve merely as evidence of good faith of
defendants in their desire to purchase the car being sold to them. Admitting
that such was the intention of the drawer of the check when she delivered it
to Manuel Gonzales, it was no fault of the plaintiff-appellee drawee if
Manuel Gonzales delivered the check or negotiated it. As the check was
payable to the plaintiff-appellee, and was entrusted to Manuel Gonzales by
Gatchalian, the delivery to Manuel Gonzales was a delivery by the drawer
Page 196 of 344
to his own agent; in other words, Manuel Gonzales was the agent of the
drawer Anita Gatchalian insofar as the possession of the check is
concerned. So, when the agent of drawer Manuel Gonzales negotiated the
check with the intention of getting its value from plaintiffappellee,
negotiation took place through no fault of the plaintiff-appellee, unless it can
be shown that the plaintiffappellee should be considered as having notice
of the defect in the possession of the holder Manuel Gonzales. Our
resolution of this issue leads us to a consideration of the last question
presented by the appellants, i.e., whether the plaintiff-appellee may be
considered as a holder in due course.

Section 52, Negotiable Instruments Law, defines holder in due

course, thus:

A holder in due course is a holder who has taken the instrument

under the following conditions:

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

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

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

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

The stipulation of facts expressly states that plaintiff-appellee was not

aware of the circumstances under which the check was delivered to
Manuel Gonzales, but we agree with the defendants-appellants that the
circumstances indicated by them in their briefs, such as the fact that
appellants had no obligation or liability to the Ocampo Clinic; that the
amount of the check did not correspond exactly with the obligation of
Matilde Gonzales to Dr. V. R. de Ocampo; and that the check had two
parallel lines in the upper left hand corner, which practice means that the
check could only be deposited but may not be converted into cash — all
these circumstances should have put the plaintiff-appellee to inquiry as to
the why and wherefore of the possession of the check by Manuel
Gonzales, and why he used it to pay Matilde's account. It was payee's duty
to ascertain from the holder Manuel Gonzales what the nature of the latter's
title to the check was or the nature of his possession. Having failed in this
respect, we must
declare that plaintiff-appellee was guilty of gross neglect in not finding out
the nature of the title and possession of Manuel Gonzales, amounting to
legal absence of good faith, and it may not be considered as a holder of the
check in good faith. To such effect is the consensus of authority.

Page 197 of 344

 In order to show that the defendant had "knowledge of such facts that
his action in taking the instrument amounted to bad faith," it is not
necessary to prove that the defendant knew the exact fraud that was
practiced upon the plaintiff by the defendant's assignor, it being
sufficient to show that the defendant had notice that there was
something wrong about his assignor's acquisition of title, although he
did not have notice of the particular wrong that was committed. Paika
v. Perry, 225 Mass. 563, 114 N.E. 830.

It is sufficient that the buyer of a note had notice or knowledge that

the note was in some way tainted with fraud. It is not necessary that
he should know the particulars or even the nature of the fraud, since
all that is required is knowledge of such facts that his action in taking
the note amounted bad faith. Ozark Motor Co. v. Horton (Mo. App.),
196 S.W. 395. Accord. Davis v. First Nat. Bank, 26 Ariz. 621, 229
Pac. 391.
Liberty bonds stolen from the plaintiff were brought by the thief, a boy
fifteen years old, less
than five feet tall, immature in appearance and bearing on his face
the stamp a degenerate, to the defendants' clerk for sale. The boy
stated that they belonged to his mother. The defendants paid the boy
for the bonds without any further inquiry. Held, the plaintiff could
recover the value of the bonds. The term 'bad faith' does not
necessarily involve furtive motives, but means bad faith in a
commercial sense. The manner in which the defendants conducted
their Liberty Loan department provided an easy way for thieves to
dispose of their plunder. It was a case of "no questions asked."
Although gross negligence does not of itself constitute bad faith, it is
evidence from which bad faith may be inferred. The circumstances
thrust the duty upon the defendants to make further inquiries and they
had no right to shut their eyes deliberately to obvious facts.
Morris v. Muir, 111 Misc. Rep. 739, 181 N.Y. Supp. 913, affd. in
memo., 191 App. Div. 947, 181 N.Y. Supp. 945." (pp. 640-642,
Brannan's Negotiable Instruments Law, 6th ed.).

The above considerations would seem sufficient to justify our ruling that
plaintiff-appellee should not be allowed to recover the value of the check.
Let us now examine the express provisions of the Negotiable Instruments
Law pertinent to the matter to find if our ruling conforms thereto. Section 52
(c) provides that a holder in due course is one who takes the instrument "in
good faith and for value;" Section 59, "that every holder is deemed prima
facie to be a holder in due course;" and Section 52 (d), that in order that
one may be a holder in due course it is necessary that "at the time the
instrument was negotiated to him "he had no notice of any . . . defect in the
title of the person negotiating it;" and lastly Section 59, that every holder is
deemed prima facieto be a holder in due course.

In the case at bar the rule that a possessor of the instrument is prima faciea
holder in due course does not apply because there was a defect in the title
Page 198 of 344
of the holder (Manuel Gonzales), because the instrument is not payable to
him or to bearer. On the other hand, the stipulation of facts indicated by the
appellants in their brief, like the fact that the drawer had no account with
the payee; that the holder did not show or tell the payee why he had the
check in his possession and why he was using it for the payment of his own
personal account — show that holder's title was defective or suspicious, to
say the least. As holder's title was defective or suspicious, it cannot be
stated that the payee acquired the check without knowledge of said defect
in holder's title, and for this reason the presumption that it is a holder in due
course or that it acquired the instrument in good faith does not exist. And
having presented no evidence that it acquired the check in good faith, it
(payee) cannot be considered as a holder in due course. In other words,
under the circumstances of the case, instead of the presumption that payee
was a holder in good faith, the fact is that it acquired possession of the
instrument under circumstances that should have put it to inquiry as to the
title of the holder who negotiated the check to it. The burden was,
therefore, placed upon it to show that notwithstanding the suspicious
circumstances, it acquired the check in actual good faith.

The rule applicable to the case at bar is that described in the case of
Howard National Bank v. Wilson, et al., 96 Vt. 438, 120 At. 889, 894, where
the Supreme Court of Vermont made the following disquisition:

Prior to the Negotiable Instruments Act, two distinct lines of cases

had developed in this country. The first had its origin in Gill v. Cubitt,
3 B. & C. 466, 10 E. L. 215, where the rule was distinctly laid down by
the court of King's Bench that the purchaser of negotiable paper must
exercise reasonable prudence and caution, and that, if the
circumstances were such as ought to have excited the suspicion of a
prudent and careful man, and he made no inquiry, he did not stand in
the legal position of a bona fide holder. The rule was adopted by the
courts of this country generally and seem to have become a fixed rule
in the law of negotiable paper. Later in
Goodman v. Harvey, 4 A. & E. 870, 31 E. C. L. 381, the English court
abandoned its former position and adopted the rule that nothing short
of actual bad faith or fraud in the purchaser would deprive him of the
character of a bona fide purchaser and let in defenses existing
between prior parties, that no circumstances of suspicion merely, or
want of proper caution in the purchaser, would have this effect, and
that even gross negligence would have no effect, except as evidence
tending to establish bad faith or fraud. Some of the American courts
adhered to the earlier rule, while others followed the change
inaugurated in Goodman v. Harvey. The question was before this
court in Roth v. Colvin, 32 Vt. 125, and, on full consideration of the
question, a rule was adopted in harmony with that announced in Gill
v. Cubitt, which has been adhered to in subsequent cases, including
those cited above. Stated briefly, one line of cases including our own
had adopted the test of the reasonably prudent man and the other

Page 199 of 344

 that of actual good faith. It would seem that it was the intent of the
Negotiable Instruments Act to
harmonize this disagreement by adopting the latter test. That such is
the view generally accepted by the courts appears from a recent
review of the cases concerning what constitutes notice of defect.
Brannan on Neg. Ins. Law, 187-201. To effectuate the general
purpose of the act to make uniform the Negotiable Instruments Law
of those states which should enact it, we are constrained to hold
(contrary to the rule adopted in our former decisions) that negligence
on the part of the plaintiff, or suspicious circumstances sufficient to
put a prudent man on inquiry, will not of themselves prevent a
recovery, but are to be considered merely as evidence bearing on the
question of bad faith. See G. L. 3113, 3172, where such a course is
required in construing other uniform acts.

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

In the case at bar as the payee acquired the check under circumstances
which should have put it to inquiry, why the holder had the check and used
it to pay his own personal account, the duty devolved upon it, plaintiff-
appellee, to prove that it actually acquired said check in good faith. The
stipulation of facts contains no statement of such good faith, hence we are
forced to the conclusion that plaintiff payee has not proved that it acquired
the check in good faith and may not be deemed a holder in due course
thereof.

For the foregoing considerations, the decision appealed from should be, as
it is hereby, reversed, and the defendants are absolved from the complaint.
With costs against plaintiff-appellee.

Page 200 of 344

 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. 4195-01165-2, 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

Page 201 of 344

 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 14-009467,
dated December 22, 1987, also in the amount of P2.087 million. In
exchange, Chandiramani got 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
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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

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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. 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 plaintiff-appellant 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:

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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, defendant-
appellee 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

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questions of 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

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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
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

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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

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do with him at all, but which arose from 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.
Page 209 of 344
 G.R. No. 70145 November 13, 1986

MARCELO A. MESINA, petitioner,

vs.
TH E HONORABLE INTERMEDIATE APPELLATE COURT, HON.
ARSENIO M. GONONG, in his capacity as Judge of Regional Trial
Court — Manila (Branch VIII), JOSE GO, and ALBERT UY,
respondents.

PARAS, J.:

This is an appeal by certiorari from the decision of the then Intermediate

Appellate Court (IAC for short), now the Court of Appeals (CA) in AC-G.R.
S.P. 04710, dated Jan. 22, 1985, which dismissed the petition for certiorari
and prohibition filed by Marcelo A. Mesina against the trial court in Civil
Case No. 84-22515. Said case (an Interpleader) was filed by Associated
Bank against Jose Go and Marcelo A. Mesina regarding their conflicting
claims over Associated Bank Cashier's Check No. 011302 for P800,000.00,
dated December 29, 1983.

Briefly, the facts and statement of the case are as follows:

Respondent Jose Go, on December 29, 1983, purchased from Associated

Bank Cashier's Check No. 011302 for P800,000.00. Unfortunately, Jose Go
left said check on the top of the desk of the bank manager when he left the
bank. The bank manager entrusted the check for safekeeping to a bank
official, a certain Albert Uy, who had then a visitor in the person of
Alexander Lim. Uy had to answer a phone call on a nearby telephone after
which he proceeded to the men's room. When he returned to his desk, his
visitor Lim was already gone. When Jose Go inquired for his cashier's
check from Albert Uy, the check was not in his folder and nowhere to be
found. The latter advised Jose Go to go to the bank to accomplish a "STOP
PAYMENT" order, which suggestion Jose Go immediately followed. He
also executed an affidavit of loss. Albert Uy went to the police to report the
loss of the check, pointing to the person of Alexander Lim as the one who
could shed light on it.

The records of the police show that Associated Bank received the lost
check for clearing on December 31, 1983, coming from Prudential Bank,
Escolta Branch. The check was immediately dishonored by Associated
Bank by sending it back to Prudential Bank, with the words "Payment
Stopped" stamped on it. However, the same was again returned to
Associated Bank on January 4, 1984 and for the second time it was
dishonored. Several days later, respondent Associated Bank received a
letter, dated January 9, 1984, from a certain Atty. Lorenzo Navarro
demanding payment on the cashier's check in question, which was being
held by his client. He however refused to reveal the name of his client and
threatened to sue, if payment is not made. Respondent bank, in its letter,
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dated January 20, 1984, replied saying the check belonged to Jose Go who
lost it in the bank and is laying claim to it.

On February 1, 1984, police sent a letter to the Manager of the Prudential

Bank, Escolta Branch, requesting assistance in Identifying the person who
tried to encash the check but said bank refused saying that it had to protect
its client's interest and the Identity could only be revealed with the client's
conformity. Unsure of what to do on the matter, respondent Associated
Bank on February 2, 1984 filed an action for Interpleader naming as
respondent, Jose Go and one John Doe, Atty. Navarro's then unnamed
client. On even date, respondent bank received summons and copy of the
complaint for damages of a certain Marcelo A. Mesina from the Regional
Trial Court (RTC) of Caloocan City filed on January 23, 1984 bearing the
number C-11139. Respondent bank moved to amend its complaint, having
been notified for the first time of the name of Atty. Navarro's client and
substituted Marcelo A. Mesina for John Doe. Simultaneously, respondent
bank, thru representative Albert Uy, informed Cpl. Gimao of the Western
Police District that the lost check of Jose Go is in the possession of
Marcelo Mesina, herein petitioner. When Cpl. Gimao went to Marcelo
Mesina to ask how he came to possess the check, he said it was paid to
him by Alexander Lim in a "certain transaction" but refused to elucidate
further. An information for theft (Annex J) was instituted against Alexander
Lim and the corresponding warrant for his arrest was issued (Annex 6-A)
which up to the date of the filing of this instant petition remains unserved
because of Alexander Lim's successful evation thereof.

Meanwhile, Jose Go filed his answer on February 24, 1984 in the

Interpleader Case and moved to participate as intervenor in the complain
for damages. Albert Uy filed a motion of intervention and answer in the
complaint for Interpleader. On the Scheduled date of pretrial conference
inthe interpleader case, it was disclosed that the "John Doe" impleaded as
one of the defendants is actually petitioner Marcelo A. Mesina. Petitioner
instead of filing his answer to the complaint in the interpleader filed on May
17, 1984 an Omnibus Motion to Dismiss Ex Abudante Cautela alleging lack
of jurisdiction in view of the absence of an order to litigate, failure to state a
cause of action and lack of personality to sue. Respondent bank in the
other civil case (CC-11139) for damages moved to dismiss suit in view of
the existence already of the Interpleader case.

The trial court in the interpleader case issued an order dated July 13, 1984,
denying the motion to dismiss of petitioner Mesina and ruling that
respondent bank's complaint sufficiently pleaded a cause of action for
itnerpleader.

Petitioner filed his motion for reconsideration which was denied by the trial
court on September 26, 1984. Upon motion for respondent Jose Go dated
October 31, 1984, respondent judge issued an order on November 6, 1984,
declaring petitioner in default since his period to answer has already
expirecd and set the ex-parte presentation of respondent bank's evidence
Page 211 of 344
on November 7, 1984. Petitioner Mesina filed a petition for certioari with
preliminary injunction with IAC to set aside 1) order of respondent court
denying his omnibus Motion to Dismiss 2) order of 3) the order of default
against him.

On January 22, 1985, IAC rendered its decision dimissing the petition for
certiorari. Petitioner Mesina filed his Motion for Reconsideration which was
also denied by the same court in its resolution dated February 18, 1985.

Meanwhile, on same date (February 18, 1985), the trial court in Civil Case
#84-22515 (Interpleader) rendered a decisio, the dispositive portion reading
as follows:

WHEREFORE, in view of the foregoing, judgment is hereby rendered

ordering plaintiff Associate Bank to replace Cashier's Check No.
011302 in favor of Jose Go or its cas equivalent with legal rate of
inTerest from date of complaint, and with costs of suit against the latter.

SO ORDERED.

On March 29, 1985, the trial court in Civil Case No. C-11139, for
damages, issued an order, the pertinent portion of which states:

The records of this case show that on August 20, 1984 proceedings
in this case was (were) ordered suspended because the main issue in
Civil Case No. 84-22515 and in this instant case are the same which is:
who between Marcelo Mesina and Jose Go is entitled to payment of
Associated Bank's Cashier's Check No. CC-011302? Said issue having
been resolved already in Civil casde No. 84- 22515, really this instant case
has become moot and academic.

WHEREFORE, in view of the foregoing, the motion sholud be as it is

hereby granted and this case is ordered dismissed.

In view of the foregoing ruling no more action should be taken on the

"Motion For Reconsideration (of the order admitting the Intervention)"
dated June 21, 1984 as well as the Motion For Reconsideration dated
September 10, 1984.

SO ORDERED.

Petitioner now comes to Us, alleging that:

1. IAC erred in ruling that a cashier's check can be countermanded even in
the hands of a holder in due course.
2. IAC erred in countenancing the filing and maintenance of an interpleader
suit by a party who had earlier been sued on the same claim.
3. IAC erred in upholding the trial court's order declaring petitioner as in
default when there was no proper order for him to plead in the interpleader
complaint.
Page 212 of 344
4. IAC went beyond the scope of its certiorari jurisdiction by making
findings of facts in advance of trial.

Petitioner now interposes the following prayer:

1. Reverse the decision of the IAC, dated January 22, 1985 and set aside
the February 18, 1985 resolution denying the Motion for Reconsideration.
2. Annul the orders of respondent Judge of RTC Manila giving due course
to the interpleader suit and declaring petitioner in default.

Petitioner's allegations hold no water. Theories and examples advanced by

petitioner on causes and effects of a cashier's check such as 1) it cannot
be countermanded in the hands of a holder in due course and 2) a
cashier's check is a bill of exchange drawn by the bank against itself-are
general principles which cannot be aptly applied to the case at bar, without
considering other things. Petitioner failed to substantiate his claim that he is
a holder in due course and for consideration or value as shown by the
established facts of the case. Admittedly, petitioner became the holder of
the cashier's check as endorsed by Alexander Lim who stole the check. He
refused to say how and why it was passed to him. He had therefore notice
of the defect of his title over the check from the start. The holder of a
cashier's check who is not a holder in due course cannot enforce such
check against the issuing bank which dishonors the same. If a payee of a
cashier's check obtained it from the issuing bank by fraud, or if there is
some other reason why the payee is not entitled to collect the check, the
respondent bank would, of course, have the right to refuse payment of the
check when presented by the payee, since respondent bank was aware of
the facts surrounding the loss of the check in question. Moreover, there is
no similarity in the cases cited by petitioner since respondent bank did not
issue the cashier's check in payment of its obligation. Jose Go bought it
from respondent bank for purposes of transferring his funds from
respondent bank to another bank near his establishment realizing that
carrying money in this form is safer than if it were in cash. The check was
Jose Go's property when it was misplaced or stolen, hence he stopped its
payment. At the outset, respondent bank knew it was Jose Go's check and
no one else since Go had not paid or indorsed it to anyone. The bank was
therefore liable to nobody on the check but Jose Go. The bank had no
intention to issue it to petitioner but only to buyer Jose Go. When payment
on it was therefore stopped, respondent bank was not the one who did it
but Jose Go, the owner of the check. Respondent bank could not be
drawer and drawee for clearly, Jose Go owns the money it represents and
he is therefore the drawer and the drawee in the same manner as if he has
a current account and he issued a check against it; and from the moment
said cashier's check was lost and/or stolen no one outside of Jose Go can
be termed a holder in due course because Jose Go had not indorsed it in
due course. The check in question suffers from the infirmity of not having
been properly negotiated and for value by respondent Jose Go who as
already been said is the real owner of said instrument.

Page 213 of 344

In his second assignment of error, petitioner stubbornly insists that there is
no showing of conflicting claims and interpleader is out of the question.
There is enough evidence to establish the contrary. Considering the
aforementioned facts and circumstances, respondent bank merely took the
necessary precaution not to make a mistake as to whom to pay and
therefore interpleader was its proper remedy. It has been shown that the
interpleader suit was filed by respondent bank because petitioner and Jose
Go were both laying their claims on thecheck, petitioner asking payment
thereon and Jose Go as the purchaser or owner. The allegation of
petitioner thatrespondent bank had effectively relieved itself of its primary
liability under the check by simply filing a complaint for interpleader is
belied by the willingness of respondent bank to issue a certificate of time
deposit in the amount ofP800,000 representing the cashier's check in
question in the name of the Clerk of Court of Manila to be awarded
towhoever wig be found by the court as validly entitled to it. Said validity will
depend on the strength of the parties' respective rights and titles thereto.
Bank filed the interpleader suit not because petitioner sued it but because
petitioner is laying claim to the same check that Go is claiming. On the very
day that the bank instituted the case in interpleader, it was not aware of any
suit for damages filed by petitioner against it as supported by the fact that
the interpleader case was first entitled Associated Bank vs. Jose Go and
John Doe, but later on changed to Marcelo A. Mesina for John Doe when
his name became known to respondent bank.

In his third assignment of error, petitioner assails the then respondent IAC
in upholding the trial court's orderdeclaring petitioner in default when there
was no proper order for him to plead in the interpleader case. Again,
suchcontention is untenable. The trial court issued an order, compelling
petitioner and respondent Jose Go to file their Answers setting forth their
respective claims. Subsequently, a Pre-Trial Conference was set with
notice to parties to submit position papers. Petitioner argues in his
memorandum that this order requiring petitioner to file his answer was
issued without jurisdiction alleging that since he is presumably a holder in
due course and for value, how can he be compelled to litigate against Jose
Go who is not even a party to the check? Such argument is trite and
ridiculousif we have to consider that neither his name or Jose Go's name
appears on the check. Following such line of argument, petitioner is not a
party to the check either and therefore has no valid claim to the Check.
Furthermore, the Order of the trial court requiring the parties to file their
answers is to all intents and purposes an order to interplead, substantially
and essentially and therefore in compliance with the provisions of Rule 63
of the Rules of Court. What else is the purpose of a law suit but to litigate?

The records of the case show that respondent bank had to resort to details
in support of its action for Interpleader. Before it resorted to Interpleader,
respondent bank took an precautionary and necessary measures to bring
out the truth. On the other hand, petitioner concealed the circumstances
known to him and now that private respondent bank brought these
circumstances out in court (which eventually rendered its decision in the
Page 214 of 344
light of these facts),petitioner charges it with "gratuitous excursions into
these non-issues." Respondent IAC cannot rule on whether respondent
RTC committed an abuse of discretion or not, without being apprised of the
facts and reasons why respondent Associated Bank instituted the
Interpleader case. Both parties were given an opportunity to present their
sides. Petitioner chose to withhold substantial facts. Respondents were not
forbidden to present their side-this is the purpose of the Comment of
respondent to the petition. IAC decided the question by considering both
the facts submitted by petitioner and those given by respondents. IAC did
not act therefore beyond the scope of the remedy sought in the petition.

WHEREFORE, finding that the instant petition is merely dilatory, the same
is hereby denied and the assailed orders of the respondent court are
hereby AFFIRMED in toto.

SO ORDERED.

SECOND DIVISION

G.R. No. L-39641 February 28, 1983

METROPOL (BACOLOD) FINANCING & INVESTMENT
CORPORATION, plaintiff-appellee,
vs.
SAMBOK MOTORS COMPANY and NG SAMBOK SONS MOTORS CO.,
LTD., defendants-appellants.
Rizal Quimpo & Cornelio P. Revena for plaintiff-appellee.
Diosdado Garingalao for defendants-appellants.

DE CASTRO, J.:

The former Court of Appeals, by its resolution dated October 16, 1974
certified this case to this Court the issue issued therein being one purely of
law.

On April 15, 1969 Dr. Javier Villaruel executed a promissory note in favor of
Ng Sambok Sons Motors Co., Ltd., in the amount of P15,939.00 payable in
twelve (12) equal monthly installments, beginning May 18, 1969, with
interest at the rate of one percent per month. It is further provided that in
case on non-payment of any of the installments, the total principal sum

Page 215 of 344

then remaining unpaid shall become due and payable with an additional
interest equal to twenty-five percent of the total amount due.

On the same date, Sambok Motors Company (hereinafter referred to as

Sambok), a sister company of Ng Sambok Sons Motors Co., Ltd., and
under the same management as the former, negotiated and indorsed the
note in favor of plaintiff Metropol Financing & Investment Corporation with
the following indorsement:

Pay to the order of Metropol Bacolod Financing & Investment

Corporation with recourse. Notice of Demand; Dishonor;
Protest; and Presentment are hereby waived.

SAMBOK MOTORS CO.

(BACOLOD)

By:

RODOLFO G. NONILLO Asst. General Manager

The maker, Dr. Villaruel defaulted in the payment of his installments when
they became due, so on October 30, 1969 plaintiff formally presented the
promissory note for payment to the maker. Dr. Villaruel failed to pay the
promissory note as demanded, hence plaintiff notified Sambok as indorsee
of said note of the fact that the same has been dishonored and demanded
payment.

Sambok failed to pay, so on November 26, 1969 plaintiff filed a complaint

for collection of a sum of money before the Court of First Instance of Iloilo,
Branch I. Sambok did not deny its liability but contended that it could not be
obliged to pay until after its co-defendant Dr. Villaruel has been declared
insolvent.

During the pendency of the case in the trial court, defendant Dr. Villaruel
died, hence, on October 24, 1972 the lower court, on motion, dismissed the
case against Dr. Villaruel pursuant to Section 21, Rule 3 of the Rules of
Court. 1

On plaintiff's motion for summary judgment, the trial court rendered its
decision dated September 12, 1973, the dispositive portion of which reads
as follows:

WHEREFORE, judgment is rendered:

(a) Ordering Sambok Motors Company to pay to the plaintiff the

sum of P15,939.00 plus the legal rate of interest from October
30, 1969;

Page 216 of 344

 (b) Ordering same defendant to pay to plaintiff the sum
equivalent to 25% of P15,939.00 plus interest thereon until fully
paid; and

(c) To pay the cost of suit.

Not satisfied with the decision, the present appeal was instituted, appellant
Sambok raising a lone assignment of error as follows:

The trial court erred in not dismissing the complaint by finding

defendant appellant Sambok Motors Company as assignor and
a qualified indorsee of the subject promissory note and in not
holding it as only secondarily liable thereof.

Appellant Sambok argues that by adding the words "with recourse" in the
indorsement of the note, it becomes a qualified indorser that being a
qualified indorser, it does not warrant that if said note is dishonored by the
maker on presentment, it will pay the amount to the holder; that it only
warrants the following pursuant to Section 65 of the Negotiable Instruments
Law: (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; (d) that he has no knowledge of any fact which would impair the
validity of the instrument or render it valueless.

The appeal is without merit.

A qualified indorsement constitutes the indorser a mere assignor of the title

to the instrument. It may be made by adding to the indorser's signature the
words "without recourse" or any words of similar import. 2 Such an
indorsement relieves the indorser of the general obligation to pay if the
instrument is dishonored but not of the liability arising from warranties on
the instrument as provided in Section 65 of the Negotiable Instruments Law
already mentioned herein. However, appellant Sambok indorsed the note
"with recourse" and even waived the notice of demand, dishonor, protest
and presentment.

"Recourse" means resort to a person who is secondarily liable after the

default of the person who is primarily liable. 3 Appellant, by indorsing the
note "with recourse" does not make itself a qualified indorser but a general
indorser who is secondarily liable, because by such indorsement, it agreed
that if Dr. Villaruel fails to pay the note, plaintiff-appellee can go after said
appellant. The effect of such indorsement is that the note was indorsed
without qualification. A person who indorses without qualification engages
that on due presentment, the note shall be accepted or paid, or both as the
case may be, and that if it be dishonored, he will pay the amount thereof to
the holder. 4 Appellant Sambok's intention of indorsing the note without
qualification is made even more apparent by the fact that the notice of
demand, dishonor, protest and presentment were an waived. The words
added by said appellant do not limit his liability, but rather confirm his
obligation as a general indorser.
Page 217 of 344
Lastly, the lower court did not err in not declaring appellant as only
secondarily liable because after an instrument is dishonored by non-
payment, the person secondarily liable thereon ceases to be such and
becomes a principal debtor. 5 His liabiliy becomes the same as that of the
original obligor. 6 Consequently, the holder need not even proceed against
the maker before suing the indorser.

WHEREFORE, the decision of the lower court is hereby affirmed. No costs.

SO ORDERED.

Makasiar (Chairman), Concepcion, Jr., Guerrero and Escolin, JJ., concur.

Aquino, J., is on leave.

Separate Opinions

ABAD SANTOS, J., concurring:

I concur and wish to add the observation that the appeal could have been
treated as a petition for review under R.A. 5440 and dismissed by minute
resolution.

SECOND DIVISION

[G.R. No. 130756. January 21, 1999]

ESTER B. MARALIT, petitioner, vs. JESUSA CORAZON L.
IMPERIAL, respondent.

DECISION
MENDOZA, J.:
This is a petition for review on certiorari of the decision, dated August
26, 1997, and the resolution, dated September 29, 1997, of the Regional
Trial Court of Naga City (Branch 21) in Special Civil Case No. RTC 97-
3744.
The facts are as follows:
Petitioner Ester B. Maralit filed three complaints for estafa through
falsification of commercial documents through reckless imprudence against
respondent Jesusa Corazon L. Imperial.[1] Maralit alleged that she was
assistant manager of the Naga City branch of the Philippine National Bank
(PNB); that on May 20, 1992, June 1, 1992, and July 1, 1992 respondent
Imperial separately deposited in her savings account at the PNB three
United States treasury warrants bearing USTW Nos. 2034-91254963,
Page 218 of 344
2034-91180047, and 2034-33330760 and on the same days withdrew their
peso equivalent of P59,216.86, P130,743.60, and P130,326.00,
respectively; and that the treasury warrants were subsequently returned
one after the other by the United States Treasury, through the Makati
branch of the Citibank, on the ground that the amounts thereof had been
altered. Maralit claimed that, as a consequence, she was held personally
liable by the PNB for the total amount of P320,287.30.
In her counter-affidavit, respondent claimed that she merely helped a
relative, Aida Abengoza, encash the treasury warrants; that she deposited
the treasury warrants in her savings account and then withdrew their peso
equivalent with the approval of petitioner; that she gave the money to Aida
Abengoza; that she did not know that the amounts on the treasury warrants
had been altered nor did she represent to petitioner that the treasury
warrants were genuine; and that upon being informed of the dishonor of the
warrants she immediately contacted Aida Abengoza and signed an
acknowledgment of debt promising to pay the total amount of the treasury
warrants.
After preliminary investigation, the City Prosecutor of Naga City filed
three informations against respondent in the Municipal Trial Court of Naga
City (Branch 3).
On September 26, 1996, judgment was rendered as follows:

WHEREFORE, in view of the foregoing considerations, the Court finds no

ground to hold the accused criminally liable for which she is charged,
hence Corazon Jesusa L. Imperial is ACQUITTED of all the charges
against her. The accused however is civilly liable as indorser of the checks
which is (sic) the subject matter of the criminal action.[2]

The decision having become final and executory, the MTC, on

November 11, 1996, ordered the enforcement of the civil liability against
the accused arising from the criminal action.[3] The writ of execution, dated
December 9, 1996, directed the sheriff as follows:[4]

NOW, THEREFORE, you are hereby commanded to cause the execution

of the aforesaid judgment in the amount of THREE HUNDRED TWENTY
THOUSAND TWO HUNDRED EIGHTY SIX & 46/100 (P320,286.46)
ONLY, equivalent to the amount of the 3 three US$ checks amounting to
$12,621.13, and to levy the goods and chattels of the defendant/s, except
those which are exempt from execution and to make the sale thereat in
accordance with the procedure outlined by Rule 39, Revised Rules of Court
and such cases made and provided, together with all your lawful fees for
the services of this writ.

Accordingly, the sheriff served a notice of garnishment on the PNB.

Respondent at first moved to declare her savings account exempt from
execution on the ground that the same represented her salary as an
employee of the Commission on Audit, which was not even sufficient for

Page 219 of 344

her expenses and that of her family. Later, she moved to quash the writ of
execution on the ground that the judgment did not order the accused to pay
[a] specific amount of money to a particular person as it merely adjudicated
the criminal aspect but not the civil aspect hence there was no judgment
rendered which can be the subject of execution.
Both motions of respondent were denied by the MTC for lack of merit in
its order, dated February 24, 1997.[5] Accordingly, an alias writ of execution
was issued.
On April 14, 1997, respondent filed a petition for certiorari and
prohibition in the Regional Trial Court of Naga City, contending that the writ
of execution issued by the MTC was at variance with the judgment in the
criminal cases.
The RTC issued a writ of preliminary injunction enjoining enforcement
of the writ of execution issued by the MTC. On August 26, 1997, it rendered
a decision, which, among other things, made permanent the injunction. The
RTC held that the decision of the MTC did not really find respondent liable
for P320,286.46 because in fact it was petitioner who was found
responsible for making the defraudation possible.
Petitioner moved for reconsideration alleging that respondent filed her
petition for certiorari and prohibition more than three months after the MTC
had ordered execution of its decision on November 11, 1996. However, her
motion was denied on September 28, 1997.[6] The RTC held that the three-
month period should be counted from April 1, 1997, when the alias writ of
execution was issued, or from April 7, 1997, when the MTC denied private
respondents motion for reconsideration of the order denying her motion to
quash the writ of execution. The RTC likewise found the second ground of
petitioners motion for reconsideration, i.e., that its decision was contrary to
law and jurisprudence, devoid of merit.
Hence, this petition. Petitioner raises the following issues:[7]
1. Whether respondents Petition for Certiorari and Prohibition under
Rule 65 of the Rules of Court was filed out of time;
2. Whether this case warrants the relaxation of the rule that Certiorari is
not a substitute for a lost or lapsed appeal.
3. Whether or not the MTC committed grave abuse of discretion
amounting to lack or excess of jurisdiction, when it issued the Order of
Execution, Writ of Execution and Alias Writ of Execution to implement
its final and executory civil judgment in Criminal Cases No. 68697,
68698 and 68699, which reads: . . . The accused however is civilly
liable as indorser of the checks subject matter of the criminal action.
4. Whether or not the MTC merely adjudicated the criminal aspect but
not the civil aspect of Criminal Cases 68697, 68698 and 68699.
5. Whether there was substantial variance as between the dispositive
portion of the civil judgment and the writ of execution issued thereunder.
6. Whether or not a court exercising certiorari jurisdiction has the
authority to modify or alter the final and executory decision of the lower
court even by way of an obiter dictum.

Page 220 of 344

 Petitioner contends that the phrase civilly liable in the judgment part of
the MTCs decision also connotes an order to pay on respondents part.
It may fairly be assumed that the decision of the MTC was an
adjudication of both the criminal and civil liability of respondent inasmuch
as it does not appear that petitioner instituted a separate civil action or
reserved or waived the right to bring such action. The question is whether
the decision of the MTC finds respondent civilly liable and, in the
affirmative, for how much. As already stated, the RTC held that the MTC
did not really find respondent liable. In reaching that conclusion, the RTC
said:

A mere reading of the dispositive portion of the judgment and the writ of
execution will readily show that there is variance between the
two. Whereas, the judgment pronounced [respondent herein] to be civilly
liable as indorser of the checks which is the subject matter of the criminal
action, the writ of execution commanded the Sheriff to cause the execution
of the aforesaid judgment in the amount of THREE HUNDRED TWENTY
THOUSAND TWO HUNDRED EIGHTY SIX & 46/100 (P320,286.46)
ONLY, equivalent to the amount of the 3 three US$ checks amounting to
$12,621.13, . . . . In the judgment, nothing is mentioned about the amount
for which [respondent herein] is liable as indorser, but in the writ of
execution, the civil liability of the [respondent herein] has already been
fixed at P320,286.46. The variance, therefore, between the judgment and
the writ of execution is substantial because it consists of the addition of the
amount of the civil liability of the [respondent herein].

. . . The [MTCs] findings of facts and conclusions of law as expressed in the

body of the decision do not support the dispositive portion of the
judgment that [respondent herein] is civilly liable. On the contrary a
reading of the body of the judgment in question will show that
[respondent] is not civilly liable. For three (3) times, the Court stated in
the body of its decision that it is [petitioner] Maralit herself who should
be faulted and be held responsible for the payment of the dishonored
US Dollar checks.

Hereunder quoted are portions of the body of the decision in question

showing that [respondent] herein should not be held civilly liable and that it
was [petitioner] Maralit who should be blamed and be held responsible:

. . . The Court however is quite intrigue[d] on why the accused was allowed
to encash the peso equivalent despite the fact that the check was
deposited for collection and clearing. It is the established procedure of
banks that out of town checks and US Treasury Warrants should first be
cleared before the same is to be paid. More so if the holder is a second
indorser. The private complainant in this regard explained that [as assistant
branch manager] she has the discretion and that there is no hold order
appearing in the savings account of the accused. She likewise explained
that she trusted the accused whom she knew is working in the same
building and a depositor. In short she took the risk of approving the
Page 221 of 344
withdrawal of the peso equivalent, without the check being cleared and if
the same is dishonored she should be responsible. (page 5, judgment).

The information accuses the accused for disregarding the banking laws
and procedure of the PNB. This is a generous statement. In the first place
the accused is not an employee of the bank. She has no control nor
supervision over its employees. If there is anyone who has disregarded
banking laws, it is the private complainant for approving withdrawals before
the check were cleared. Mrs. Maralit is more knowledgeable of the banking
procedures of the bank of which she is the assistant manager. She knows
the risk of approving encashment before clearing. She took the risk
therefore she should be responsible for the outcome of the risk she
has taken. (page 6, Judgment).

The Court is of the opinion that there was negligence on both the
complainant and the accused but greater responsibility should be borne
by the private complainant. The accused could not have encashed and
deposited the checks without her approval. If the complainant was not
remiss in her duty in imposing the banking rules strictly, then these things
could not have happened. (page 7, Judgment).[8]

This portion of the decision of the MTC actually refers to respondents

criminal liability and not her civil liability. More specifically, the portion in
question refers to the allegations in the three informations that respondent
committed falsification of commercial documents through reckless
imprudence by 1) taking advantage of [her] position as state auditor of the
Commission on Audit assigned at the PNB, Naga Branch, 2) disregard[ing]
existing procedure, banking laws, policies, and circulars of the PNB, 3) . . .
not tak[ing] the necessary precaution to determine the genuineness of the
Treasury Warrants and the alteration of the amount[s] therein deposited
and [in] encash[ing] the checks, and 4) . . . [her] negligence, carelessness,
and imprudence [which] caused damage and loss to
[9]
[petitioner]. Nevertheless, the MTC held that respondent was civilly liable
as the penultimate paragraph of its decision makes clear:

The Court symphatizes with the complainant that there was indeed damage
and loss, but said loss is chargeable to the accused who upon her
indorsements warrant that the instrument is genuine in all respect what it
purports to be and that she will pay the amount thereof in case of
dishonor. (Sec. 66 Negotiable Instrument Law) [10]

Thus, while the MTC found petitioner partly responsible for the
encashment of the altered checks, it found respondent civilly liable because
of her indorsements of the treasury warrants, in addition to the fact that
respondent executed a notarized acknowledgment of debt promising to pay
the total amount of said warrants.
In this case, to affirm the RTCs decision would be to hold
that respondent was absolved from both criminal and civil liability by the
MTC. Such reading of the MTC decision will not, however, bear analysis.

Page 222 of 344

For one, the dispositive portion of the decision of the MTC expressly
declares respondent to be civilly liable as indorser of the checks which is
[sic] the subject matter of the criminal action. To find therefore that there is
no declaration of civil liability of respondent would be to disregard the
judgment of the MTC. Worse, it would be to amend a final and executory
decision of a court.
It is argued that the decision of the MTC did not order respondent, as
accused in the case, to pay a specific amount of money to any particular
person such that it could not be an adjudication of respondents civil liability.
However, the ambiguity can easily be clarified by a resort to the text of the
decision or, what is properly called, the opinion part. Doing so, it is clear
that it can only be to petitioner that respondent was made liable as the
former was the offended party in the case. As for what amount respondent
is liable, it can only be for the total amount of the treasury warrants subject
of the case, determined according to their peso equivalent, in the decision
of the MTC.
For another, that respondent should pay petitioner the amounts of the
altered treasury warrants is the logical consequence of the MTCs holding
that private respondent is civilly liable for the treasury warrants subject of
the case.[11]
WHEREFORE, the decision of the Regional Trial Court of Naga City
(Branch 21) is REVERSED.
SO ORDERED.
SECOND DIVISION

[G.R. No. 128927. September 14, 1999]

REMEDIOS NOTA SAPIERA, petitioner, vs. COURT OF APPEALS and
RAMON SUA, respondents.

DECISION
BELLOSILLO, J.:

REMEDIOS NOTA SAPIERA appeals to us through this petition for

review the Decision of the Court of Appeals[1] which acquitted her of the
crime of estafa but held her liable nonetheless for the value of the checks
she indorsed in favor of private respondent Ramon Sua.
On several occasions petitioner Remedios Nota Sapiera, a sari-sari
store owner, purchased from Monrico Mart certain grocery items, mostly
cigarettes, and paid for them with checks issued by one Arturo de
Guzman: (a) PCIB Check No. 157059 dated 26 February 1987
for P140,000.00; (b) PCIB Check No. 157073 dated 26 February 1987
for P28,000.00; (c) PCIB Check No. 157057 dated 27 February 1987
for P42,150.00; and, d) Metrobank Check No. DAG - 045104758 PA dated
2 March 1987 for P125,000.00. These checks were signed at the back by
petitioner. When presented for payment the checks were dishonored
because the drawers account was already closed. Private respondent
Page 223 of 344
Ramon Sua informed Arturo de Guzman and petitioner about the dishonor
but both failed to pay the value of the checks.Hence, four (4) charges of
estafa were filed against petitioner with the Regional Trial Court of
Dagupan City, docketed as Crim. Cases Nos. D-8728, D-8729, D-8730 and
D-8731. Arturo de Guzman was charged with two (2) counts of violation of
B.P. Blg. 22, docketed as Crim. Cases Nos. D-8733 and D-8734. These
cases against petitioner and de Guzman were consolidated and tried
jointly.
On 27 December 1989 the court a quo[2] acquitted petitioner of all the
charges of estafa but did not rule on whether she could be held civilly liable
for the checks she indorsed to private respondent. The trial court found
Arturo de Guzman guilty of Violation of B.P. Blg. 22 on two (2) counts and
sentenced him to suffer imprisonment of six (6) months and one (1) day in
each of the cases, and to pay private respondent P167,150.00 as civil
indemnity.
Private respondent filed a notice of appeal with the trial court with
regard to the civil aspect but the court refused to give due course to the
appeal on the ground that the acquittal of petitioner was absolute. Private
respondent then filed a petition for mandamus with the Court of Appeals,
docketed as CA-GR SP No. 24626, praying that the court a quo be ordered
to give due course to the appeal on the civil aspect of the decision. The
Court of Appeals granted the petition and ruled that private respondent
could appeal with respect to the civil aspect the judgment of acquittal by the
trial court.
On 22 January 1996, the Court of Appeals in CA-GR CV No. 36376
rendered the assailed Decision insofar as it sustained the appeal of private
respondent on the civil aspect and ordering petitioner to pay private
respondent P335,000.00 representing the aggregate face value of the four
(4) checks indorsed by petitioner plus legal interest from the notice of
dishonor.
Petitioner filed a motion for reconsideration of the Decision. On 19
March 1997 the Court of Appeals issued a Resolution noting the admission
of both parties that private respondent had already collected the amount
of P125,000.00 from Arturo de Guzman with regard to his civil liability in
Crim. Cases Nos. 8733 and 8734. The appellate court noted that private
respondent was the same offended party in the criminal cases against
petitioner and against de Guzman. Criminal Cases Nos. 8733 and 8734
against De Guzman, and Crim. Cases Nos. 8730 and 8729 against
petitioner, involved the same checks, to wit:PCIB Checks Nos. 157057
for P42,150.00 and Metrobank Check No. DAG-045104758 PA
for P125,000.00.
Thus, the Court of Appeals ruled that private respondent could not
recover twice on the same checks. Since he had collected P125,000.00 as
civil indemnity in Crim. Cases Nos. 8733 and 8734, this amount should be
deducted from the sum total of the civil indemnity due him arising from the
estafa cases against petitioner. The appellate court then corrected its

Page 224 of 344

previous award, which was erroneously placed at P335,000.00,
to P335,150.00 as the sum total of the amounts of the four (4) checks
involved. Deducting the amount of P125,000.00 already collected by
private respondent, petitioner was adjudged to pay P210,150.00 as civil
liability to private respondent. Hence, this petition alleging that respondent
Court of Appeals erred in holding petitioner civilly liable to private
respondent because her acquittal by the trial court from charges of estafa
in Crim. Cases Nos. D-8728, D-8729, D-8730 and D-8731 was absolute,
the trial court having declared in its decision that the fact from which the
civil liability might have arisen did not exist.
We cannot sustain petitioner. The issue is whether respondent Court of
Appeals committed reversible error in requiring petitioner to pay civil
indemnity to private respondent after the trial court had acquitted her of the
criminal charges. Section 2, par. (b), of Rule 111 of the Rules of Court, as
amended, specifically provides: "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.
The judgment of acquittal extinguishes the liability of the accused for
damages only when it includes a declaration that the fact from which the
civil liability might arise did not exist. Thus, the civil liability is not
extinguished by acquittal where: (a) 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.[3] Thus, under Art. 29 of the Civil Code -

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.

In a criminal case where 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 acquittal is due to that ground.

An examination of the decision in the criminal cases reveals these

findings of the trial court -

Evidence for the prosecution tends to show that on various occasions,

Remedios Nota Sapiera purchased from Monrico Mart grocery items
(mostly cigarettes) which purchases were paid with checks issued by
Arturo de Guzman; that those purchases and payments with checks were
as follows:

Page 225 of 344

(a) Sales Invoice No. 20104 dated February 26, 1987 in the amount
of P28,000.00; that said items purchased were paid with PCIBank Check
No. 157073 dated February 26, 1987;

(b) Sales Invoice No. 20108 dated February 26, 1987 in the amount
of P140,000.00; that said items purchased were paid with PCIBank No.
157059 dated February 26, 1987;

(c) Sales Invoice No. 20120 dated February 27, 1987 in the amount
of P42,150.00; that said items were paid with PCIBank Check No. 157057
dated February 27, 1987;

(d) Sales Invoice No. 20148 and 20149 both dated March 2, 1987 in the
amount of P120,103.75; said items were paid with Metrobank Check No.
045104758 dated March 2, 1987 in the amount of P125,000.00.

That all these checks were deposited with the Consolidated Bank and
Trust Company, Dagupan Branch, for collection from the drawee bank;

That when presented for payment by the collecting bank to the drawee
bank, said checks were dishonored due to account closed, as evidenced by
check return slips; x x x x.

From the evidence, the Court finds that accused Remedios Nota Sapiera is
the owner of a sari-sari store inside the public market; that she sells
can(ned) goods, candies and assorted grocery items; that she knows
accused Arturo De Guzman, a customer since February 1987; that de
Guzman purchases from her grocery items including cigarettes; that she
knows Ramon Sua; that she has business dealings with him for 5 years;
that her purchase orders were in clean sheets of paper; that she never
pays in check; that Ramon Sua asked her to sign subject checks as
identification of the signature of Arturo de Guzman; that she pays in cash;
sometimes delayed by several days; that she signed the four (4) checks on
the reverse side; that she did not know the subject invoices; that de
Guzman made the purchases and he issued the checks; that the goods
were delivered to de Guzman; that she was not informed of dishonored
checks; and that counsel for Ramon Sua informed de Guzman and told him
to pay x x x x

In the case of accused Remedios Nota Sapiera, the prosecution failed to

prove conspiracy.

Based on the above findings of the trial court, the exoneration of

petitioner of the charges of estafa was based on the failure of the
prosecution to present sufficient evidence showing conspiracy between her
and the other accused Arturo de Guzman in defrauding private
respondent. However, by her own testimony, petitioner admitted having
signed the four (4) checks in question on the reverse side. The evidence of
the prosecution shows that petitioner purchased goods from the grocery
store of private respondent as shown by the sales invoices issued by
Page 226 of 344
private respondent; that these purchases were paid with the four (4) subject
checks issued by de Guzman; that petitioner signed the same checks on
the reverse side; and when presented for payment, the checks were
dishonored by the drawee bank due to the closure of the drawers account;
and, petitioner was informed of the dishonor.
We affirm the findings of the Court of Appeals that despite the
conflicting versions of the parties, it is undisputed that the four (4) checks
issued by de Guzman were signed by petitioner at the back without any
indication as to how she should be bound thereby and, therefore, she is
deemed to be an indorser thereof. The Negotiable Instruments Law clearly
provides -

Sec. 17. Construction where instrument is ambiguous. - Where the

language of the instrument is ambiguous, or there are admissions therein,
the following rules of construction apply: x x x x (f) Where a signature is so
placed upon the instrument that it is not clear in what capacity the person
making the same intended to sign, he is deemed an indorser. x x x x

Sec. 63. When person deemed indorser. - A person placing his signature
upon an instrument otherwise than as maker, drawer or acceptor, is
deemed to be an indorser unless he clearly indicates by appropriate words
his intention to be bound in some other capacity.

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 the
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 dismissal of the criminal cases against petitioner did not erase her
civil liability since the dismissal was due to insufficiency of evidence and
not from a declaration from the court that the fact from which the civil action
might arise did not exist.[4] An accused acquitted of estafa may
nevertheless be held civilly liable where the facts established by the
evidence so warrant. The accused should be adjudged liable for the unpaid
value of the checks signed by her in favor of the complainant.[5]
The rationale behind the award of civil indemnity despite a judgment of
acquittal when evidence is sufficient to sustain the award was explained by
the Code Commission in connection with Art. 29 of the Civil Code, to wit:

The old rule that the acquittal of the accused in a criminal case also
releases him from civil liability is one of the most serious flaws in the
Philippine legal system. It has given rise to numberless instances of
Page 227 of 344
miscarriage of justice, where the acquittal was due to a reasonable doubt in
the mind of the court as to the guilt of the accused. The reasoning followed
is that inasmuch as the civil responsibility is derived from the criminal
offense, when the latter is not proved, civil liability cannot be demanded.

This is one of those cases where confused thinking leads to unfortunate

and deplorable consequences. Such reasoning fails to draw a clear line of
demarcation between criminal liability and civil responsibility, and to
determine the logical result of the distinction. The two liabilities are
separate and distinct from each other. One affects the social order and the
other private rights. One is for punishment or correction of the offender
while the other is for reparation of damages suffered by the aggrieved party
x x x x It is just and proper that for the purposes of imprisonment of or fine
upon the accused, the offense should be proved beyond reasonable
doubt. But for the purpose of indemnifying the complaining party, why
should the offense also be proved beyond reasonable doubt? Is not the
invasion or violation of every private right to be proved only by
preponderance of evidence? Is the right of the aggrieved person any less
private because the wrongful act is also punishable by the criminal law?[6]

Finally, with regard to the computation of the civil liability of petitioner,

the finding of the Court of Appeals that petitioner is civilly liable for the
aggregate value of the unpaid four (4) checks subject of the criminal cases
in the sum of P335,150.00, less the amount of P125,000.00 already
collected by private respondent pending appeal, resulting in the amount
of P210,150.00 still due private respondent, is a factual matter which is
binding and conclusive upon this Court.
WHEREFORE, the petition is DENIED. The Decision of the Court of
Appeals dated 22 January 1996 as amended by its Resolution dated 19
March 1997 ordering petitioner Remedios Nota Sapiera to pay private
respondent Ramon Sua the remaining amount of P210,150.00 as civil
liability, is AFFIRMED. Costs against petitioners.
SO ORDERED.
Mendoza, Quisumbing, and Buena, JJ., concur.

Page 228 of 344

 SECOND DIVISION

G.R. No. 72593 April 30, 1987

CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and
RODOLFO T. VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.

Carpio, Villaraza & Cruz Law Offices for petitioners.

Europa, Dacanay & Tolentino for respondent.

GUTIERREZ, JR., J.:

This is a petition for certiorari under Rule 45 of the Rules of Court which
assails on questions of law a decision of the Intermediate Appellate Court
in AC-G.R. CV No. 68609 dated July 17, 1985, as well as its resolution
dated October 17, 1985, denying the motion for reconsideration.

The antecedent facts culled from the petition are as follows:

The petitioner is a corporation engaged in the logging business. It had for

its program of logging activities for the year 1978 the opening of additional
roads, and simultaneous logging operations along the route of said roads,
in its logging concession area at Baganga, Manay, and Caraga, Davao
Oriental. For this purpose, it needed two (2) additional units of tractors.

Page 229 of 344

Cognizant of petitioner-corporation's need and purpose, Atlantic Gulf &
Pacific Company of Manila, through its sister company and marketing arm,
Industrial Products Marketing (the "seller-assignor"), a corporation dealing
in tractors and other heavy equipment business, offered to sell to petitioner-
corporation two (2) "Used" Allis Crawler Tractors, one (1) an HDD-21-B and
the other an HDD-16-B.

In order to ascertain the extent of work to which the tractors were to be

exposed, (t.s.n., May 28, 1980, p. 44) and to determine the capability of the
"Used" tractors being offered, petitioner-corporation requested the seller-
assignor to inspect the job site. After conducting said inspection, the seller-
assignor assured petitioner-corporation that the "Used" Allis Crawler
Tractors which were being offered were fit for the job, and gave the
corresponding warranty of ninety (90) days performance of the machines
and availability of parts. (t.s.n., May 28, 1980, pp. 59-66).

With said assurance and warranty, and relying on the seller-assignor's skill
and judgment, petitioner-corporation through petitioners Wee and Vergara,
president and vice- president, respectively, agreed to purchase on
installment said two (2) units of "Used" Allis Crawler Tractors. It also paid
the down payment of Two Hundred Ten Thousand Pesos (P210,000.00).

On April 5, 1978, the seller-assignor issued the sales invoice for the two 2)
units of tractors (Exh. "3-A"). At the same time, the deed of sale with chattel
mortgage with promissory note was executed (Exh. "2").

Simultaneously with the execution of the deed of sale with chattel mortgage
with promissory note, the seller-assignor, by means of a deed of
assignment (E exh. " 1 "), assigned its rights and interest in the chattel
mortgage in favor of the respondent.

Immediately thereafter, the seller-assignor delivered said two (2) units of

"Used" tractors to the petitioner-corporation's job site and as agreed, the
seller-assignor stationed its own mechanics to supervise the operations of
the machines.

Barely fourteen (14) days had elapsed after their delivery when one of the
tractors broke down and after another nine (9) days, the other tractor
likewise broke down (t.s.n., May 28, 1980, pp. 68-69).

On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-
assignor of the fact that the tractors broke down and requested for the
seller-assignor's usual prompt attention under the warranty (E exh. " 5 ").

In response to the formal advice by petitioner Rodolfo T. Vergara, Exhibit

"5," the seller-assignor sent to the job site its mechanics to conduct the
necessary repairs (Exhs. "6," "6-A," "6-B," 16 C," "16-C-1," "6-D," and "6-
E"), but the tractors did not come out to be what they should be after the
repairs were undertaken because the units were no longer serviceable (t. s.
n., May 28, 1980, p. 78).
Page 230 of 344
Because of the breaking down of the tractors, the road building and
simultaneous logging operations of petitioner-corporation were delayed and
petitioner Vergara advised the seller-assignor that the payments of the
installments as listed in the promissory note would likewise be delayed until
the seller-assignor completely fulfills its obligation under its warranty (t.s.n,
May 28, 1980, p. 79).

Since the tractors were no longer serviceable, on April 7, 1979, petitioner

Wee asked the seller-assignor to pull out the units and have them
reconditioned, and thereafter to offer them for sale. The proceeds were to
be given to the respondent and the excess, if any, to be divided between
the seller-assignor and petitioner-corporation which offered to bear one-half
(1/2) of the reconditioning cost (E exh. " 7 ").

No response to this letter, Exhibit "7," was received by the petitioner-

corporation and despite several follow-up calls, the seller-assignor did
nothing with regard to the request, until the complaint in this case was filed
by the respondent against the petitioners, the corporation, Wee, and
Vergara.

The complaint was filed by the respondent against the petitioners for the
recovery of the principal sum of One Million Ninety Three Thousand Seven
Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71), accrued interest of
One Hundred Fifty One Thousand Six Hundred Eighteen Pesos & 86/100
(P151,618.86) as of August 15, 1979, accruing interest thereafter at the
rate of twelve (12%) percent per annum, attorney's fees of Two Hundred
Forty Nine Thousand Eighty One Pesos & 71/100 (P249,081.7 1) and costs
of suit.

The petitioners filed their amended answer praying for the dismissal of the
complaint and asking the trial court to order the respondent to pay the
petitioners damages in an amount at the sound discretion of the court,
Twenty Thousand Pesos (P20,000.00) as and for attorney's fees, and Five
Thousand Pesos (P5,000.00) for expenses of litigation. The petitioners
likewise prayed for such other and further relief as would be just under the
premises.

In a decision dated April 20, 1981, the trial court rendered the following
judgment:

WHEREFORE, judgment is hereby rendered:

1. ordering defendants to pay jointly and severally in their

official and personal capacities the principal sum of ONE
MILLION NINETY THREE THOUSAND SEVEN HUNDRED
NINETY EIGHT PESOS & 71/100 (P1,093,798.71) with
accrued interest of ONE HUNDRED FIFTY ONE THOUSAND
SIX HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.,86)
as of August 15, 1979 and accruing interest thereafter at the
rate of 12% per annum;
Page 231 of 344
 2. ordering defendants to pay jointly and severally attorney's
fees equivalent to ten percent (10%) of the principal and to pay
the costs of the suit.

Defendants' counterclaim is disallowed. (pp. 45-46, Rollo)

On June 8, 1981, the trial court issued an order denying the motion for
reconsideration filed by the petitioners.

Thus, the petitioners appealed to the Intermediate Appellate Court and

assigned therein the following errors:

THAT THE LOWER COURT ERRED IN FINDING THAT THE SELLER

ATLANTIC GULF AND PACIFIC COMPANY OF MANILA DID NOT
APPROVE DEFENDANTS-APPELLANTS CLAIM OF WARRANTY.

II

THAT THE LOWER COURT ERRED IN FINDING THAT PLAINTIFF-

APPELLEE IS A HOLDER IN DUE COURSE OF THE PROMISSORY
NOTE AND SUED UNDER SAID NOTE AS HOLDER THEREOF IN DUE
COURSE.

On July 17, 1985, the Intermediate Appellate Court issued the challenged
decision affirming in toto the decision of the trial court. The pertinent
portions of the decision are as follows:

xxx xxx xxx

From the evidence presented by the parties on the issue of

warranty, We are of the considered opinion that aside from the
fact that no provision of warranty appears or is provided in the
Deed of Sale of the tractors and even admitting that in a
contract of sale unless a contrary intention appears, there is an
implied warranty, the defense of breach of warranty, if there is
any, as in this case, does not lie in favor of the appellants and
against the plaintiff-appellee who is the assignee of the
promissory note and a holder of the same in due course.
Warranty lies in this case only between Industrial Products
Marketing and Consolidated Plywood Industries, Inc. The
plaintiff-appellant herein upon application by appellant
corporation granted financing for the purchase of the
questioned units of Fiat-Allis Crawler,Tractors.

xxx xxx xxx

Holding that breach of warranty if any, is not a defense

available to appellants either to withdraw from the contract

Page 232 of 344

 and/or demand a proportionate reduction of the price with
damages in either case (Art. 1567, New Civil Code). We now
come to the issue as to whether the plaintiff-appellee is a holder
in due course of the promissory note.

To begin with, it is beyond arguments that the plaintiff-appellee

is a financing corporation engaged in financing and receivable
discounting extending credit facilities to consumers and
industrial, commercial or agricultural enterprises by discounting
or factoring commercial papers or accounts receivable duly
authorized pursuant to R.A. 5980 otherwise known as the
Financing Act.

A study of the questioned promissory note reveals that it is a

negotiable instrument which was discounted or sold to the IFC
Leasing and Acceptance Corporation for P800,000.00 (Exh.
"A") considering the following. it is in writing and signed by the
maker; it contains an unconditional promise to pay a certain
sum of money payable at a fixed or determinable future time; it
is payable to order (Sec. 1, NIL); the promissory note was
negotiated when it was transferred and delivered by IPM to the
appellee and duly endorsed to the latter (Sec. 30, NIL); it was
taken in the conditions that the note was complete and regular
upon its face before the same was overdue and without notice,
that it had been previously dishonored and that the note is in
good faith and for value without notice of any infirmity or defect
in the title of IPM (Sec. 52, NIL); that IFC Leasing and
Acceptance Corporation held the instrument free from any
defect of title of prior parties and free from defenses available to
prior parties among themselves and may enforce payment of
the instrument for the full amount thereof against all parties
liable thereon (Sec. 57, NIL); the appellants engaged that they
would pay the note according to its tenor, and admit the
existence of the payee IPM and its capacity to endorse (Sec.
60, NIL).

In view of the essential elements found in the questioned

promissory note, We opine that the same is legally and
conclusively enforceable against the defendants-appellants.

WHEREFORE, finding the decision appealed from according to

law and evidence, We find the appeal without merit and thus
affirm the decision in toto. With costs against the appellants.
(pp. 50-55, Rollo)

The petitioners' motion for reconsideration of the decision of July 17, 1985
was denied by the Intermediate Appellate Court in its resolution dated
October 17, 1985, a copy of which was received by the petitioners on
October 21, 1985.

Page 233 of 344

Hence, this petition was filed on the following grounds:

I.

ON ITS FACE, THE PROMISSORY NOTE IS CLEARLY NOT A

NEGOTIABLE INSTRUMENT AS DEFINED UNDER THE LAW SINCE IT
IS NEITHER PAYABLE TO ORDER NOR TO BEARER.

II

THE RESPONDENT IS NOT A HOLDER IN DUE COURSE: AT BEST, IT

IS A MERE ASSIGNEE OF THE SUBJECT PROMISSORY NOTE.

III.

SINCE THE INSTANT CASE INVOLVES A NON-NEGOTIABLE

INSTRUMENT AND THE TRANSFER OF RIGHTS WAS THROUGH A
MERE ASSIGNMENT, THE PETITIONERS MAY RAISE AGAINST THE
RESPONDENT ALL DEFENSES THAT ARE AVAILABLE TO IT AS
AGAINST THE SELLER- ASSIGNOR, INDUSTRIAL PRODUCTS
MARKETING.

IV.

THE PETITIONERS ARE NOT LIABLE FOR THE PAYMENT OF THE

PROMISSORY NOTE BECAUSE:

A) THE SELLER-ASSIGNOR IS GUILTY OF BREACH OF WARRANTY

UNDER THE LAW;

B) IF AT ALL, THE RESPONDENT MAY RECOVER ONLY FROM THE

SELLER-ASSIGNOR OF THE PROMISSORY NOTE.

V.

THE ASSIGNMENT OF THE CHATTEL MORTGAGE BY THE SELLER-

ASSIGNOR IN FAVOR OF THE RESPONDENT DOES NOT CHANGE
THE NATURE OF THE TRANSACTION FROM BEING A SALE ON
INSTALLMENTS TO A PURE LOAN.

VI.

THE PROMISSORY NOTE CANNOT BE ADMITTED OR USED IN

EVIDENCE IN ANY COURT BECAUSE THE REQUISITE
DOCUMENTARY STAMPS HAVE NOT BEEN AFFIXED THEREON OR
CANCELLED.

The petitioners prayed that judgment be rendered setting aside the

decision dated July 17, 1985, as well as the resolution dated October 17,
1985 and dismissing the complaint but granting petitioners' counterclaims
before the court of origin.
Page 234 of 344
On the other hand, the respondent corporation in its comment to the
petition filed on February 20, 1986, contended that the petition was filed out
of time; that the promissory note is a negotiable instrument and respondent
a holder in due course; that respondent is not liable for any breach of
warranty; and finally, that the promissory note is admissible in evidence.

The core issue herein is whether or not the promissory note in question is a
negotiable instrument so as to bar completely all the available defenses of
the petitioner against the respondent-assignee.

Preliminarily, it must be established at the outset that we consider the

instant petition to have been filed on time because the petitioners' motion
for reconsideration actually raised new issues. It cannot, therefore, be
considered pro- formal.

The petition is impressed with merit.

First, there is no question that the seller-assignor breached its express 90-
day warranty because the findings of the trial court, adopted by the
respondent appellate court, that "14 days after delivery, the first tractor
broke down and 9 days, thereafter, the second tractor became inoperable"
are sustained by the records. The petitioner was clearly a victim of a
warranty not honored by the maker.

The Civil Code provides that:

ART. 1561. The vendor shall be responsible for warranty

against the hidden defects which the thing sold may have,
should they render it unfit for the use for which it is intended, or
should they diminish its fitness for such use to such an extent
that, had the vendee been aware thereof, he would not have
acquired it or would have given a lower price for it; but said
vendor shall not be answerable for patent defects or those
which may be visible, or for those which are not visible if the
vendee is an expert who, by reason of his trade or profession,
should have known them.

ART. 1562. In a sale of goods, there is an implied warranty or

condition as to the quality or fitness of the goods, as follows:

(1) Where the buyer, expressly or by implication makes known

to the seller the particular purpose for which the goods are
acquired, and it appears that the buyer relies on the sellers skill
or judge judgment (whether he be the grower or manufacturer
or not), there is an implied warranty that the goods shall be
reasonably fit for such purpose;

xxx xxx xxx

Page 235 of 344

 ART. 1564. An implied warranty or condition as to the quality or
fitness for a particular purpose may be annexed by the usage of
trade.

xxx xxx xxx

ART. 1566. The vendor is responsible to the vendee for any

hidden faults or defects in the thing sold even though he was
not aware thereof.

This provision shall not apply if the contrary has been

stipulated, and the vendor was not aware of the hidden faults or
defects in the thing sold. (Emphasis supplied).

It is patent then, that the seller-assignor is liable for its breach of warranty
against the petitioner. This liability as a general rule, extends to the
corporation to whom it assigned its rights and interests unless the assignee
is a holder in due course of the promissory note in question, assuming the
note is negotiable, in which case the latter's rights are based on the
negotiable instrument and assuming further that the petitioner's defenses
may not prevail against it.

Secondly, it likewise cannot be denied that as soon as the tractors broke

down, the petitioner-corporation notified the seller-assignor's sister
company, AG & P, about the breakdown based on the seller-assignor's
express 90-day warranty, with which the latter complied by sending its
mechanics. However, due to the seller-assignor's delay and its failure to
comply with its warranty, the tractors became totally unserviceable and
useless for the purpose for which they were purchased.

Thirdly, the petitioner-corporation, thereafter, unilaterally rescinded its

contract with the seller-assignor.

Articles 1191 and 1567 of the Civil Code provide that:

ART. 1191. The power to rescind obligations is implied in

reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.

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

xxx xxx xxx

ART. 1567. In the cases of articles 1561, 1562, 1564, 1565 and
1566, the vendee may elect between withdrawing from the
contract and demanding a proportionate reduction of the price,
with damages in either case. (Emphasis supplied)

Page 236 of 344

Petitioner, having unilaterally and extrajudicially rescinded its contract with
the seller-assignor, necessarily can no longer sue the seller-assignor
except by way of counterclaim if the seller-assignor sues it because of the
rescission.

In the case of the University of the Philippines v. De los Angeles (35 SCRA
102) we held:

In other words, the party who deems the contract violated may
consider it resolved or rescinded, and act accordingly, without
previous court action, but it proceeds at its own risk. For it is
only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or
was not correct in law. But the law definitely does not require
that the contracting party who believes itself injured must first
file suit and wait for adjudgement before taking extrajudicial
steps to protect its interest. Otherwise, the party injured by the
other's breach will have to passively sit and watch its damages
accumulate during the pendency of the suit until the final
judgment of rescission is rendered when the law itself requires
that he should exercise due diligence to minimize its own
damages (Civil Code, Article 2203). (Emphasis supplied)

Going back to the core issue, we rule that the promissory note in question
is not a negotiable instrument.

The pertinent portion of the note is as follows:

FOR VALUE RECEIVED, I/we jointly and severally promise to

pay to the INDUSTRIAL PRODUCTS MARKETING, the sum of
ONE MILLION NINETY THREE THOUSAND SEVEN
HUNDRED EIGHTY NINE PESOS & 71/100 only (P
1,093,789.71), Philippine Currency, the said principal sum, to
be payable in 24 monthly installments starting July 15, 1978
and every 15th of the month thereafter until fully paid. ...

Considering that paragraph (d), Section 1 of the Negotiable Instruments

Law requires that a promissory note "must be payable to order or bearer, "
it cannot be denied that the promissory note in question is not a negotiable
instrument.

The instrument in order to be considered negotiablility-i.e. must

contain the so-called 'words of negotiable, must be payable to
'order' or 'bearer'. These words serve as an expression of
consent that the instrument may be transferred. This consent is
indispensable since a maker assumes greater risk under a
negotiable instrument than under a non-negotiable one. ...

xxx xxx xxx

Page 237 of 344

 When instrument is payable to order.

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. . . .

xxx xxx xxx

These are the only two ways by which an instrument may be

made payable to order. There must always be a specified
person named in the instrument. It means that the bill or note is
to be paid to the person designated in the instrument or to any
person to whom he has indorsed and delivered the
same. Without the words "or order" or"to the order of, "the
instrument is payable only to the person designated therein and
is therefore non-negotiable. Any subsequent purchaser thereof
will not enjoy the advantages of being a holder of a negotiable
instrument but will merely "step into the shoes" of the person
designated in the instrument and will thus be open to all
defenses available against the latter." (Campos and Campos,
Notes and Selected Cases on Negotiable Instruments Law,
Third Edition, page 38). (Emphasis supplied)

Therefore, considering that the subject promissory note is not a negotiable

instrument, it follows that the respondent can never be a holder in due
course but remains a mere assignee of the note in question. Thus, the
petitioner may raise against the respondent all defenses available to it as
against the seller-assignor Industrial Products Marketing.

This being so, there was no need for the petitioner to implied the seller-
assignor when it was sued by the respondent-assignee because the
petitioner's defenses apply to both or either of either of them. Actually, the
records show that even the respondent itself admitted to being a mere
assignee of the promissory note in question, to wit:

ATTY. PALACA:

Did we get it right from the counsel that what is

being assigned is the Deed of Sale with Chattel
Mortgage with the promissory note which is as
testified to by the witness was indorsed? (Counsel
for Plaintiff nodding his head.) Then we have no
further questions on cross,

COURT:

You confirm his manifestation? You are nodding

your head? Do you confirm that?

ATTY. ILAGAN:

Page 238 of 344

 The Deed of Sale cannot be assigned. A deed of
sale is a transaction between two persons; what is
assigned are rights, the rights of the mortgagee
were assigned to the IFC Leasing & Acceptance
Corporation.

COURT:

He puts it in a simple way as one-deed of sale and

chattel mortgage were assigned; . . . you want to
make a distinction, one is an assignment of
mortgage right and the other one is indorsement of
the promissory note. What counsel for defendants
wants is that you stipulate that it is contained in one
single transaction?

ATTY. ILAGAN:

We stipulate it is one single transaction. (pp. 27-29,

TSN., February 13, 1980).

Secondly, even conceding for purposes of discussion that the promissory

note in question is a negotiable instrument, the respondent cannot be a
holder in due course for a more significant reason.

The evidence presented in the instant case shows that prior to the sale on
installment of the tractors, there was an arrangement between the seller-
assignor, Industrial Products Marketing, and the respondent whereby the
latter would pay the seller-assignor the entire purchase price and the seller-
assignor, in turn, would assign its rights to the respondent which acquired
the right to collect the price from the buyer, herein petitioner Consolidated
Plywood Industries, Inc.

A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory
Note, the Deed of Assignment and the Disclosure of Loan/Credit
Transaction shows that said documents evidencing the sale on installment
of the tractors were all executed on the same day by and among the buyer,
which is herein petitioner Consolidated Plywood Industries, Inc.; the seller-
assignor which is the Industrial Products Marketing; and the assignee-
financing company, which is the respondent. Therefore, the respondent
had actual knowledge of the fact that the seller-assignor's right to collect
the purchase price was not unconditional, and that it was subject to the
condition that the tractors -sold were not defective. The respondent knew
that when the tractors turned out to be defective, it would be subject to the
defense of failure of consideration and cannot recover the purchase price
from the petitioners. Even assuming for the sake of argument that the
promissory note is negotiable, the respondent, which took the same with
actual knowledge of the foregoing facts so that its action in taking the
instrument amounted to bad faith, is not a holder in due course. As such,
the respondent is subject to all defenses which the petitioners may raise
Page 239 of 344
against the seller-assignor. Any other interpretation would be most
inequitous to the unfortunate buyer who is not only saddled with two
useless tractors but must also face a lawsuit from the assignee for the
entire purchase price and all its incidents without being able to raise valid
defenses available as against the assignor.

Lastly, the respondent failed to present any evidence to prove that it had no
knowledge of any fact, which would justify its act of taking the promissory
note as not amounting to bad faith.

Sections 52 and 56 of the Negotiable Instruments Law provide that:

negotiating it.

xxx xxx xxx

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:

xxx xxx xxx

xxx xxx xxx

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

(d) That the time it was negotiated by him he had no notice of

any infirmity in the instrument of deffect in the title of the person
negotiating it

xxx xxx xxx

SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To

constitute notice of an infirmity in the instrument or defect in the
title of the person negotiating the same, the person to whom it
is negotiated must have had actual knowledge of the infirmity or
defect, or knowledge of such facts that his action in taking the
instrument amounts to bad faith. (Emphasis supplied)

We subscribe to the view of Campos and Campos that a financing

company is not a holder in good faith as to the buyer, to wit:

In installment sales, the buyer usually issues a note payable to

the seller to cover the purchase price. Many times, in
pursuance of a previous arrangement with the seller, a finance
company pays the full price and the note is indorsed to it,
subrogating it to the right to collect the price from the buyer,
with interest. With the increasing frequency of installment
buying in this country, it is most probable that the tendency of
the courts in the United States to protect the buyer against the
finance company will , the finance company will be subject to

Page 240 of 344

 the defense of failure of consideration and cannot recover the
purchase price from the buyer. As against the argument that
such a rule would seriously affect "a certain mode of transacting
business adopted throughout the State," a court in one case
stated:

It may be that our holding here will require some

changes in business methods and will impose a
greater burden on the finance companies. We think
the buyer-Mr. & Mrs. General Public-should have
some protection somewhere along the line. We
believe the finance company is better able to bear
the risk of the dealer's insolvency than the buyer
and in a far better position to protect his interests
against unscrupulous and insolvent dealers. . . .

If this opinion imposes great burdens on finance

companies it is a potent argument in favor of a rule
which win afford public protection to the general
buying public against unscrupulous dealers in
personal property. . . . (Mutual Finance Co. v.
Martin, 63 So. 2d 649, 44 ALR 2d 1 [1953])
(Campos and Campos, Notes and Selected Cases
on Negotiable Instruments Law, Third Edition, p.
128).

In the case of Commercial Credit Corporation v. Orange Country Machine

Works (34 Cal. 2d 766) involving similar facts, it was held that in a very real
sense, the finance company was a moving force in the transaction from its
very inception and acted as a party to it. When a finance company actively
participates in a transaction of this type from its inception, it cannot be
regarded as a holder in due course of the note given in the transaction.

In like manner, therefore, even assuming that the subject promissory note
is negotiable, the respondent, a financing company which actively
participated in the sale on installment of the subject two Allis Crawler
tractors, cannot be regarded as a holder in due course of said note. It
follows that the respondent's rights under the promissory note involved in
this case are subject to all defenses that the petitioners have against the
seller-assignor, Industrial Products Marketing. For Section 58 of the
Negotiable Instruments Law provides that "in the hands of any holder other
than a holder in due course, a negotiable instrument is subject to the same
defenses as if it were non-negotiable. ... "

Prescinding from the foregoing and setting aside other peripheral issues,
we find that both the trial and respondent appellate court erred in holding
the promissory note in question to be negotiable. Such a ruling does not
only violate the law and applicable jurisprudence, but would result in unjust
enrichment on the part of both the assigner- assignor and respondent

Page 241 of 344

assignee at the expense of the petitioner-corporation which rightfully
rescinded an inequitable contract. We note, however, that since the seller-
assignor has not been impleaded herein, there is no obstacle for the
respondent to file a civil Suit and litigate its claims against the seller-
assignor in the rather unlikely possibility that it so desires,

WHEREFORE, in view of the foregoing, the decision of the respondent

appellate court dated July 17, 1985, as well as its resolution dated October
17, 1986, are hereby ANNULLED and SET ASIDE. The complaint against
the petitioner before the trial court is DISMISSED.

SO ORDERED.

Fernan, Paras, Padilla, Bidin and Cortes, JJ., concur.

FIRST DIVISION

G.R. No. 111190 June 27, 1995

LORETO D. DE LA VICTORIA, as City Fiscal of Mandaue City and in

his personal capacity as garnishee, petitioner,
vs.
HON. JOSE P. BURGOS, Presiding Judge, RTC, Br. XVII, Cebu City,
and RAUL H. SESBREÑO, respondents.

BELLOSILLO, J.:

RAUL H. SESBREÑO filed a complaint for damages against Assistant City

Fiscals Bienvenido N. Mabanto, Jr., and Dario D. Rama, Jr., before the
Regional Trial Court of Cebu City. After trial judgment was rendered
ordering the defendants to pay P11,000.00 to the plaintiff, private
respondent herein. The decision having become final and executory, on
motion of the latter, the trial court ordered its execution. This order was
questioned by the defendants before the Court of Appeals. However, on 15
January 1992 a writ of execution was issued.

On 4 February 1992 a notice of garnishment was served on petitioner

Loreto D. de la Victoria as City Fiscal of Mandaue City where defendant
Mabanto, Jr., was then detailed. The notice directed petitioner not to
disburse, transfer, release or convey to any other person except to the
deputy sheriff concerned the salary checks or other checks, monies, or
cash due or belonging to Mabanto, Jr., under penalty of law. 1 On 10 March
1992 private respondent filed a motion before the trial court for examination
of the garnishees.

On 25 May 1992 the petition pending before the Court of Appeals was
dismissed. Thus the trial court, finding no more legal obstacle to act on the
motion for examination of the garnishees, directed petitioner on 4

Page 242 of 344

November 1992 to submit his report showing the amount of the garnished
salaries of Mabanto, Jr., within fifteen (15) days from receipt 2 taking into
consideration the provisions of Sec. 12, pars. (f) and (i), Rule 39 of the
Rules of Court.

On 24 November 1992 private respondent filed a motion to require

petitioner to explain why he should not be cited in contempt of court for
failing to comply with the order of 4 November 1992.

On the other hand, on 19 January 1993 petitioner moved to quash the

notice of garnishment claiming that he was not in possession of any
money, funds, credit, property or anything of value belonging to Mabanto,
Jr., except his salary and RATA checks, but that said checks were not yet
properties of Mabanto, Jr., until delivered to him. He further claimed that, as
such, they were still public funds which could not be subject to
garnishment.

On 9 March 1993 the trial court denied both motions and ordered petitioner
to immediately comply with its order of 4 November 1992. 3 It opined that
the checks of Mabanto, Jr., had already been released through petitioner
by the Department of Justice duly signed by the officer concerned. Upon
service of the writ of garnishment, petitioner as custodian of the checks
was under obligation to hold them for the judgment creditor. Petitioner
became a virtual party to, or a forced intervenor in, the case and the trial
court thereby acquired jurisdiction to bind him to its orders and processes
with a view to the complete satisfaction of the judgment. Additionally, there
was no sufficient reason for petitioner to hold the checks because they
were no longer government funds and presumably delivered to the payee,
conformably with the last sentence of Sec. 16 of the Negotiable
Instruments Law.

With regard to the contempt charge, the trial court was not morally
convinced of petitioner's guilt. For, while his explanation suffered from
procedural infirmities nevertheless he took pains in enlightening the court
by sending a written explanation dated 22 July 1992 requesting for the
lifting of the notice of garnishment on the ground that the notice should
have been sent to the Finance Officer of the Department of Justice.
Petitioner insists that he had no authority to segregate a portion of the
salary of Mabanto, Jr. The explanation however was not submitted to the
trial court for action since the stenographic reporter failed to attach it to the
record. 4

On 20 April 1993 the motion for reconsideration was denied. The trial court
explained that it was not the duty of the garnishee to inquire or judge for
himself whether the issuance of the order of execution, writ of execution
and notice of garnishment was justified. His only duty was to turn over the
garnished checks to the trial court which issued the order of execution. 5

Page 243 of 344

Petitioner raises the following relevant issues: (1) whether a check still in
the hands of the maker or its duly authorized representative is owned by
the payee before physical delivery to the latter: and, (2) whether the salary
check of a government official or employee funded with public funds can be
subject to garnishment.

Petitioner reiterates his position that the salary checks were not owned by
Mabanto, Jr., because they were not yet delivered to him, and that
petitioner as garnishee has no legal obligation to hold and deliver them to
the trial court to be applied to Mabanto, Jr.'s judgment debt. The thesis of
petitioner is that the salary checks still formed part of public funds and
therefore beyond the reach of garnishment proceedings.

Petitioner has well argued his case.

Garnishment is considered as a species of attachment for reaching credits

belonging to the judgment debtor owing to him from a stranger to the
litigation. 6 Emphasis is laid on the phrase "belonging to the judgment
debtor" since it is the focal point in resolving the issues raised.

As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public
funds. He receives his compensation in the form of checks from the
Department of Justice through petitioner as City Fiscal of Mandaue City
and head of office. Under Sec. 16 of the Negotiable Instruments Law, every
contract on a negotiable instrument is incomplete and revocable
until delivery of the instrument for the purpose of giving effect thereto. As
ordinarily understood, delivery means the transfer of the possession of the
instrument by the maker or drawer with intent to transfer title to the payee
and recognize him as the holder thereof.7

According to the trial court, the checks of Mabanto, Jr., were already
released by the Department of Justice duly signed by the officer concerned
through petitioner and upon service of the writ of garnishment by the sheriff
petitioner was under obligation to hold them for the judgment creditor. It
recognized the role of petitioner as custodian of the checks. At the same
time however it considered the checks as no longer government funds and
presumed delivered to the payee based on the last sentence of Sec. 16 of
the Negotiable Instruments Law which states: "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." Yet, the presumption is
not conclusive because the last portion of the provision says "until the
contrary is proved." However this phrase was deleted by the trial court for
no apparent reason. Proof to the contrary is its own finding that the checks
were in the custody of petitioner. Inasmuch as said checks had not yet
been delivered to Mabanto, Jr., they did not belong to him and still had the
character of public funds. In Tiro v. Hontanosas 8 we ruled that —

The salary check of a government officer or employee such as

a teacher does not belong to him before it is physically

Page 244 of 344

 delivered to him. Until that time the check belongs to the
government. Accordingly, before there is actual delivery of the
check, the payee has no power over it; he cannot assign it
without the consent of the Government.

As a necessary consequence of being public fund, the checks may not be

garnished to satisfy the judgment. 9 The rationale behind this doctrine is
obvious consideration of public policy. The Court succinctly stated
in Commissioner of Public Highways v. San Diego 10 that —

The functions and public services rendered by the State cannot

be allowed to be paralyzed or disrupted by the diversion of
public funds from their legitimate and specific objects, as
appropriated by law.

In denying petitioner's motion for reconsideration, the trial court expressed

the additional ratiocination that it was not the duty of the garnishee to
inquire or judge for himself whether the issuance of the order of execution,
the writ of execution, and the notice of garnishment was justified, citing our
ruling in Philippine Commercial Industrial Bank v. Court of Appeals. 11 Our
precise ruling in that case was that "[I]t is not incumbent upon the
garnishee to inquire or to judge for itself whether or not the order for the
advance execution of a judgment is valid." But that is invoking only the
general rule. We have also established therein the compelling reasons, as
exceptions thereto, which were not taken into account by the trial court,
e.g., a defect on the face of the writ or actual knowledge by the garnishee
of lack of entitlement on the part of the garnisher. It is worth to note that the
ruling referred to the validity of advance execution of judgments, but a
careful scrutiny of that case and similar cases reveals that it was applicable
to a notice of garnishment as well. In the case at bench, it was incumbent
upon petitioner to inquire into the validity of the notice of garnishment as he
had actual knowledge of the non-entitlement of private respondent to the
checks in question. Consequently, we find no difficulty concluding that the
trial court exceeded its jurisdiction in issuing the notice of garnishment
concerning the salary checks of Mabanto, Jr., in the possession of
petitioner.

WHEREFORE, the petition is GRANTED. The orders of 9 March 1993 and

20 April 1993 of the Regional Trial Court of Cebu City, Br. 17, subject of the
petition are SET ASIDE. The notice of garnishment served on petitioner
dated 3 February 1992 is ordered DISCHARGED.

SO ORDERED.

Quiason and Kapunan, JJ., concur.

Separate Opinions

DAVIDE, JR., J., concurring and dissenting:

Page 245 of 344

This Court may take judicial notice of the fact that checks for salaries of
employees of various Departments all over the country are prepared in
Manila not at the end of the payroll period, but days before it to ensure that
they reach the employees concerned not later than the end of the payroll
period. As to the employees in the provinces or cities, the checks are sent
through the heads of the corresponding offices of the Departments. Thus,
in the case of Prosecutors and Assistant Prosecutors of the Department of
Justice, the checks are sent through the Provincial Prosecutors or City
Prosecutors, as the case may be, who shall then deliver the checks to the
payees.

Involved in the instant case are the salary and RATA checks of then
Assistant City Fiscal Bienvenido Mabanto, Jr., who was detailed in the
Office of the City Fiscal (now Prosecutor) of Mandaue City. Conformably
with the aforesaid practice, these checks were sent to Mabanto thru the
petitioner who was then the City Fiscal of Mandaue City.

The ponencia failed to indicate the payroll period covered by the salary
check and the month to which the RATA check corresponds.

I respectfully submit that if these salary and RATA checks corresponded,

respectively, to a payroll period and to a month which had already lapsed at
the time the notice of garnishment was served, the garnishment would be
valid, as the checks would then cease to be property of the Government
and would become property of Mabanto. Upon the expiration of such period
and month, the sums indicated therein were deemed automatically
segregated from the budgetary allocations for the Department of Justice
under the General Appropriations Act.

It must be recalled that the public policy against execution, attachment, or

garnishment is directed to public funds.

Thus, in the case of Director of the Bureau of Commerce and Industry

vs. Concepcion 1 where the core issue was whether or not the salary due
from the Government to a public officer or employee can, by garnishment,
be seized before being paid to him and appropriated to the payment of his
judgment debts, this Court held:

A rule, which has never been seriously questioned, is that

money in the hands of public officers, although it may be due
government employees, is not liable to the creditors of these
employees in the process of garnishment. One reason is, that
the State, by virtue of its sovereignty, may not be sued in its
own courts except by express authorization by the Legislature,
and to subject its officers to garnishment would be to permit
indirectly what is prohibited directly. Another reason is that
moneys sought to be garnished, as long as they remain in the
hands of the disbursing officer of the Government, belong to the
latter, although the defendant in garnishment may be entitled to

Page 246 of 344

 a specific portion thereof. And still another reason which covers
both of the foregoing is that every consideration of public policy
forbids it.

The United States Supreme Court, in the leading case of

Buchanan vs. Alexander ([1846], 4 How., 19), in speaking of
the right of creditors of seamen, by process of attachment, to
divert the public money from its legitimate and appropriate
object, said:

To state such a principle is to refute it. No

government can sanction it. At all times it would be
found embarrassing, and under some
circumstances it might be fatal to the public service.
. . . So long as money remains in the hands of a
disbursing officer, it is as much the money of the
United States, as if it had not been drawn from the
treasury. Until paid over by the agent of the
government to the person entitled to it, the fund
cannot, in any legal sense, be considered a part of
his effects." (See, further, 12 R.C.L., p. 841; Keene
vs. Smith [1904], 44 Ore., 525; Wild vs. Ferguson
[1871], 23 La. Ann., 752; Bank of Tennessee vs.
Dibrell [1855], 3 Sneed [Tenn.], 379). (emphasis
supplied)

The authorities cited in the ponencia are inapplicable. Garnished or levied

on therein were public funds, to wit: (a) the pump irrigation trust fund
deposited with the Philippine National Bank (PNB) in the account of the
Irrigation Service Unit in Republic vs. Palacio; 2 (b) the deposits of the
National Media Production Center in Traders Royal Bank vs. Intermediate
Appellate Court; 3 and (c) the deposits of the Bureau of Public Highways
with the PNB under a current account, which may be expended only for
their legitimate object as authorized by the corresponding legislative
appropriation in Commissioner of Public Highways vs. Diego. 4

Neither is Tiro vs. Hontanosas 5 squarely in point. The said case involved
the validity of Circular No. 21, series of 1969, issued by the Director of
Public Schools which directed that "henceforth no cashier or disbursing
officer shall pay to attorneys-in-fact or other persons who may be
authorized under a power of attorney or other forms of authority to collect
the salary of an employee, except when the persons so designated and
authorized is an immediate member of the family of the employee
concerned, and in all other cases except upon proper authorization of the
Assistant Executive Secretary for Legal and Administrative Matters, with
the recommendation of the Financial Assistant." Private respondent Zafra
Financing Enterprise, which had extended loans to public school teachers
in Cebu City and obtained from the latter promissory notes and special
powers of attorney authorizing it to take and collect their salary checks from

Page 247 of 344

the Division Office in Cebu City of the Bureau of Public Schools,
sought, inter alia, to nullify the Circular. It is clear that the teachers had in
fact assigned to or waived in favor of Zafra their future salaries which were
still public funds. That assignment or waiver was contrary to public policy.

I would therefore vote to grant the petition only if the salary and RATA
checks garnished corresponds to an unexpired payroll period and RATA
month, respectively.

Padilla, J., concurs.

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, defendants-respondents.

Yngson & Associates for petitioner.

Henry A. Reyes & Associates for Samso Tung & Asian Industrial Plastic
Corporation.
Eduardo G. Castelo for Sima Wei.
Monsod, Tamargo & Associates for Producers Bank.
Rafael S. Santayana for Mary Cheng Uy.

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.
Page 248 of 344
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 DEFENDANTS-RESPONDENTS.

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

Page 249 of 344

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.3Delivery 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 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

Page 250 of 344

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.

Page 251 of 344

 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 five-year 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
Page 252 of 344
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
defendant-appellant 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 defendant-appellant 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, defendant-appellant'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

Page 253 of 344

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 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,
Page 254 of 344
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 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);

Page 255 of 344

 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

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.

Page 256 of 344

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 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. 11Through 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:

(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

Page 257 of 344

 (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,

Page 258 of 344

 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. 18The 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.

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

Page 259 of 344

 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

Page 260 of 344

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 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

Page 261 of 344

 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.

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 defendant-appellee 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 plaintiff-appellant. 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 defendant-
appellee 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 defendant-appellant 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 defendant-appellee 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

Page 262 of 344

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 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

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

Page 263 of 344

rejected this claim because such civil 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 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

Page 264 of 344

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

Page 265 of 344

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
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.

Page 266 of 344

 SECOND DIVISION
[G.R. No. 117857. February 2, 2001]
LUIS S. WONG, petitioner, vs. COURT OF APPEALS and PEOPLE OF
THE PHILIPPINES, respondents.

DECISION
QUISUMBING, J.:

For review on certiorari is the decision dated October 28, 1994 of the
Court of Appeals in C.A. G.R. CR 11856[1] which affirmed the decision of
the Regional Trial Court of Cebu City, Branch 17, convicting petitioner on
three (3) counts of Batas Pambansa Blg. 22 (the Bouncing Checks Law)
violations, and sentencing him to imprisonment of four (4) months for each
count, and to pay private respondent the amounts of P5,500.00, P6,410.00
and P3,375.00, respectively, corresponding to the value of the checks
involved, with the legal rate of interest from the time of filing of the criminal
charges, as well as to pay the costs.
The factual antecedents of the case are as follows:
Petitioner Wong was an agent of Limtong Press Inc. (LPI), a
manufacturer of calendars. LPI would print sample calendars, then give
them to agents to present to customers. The agents would get the
purchase orders of customers and forward them to LPI. After printing the
calendars, LPI would ship the calendars directly to the customers.
Thereafter, the agents would come around to collect the payments.
Petitioner, however, had a history of unremitted collections, which he duly
acknowledged in a confirmation receipt he co-signed with his wife.[2] Hence,
petitioners customers were required to issue postdated checks before LPI
would accept their purchase orders.

Page 267 of 344

 In early December 1985, Wong issued six (6) postdated checks
totaling P18,025.00, all dated December 30, 1985 and drawn payable to
the order of LPI, as follows:
(1) Allied Banking Corporation (ABC) Check No. 660143464-C for
P6,410.00 (Exh. B);
(2) ABC Check No. 660143460-C for P 540.00 (Exh. C);
(3) ABC Check No. PA660143451-C for P5,500.00 (Exh. D);
(4) ABC Check No. PA660143465-C for P1,100.00 (Exh. E);
(5) ABC Check No. PA660143463-C for P3,375.00 (Exh. F);
(6) ABC Check No. PA660143452-C for P1,100.00 (Exh. G).
These checks were initially intended to guarantee the calendar orders
of customers who failed to issue post-dated checks. However, following
company policy, LPI refused to accept the checks as guarantees. Instead,
the parties agreed to apply the checks to the payment of petitioners
unremitted collections for 1984 amounting to P18,077.07.[3] LPI waived
the P52.07 difference.
Before the maturity of the checks, petitioner prevailed upon LPI not to
deposit the checks and promised to replace them within 30 days. However,
petitioner reneged on his promise. Hence, on June 5, 1986, LPI deposited
the checks with Rizal Commercial Banking Corporation (RCBC). The
checks were returned for the reason account closed. The dishonor of the
checks was evidenced by the RCBC return slip.
On June 20, 1986, complainant through counsel notified the petitioner
of the dishonor. Petitioner failed to make arrangements for payment within
five (5) banking days.
On November 6, 1987, petitioner was charged with three (3) counts of
violation of B.P. Blg. 22[4] under three separate Informations for the three
checks amounting to P5,500.00, P3,375.00, and P6,410.00.[5]
The Information in Criminal Case No. CBU-12055 reads as follows:[6]

That on or about the 30th day of December, 1985 and for sometime
subsequent thereto, in the City of Cebu, Philippines, and within the
jurisdiction of this Honorable Court, the said accused, knowing at the time
of issue of the check she/he does not have sufficient funds in or credit with
the drawee bank for the payment of such check in full upon its
presentment, with deliberate intent, with intent of gain and of causing
damage, did then and there issue, make or draw Allied Banking
Corporation Check No. 660143451 dated 12-30-85 in the amount of
P5,500.00 payable to Manuel T. Limtong which check was issued in
payment of an obligation of said accused, but when the said check was
presented with said bank, the same was dishonored for reason ACCOUNT
CLOSED and despite notice and demands made to redeem or make good
said check, said accused failed and refused, and up to the present time still
fails and refuses to do so, to the damage and prejudice of said Manuel T.
Limtong in the amount of P5,500.00 Philippine Currency.

Page 268 of 344

Contrary to law.

Petitioner was similarly charged in Criminal Case No. 12057 for ABC
Check No. 660143463 in the amount of P3,375.00, and in Criminal Case
No. 12058 for ABC Check No. 660143464 for P6,410.00.Both cases were
raffled to the same trial court.
Upon arraignment, Wong pleaded not guilty. Trial ensued.
Manuel T. Limtong, general manager of LPI, testified on behalf of the
company. Limtong averred that he refused to accept the personal checks of
petitioner since it was against company policy to accept personal checks
from agents. Hence, he and petitioner simply agreed to use the checks to
pay petitioners unremitted collections to LPI. According to Limtong, a few
days before maturity of the checks, Wong requested him to defer the
deposit of said checks for lack of funds. Wong promised to replace them
within thirty days, but failed to do so. Hence, upon advice of counsel, he
deposited the checks which were subsequently returned on the ground of
account closed.
The version of the defense is that petitioner issued the six (6) checks to
guarantee the 1985 calendar bookings of his customers. According to
petitioner, he issued the checks not as payment for any obligation, but to
guarantee the orders of his customers. In fact, the face value of the six (6)
postdated checks tallied with the total amount of the calendar orders of the
six (6) customers of the accused, namely, Golden Friendship Supermarket,
Inc. (P6,410.00), New Society Rice and Corn Mill (P5,500.00), Cuesta
Enterprises (P540.00), Pelrico Marketing (P1,100.00), New Asia
Restaurant (P3,375.00), and New China Restaurant (P1,100.00). Although
these customers had already paid their respective orders, petitioner
claimed LPI did not return the said checks to him.
On August 30, 1990, the trial court issued its decision, disposing as
follows:[7]

Wherefore, premises considered, this Court finds the accused Luis S.

Wong GUILTY beyond reasonable doubt of the offense of Violations of
Section 1 of Batas Pambansa Bilang 22 in THREE (3) Counts and is
hereby sentenced to serve an imprisonment of FOUR (4) MONTHS for
each count; to pay Private Complainant Manuel T. Limtong the sums of
Five Thousand Five Hundred (P5,500.00) Pesos, Six Thousand Four
Hundred Ten (P6,410.00) Pesos and Three Thousand Three Hundred
Seventy-Five (P3,375.00) Pesos corresponding to the amounts indicated in
Allied Banking Checks Nos. 660143451, 66[0]143464 and 660143463 all
issued on December 30, 1985 together with the legal rate of interest from
the time of the filing of the criminal charges in Court and pay the costs.[8]

Petitioner appealed his conviction to the Court of Appeals. On October

28, 1994, it affirmed the trial courts decision in toto.[9]
Hence, the present petition.[10] Petitioner raises the following questions
of law -[11]

Page 269 of 344

 May a complainant successfully prosecute a case under BP 22 --- if
there is no more consideration or price or value -- ever the binding tie
that it is in contracts in general and in negotiable instruments in
particular -- behind the checks? -- if even before he deposits the
checks, he has ceased to be a holder for value because the purchase
orders (PO's) guaranteed by the checks were already paid?

Given the fact that the checks lost their reason for being, as above
stated, is it not then the duty of complainant -- knowing he is no longer
a holder for value -- to return the checks and not to deposit them ever?
Upon what legal basis then may such a holder deposit them and get
paid twice?

Is petitioner, as the drawer of the guarantee checks which lost their

reason for being, still bound under BP 22 to maintain his account long
after 90 days from maturity of the checks?

May the prosecution apply the prima facie presumption of knowledge

of lack of funds against the drawer if the checks were belatedly
deposited by the complainant 157 days after maturity, or will it be then
necessary for the prosecution to show actual proof of lack of
funds during the 90-day term?

Petitioner insists that the checks were issued as guarantees for the
1985 purchase orders (POs) of his customers. He contends that private
respondent is not a holder for value considering that the checks were
deposited by private respondent after the customers already paid their
orders. Instead of depositing the checks, private respondent should have
returned the checks to him. Petitioner further assails the credibility of
complainant considering that his answers to cross-examination questions
included: I cannot recall, anymore and We have no more record.
In his Comment,[12] the Solicitor General concedes that the checks
might have been initially intended by petitioner to guarantee payments due
from customers, but upon the refusal of LPI to accept said personal checks
per company policy, the parties had agreed that the checks would be used
to pay off petitioners unremitted collections. Petitioners contention that he
did not demand the return of the checks because he trusted LPIs good faith
is contrary to human nature and sound business practice, according to the
Solicitor General.
The issue as to whether the checks were issued merely as guarantee or
for payment of petitioners unremitted collections is a factual issue involving
as it does the credibility of witnesses. Said factual issue has been settled
by the trial court and Court of Appeals. Although initially intended to be
used as guarantee for the purchase orders of customers, they found the
checks were eventually used to settle the remaining obligations of
petitioner with LPI. Although Manuel Limtong was the sole witness for the
prosecution, his testimony was found sufficient to prove all the elements of
the offense charged.[13] We find no cogent reason to depart from findings of

Page 270 of 344

both the trial and appellate courts. In cases elevated from the Court of
Appeals, our review is confined to alleged errors of law. Its findings of fact
are generally conclusive. Absent any showing that the findings by the
respondent court are entirely devoid of any substantiation on record, the
same must stand.[14] The lack of accounting between the parties is not the
issue in this case. As repeatedly held, this Court is not a trier of
facts.[15] Moreover, in Llamado v. Court of Appeals,[16] we held that [t]o
determine the reason for which checks are issued, or the terms and
conditions for their issuance, will greatly erode the faith the public reposes
in the stability and commercial value of checks as currency substitutes, and
bring about havoc in trade and in banking communities. So what the law
punishes is the issuance of a bouncing check and not the purpose for
which it was issued nor the terms and conditions relating to its issuance.
The mere act of issuing a worthless check is malum prohibitum. Nothing
herein persuades us to hold otherwise.
The only issue for our resolution now is whether or not the prosecution
was able to establish beyond reasonable doubt all the elements of the
offense penalized under B.P. Blg. 22.
There are two (2) ways of violating B.P. Blg. 22: (1) by making or
drawing and issuing a check to apply on account or for value knowing at
the time of issue that the check is not sufficiently funded; and (2) by having
sufficient funds in or credit with the drawee bank at the time of issue but
failing to keep sufficient funds therein or credit with said bank to cover the
full amount of the check when presented to the drawee bank within a
period of ninety (90) days.[17]
The elements of B.P. Blg. 22 under the first situation, pertinent to the
present case, are:[18]

(1) The making, drawing and issuance of any check to apply for account or
for value;

(2) 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

(3) The 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.

Petitioner contends that the first element does not exist because the
checks were not issued to apply for account or for value. He attempts to
distinguish his situation from the usual cut-and-dried B.P. 22 case by
claiming that the checks were issued as guarantee and the obligations they
were supposed to guarantee were already paid. This flawed argument has
no factual basis, the RTC and CA having both ruled that the checks were in
payment for unremitted collections, and not as guarantee. Likewise, the
argument has no legal basis, for what B.P. Blg. 22 punishes is the issuance

Page 271 of 344

of a bouncing check and not the purpose for which it was issued nor the
terms and conditions relating to its issuance.[19]
As to the second element, B.P. Blg. 22 creates a presumption juris
tantum that the second element prima facie exists when the first and third
elements of the offense are present.[20] Thus, the makers knowledge is
presumed from the dishonor of the check for insufficiency of funds.[21]
Petitioner avers that since the complainant deposited the checks on
June 5, 1986, or 157 days after the December 30, 1985 maturity date, the
presumption of knowledge of lack of funds under Section 2 of B.P. Blg. 22
should not apply to him. He further claims that he should not be expected
to keep his bank account active and funded beyond the ninety-day period.
Section 2 of B.P. Blg. 22 provides:

Evidence of knowledge of insufficient funds. -- The making, drawing and

issuance of a check payment of which is refused by the drawee because of
insufficient funds in or credit with such bank, when presented within ninety
(90) days from the date of the check, shall be prima facie evidence of
knowledge of such insufficiency of funds or credit unless such maker or
drawer pays the holder thereof the amount due thereon, or makes
arrangements for payment in full by the drawee of such check within five
(5) banking days after receiving notice that such check has not been paid
by the drawee.

An essential element of the offense is knowledge on the part of the

maker or drawer of the check of the insufficiency of his funds in or credit
with the bank to cover the check upon its presentment. Since this involves
a state of mind difficult to establish, the statute itself creates a prima
facie presumption of such knowledge where payment of the check is
refused by the drawee because of insufficient funds in or credit with such
bank when presented within ninety (90) days from the date of the check. To
mitigate the harshness of the law in its application, the statute provides that
such presumption shall not arise if within five (5) banking days from receipt
of the notice of dishonor, the maker or drawer makes arrangements for
payment of the check by the bank or pays the holder the amount of the
check.[22]
Contrary to petitioners assertions, nowhere in said provision does the
law require a maker to maintain funds in his bank account for only 90 days.
Rather, the clear import of the law is to establish a prima facie presumption
of knowledge of such insufficiency of funds under the following conditions
(1) presentment within 90 days from date of the check, and (2) the dishonor
of the check and failure of the maker to make arrangements for payment in
full within 5 banking days after notice thereof. That the check must be
deposited within ninety (90) days is simply one of the conditions for
the prima facie presumption of knowledge of lack of funds to arise. It is not
an element of the offense. Neither does it discharge petitioner from his duty
to maintain sufficient funds in the account within a reasonable time thereof.
Under Section 186 of the Negotiable Instruments Law, a check must be

Page 272 of 344

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. By current banking practice, a check becomes stale after more
than six (6) months,[23] or 180 days. Private respondent herein deposited
the checks 157 days after the date of the check. Hence said checks cannot
be considered stale. Only the presumption of knowledge of insufficiency of
funds was lost, but such knowledge could still be proven by direct or
circumstantial evidence. As found by the trial court, private respondent did
not deposit the checks because of the reassurance of petitioner that he
would issue new checks. Upon his failure to do so, LPI was constrained to
deposit the said checks. After the checks were dishonored, petitioner was
duly notified of such fact but failed to make arrangements for full payment
within five (5) banking days thereof. There is, on record, sufficient evidence
that petitioner had knowledge of the insufficiency of his funds in or credit
with the drawee bank at the time of issuance of the checks. And despite
petitioners insistent plea of innocence, we find no error in the respondent
courts affirmance of his conviction by the trial court for violations of the
Bouncing Checks Law.
However, pursuant to the policy guidelines in Administrative Circular
No. 12-2000, which took effect on November 21, 2000, the penalty
imposed on petitioner should now be modified to a fine of not less than but
not more than double the amount of the checks that were dishonored.
WHEREFORE, the petition is DENIED. Petitioner Luis S. Wong is found
liable for violation of Batas Pambansa Blg. 22 but the penalty imposed on
him is hereby MODIFIED so that the sentence of imprisonment is deleted.
Petitioner is ORDERED to pay a FINE of (1) P6,750.00, equivalent to
double the amount of the check involved in Criminal Case No. CBU-12057,
(2) P12,820.00, equivalent to double the amount of the check involved in
Criminal Case No. CBU-12058, and (3) P11,000.00, equivalent to double
the amount of the check involved in Criminal Case No. CBU-12055, with
subsidiary imprisonment[24] in case of insolvency to pay the aforesaid
fines. Finally, as civil indemnity, petitioner is also ordered to pay to LPI the
face value of said checks totaling P18,025.00 with legal interest thereon
from the time of filing the criminal charges in court, as well as to pay the
costs.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.

Page 273 of 344

 FIRST DIVISION
[G.R. No. 141968. February 12, 2001]
THE INTERNATIONAL CORPORATE BANK (now UNION BANK OF
THE PHILIPPINES), petitioner, vs. SPS. FRANCIS S. GUECO and
MA. LUZ E. GUECO, respondents.

DECISION
KAPUNAN, J.:

The respondents Gueco Spouses obtained a loan from petitioner

International Corporate Bank (now Union Bank of the Philippines) to
purchase a car a Nissan Sentra 1600 4DR, 1989 Model. In consideration
thereof, the Spouses executed promissory notes which were payable in
monthly installments and chattel mortgage over the car to serve as security
for the notes.
The Spouses defaulted in payment of installments. Consequently, the
Bank filed on August 7, 1995 a civil action docketed as Civil Case No. 658-
95 for Sum of Money with Prayer for a Writ of Replevin[1] before the
Metropolitan Trial Court of Pasay City, Branch 45.[2] On August 25, 1995,
Dr. Francis Gueco was served summons and was fetched by the sheriff
and representative of the bank for a meeting in the bank premises. Desi
Tomas, the Banks Assistant Vice President demanded payment of the
amount of P184,000.00 which represents the unpaid balance for the car
loan. After some negotiations and computation, the amount was lowered
to P154,000.00, However, as a result of the non-payment of the reduced
amount on that date, the car was detained inside the banks compound.
On August 28, 1995, Dr. Gueco went to the bank and talked with its
Administrative Support, Auto Loans/Credit Card Collection Head, Jefferson
Rivera. The negotiations resulted in the further reduction of the outstanding
loan to P150,000.00.

Page 274 of 344

 On August 29, 1995, Dr. Gueco delivered a managers check in the
amount of P150,000.00 but the car was not released because of his refusal
to sign the Joint Motion to Dismiss. It is the contention of the Gueco
spouses and their counsel that Dr. Gueco need not sign the motion for joint
dismissal considering that they had not yet filed their Answer. Petitioner,
however, insisted that the joint motion to dismiss is standard operating
procedure in their bank to effect a compromise and to preclude future filing
of claims, counterclaims or suits for damages.
After several demand letters and meetings with bank representatives,
the respondents Gueco spouses initiated a civil action for damages before
the Metropolitan Trial Court of Quezon City, Branch 33.The Metropolitan
Trial Court dismissed the complaint for lack of merit.[3]
On appeal to the Regional Trial Court, Branch 227 of Quezon City, the
decision of the Metropolitan Trial Court was reversed. In its decision, the
RTC held that there was a meeting of the minds between the parties as to
the reduction of the amount of indebtedness and the release of the car but
said agreement did not include the signing of the joint motion to dismiss as
a condition sine qua non for the effectivity of the compromise. The court
further ordered the bank:
1. to return immediately the subject car to the appellants in good
working condition; Appellee may deposit the Managers check the
proceeds of which have long been under the control of the issuing
bank in favor of the appellee since its issuance, whereas the
funds have long been paid by appellants to secure said Managers
Check, over which appellants have no control;
2. to pay the appellants the sum of P50,000.00 as moral damages;
P25,000.00 as exemplary damages, and P25,000.00 as attorneys
fees, and
3. to pay the cost of suit.

In other respect, the decision of the Metropolitan Trial Court Branch 33 is

hereby AFFIRMED.[4]

The case was elevated to the Court of Appeals, which on February 17,
2000, issued the assailed decision, the decretal portion of which reads:

WHEREFORE, premises considered, the petition for review on certiorari is

hereby DENIED and the Decision of the Regional Trial Court of Quezon
City, Branch 227, in Civil Case No. Q-97-31176, for lack of any reversible
error, is AFFIRMED in toto. Costs against petitioner.

SO ORDERED.[5]

The Court of Appeals essentially relied on the respect accorded to the

finality of the findings of facts by the lower court and on the latter's finding
of the existence of fraud which constitutes the basis for the award of
damages.

Page 275 of 344

 The petitioner comes to this Court by way of petition for
review on certiorari under Rule 45 of the Rules of Court, raising the
following assigned errors:
I

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO

AGREEMENT WITH RESPECT TO THE EXECUTION OF THE JOINT
MOTION TO DISMISS AS A CONDITION FOR THE COMPROMISE
AGREEMENT.

II

THE COURT OF APPEALS ERRED IN GRANTING MORAL AND

EXEMPLARY DAMAGES AND ATTORNEYS FEES IN FAVOR OF THE
RESPONDENTS.

III

THE COURT OF APPEALS ERRED IN HOLDING THAT THE

PETITIONER RETURN THE SUBJECT CAR TO THE RESPONDENTS,
WITHOUT MAKING ANY PROVISION FOR THE ISSUANCE OF THE
NEW MANAGERS/CASHIERS CHECK BY THE RESPONDENTS IN
FAVOR OF THE PETITIONER IN LIEU OF THE ORIGINAL CASHIERS
CHECK THAT ALREADY BECAME STALE.[6]

As to the first issue, we find for the respondents. The issue as to what
constitutes the terms of the oral compromise or any subsequent novation is
a question of fact that was resolved by the Regional Trial Court and the
Court of Appeals in favor of respondents. It is well settled that the findings
of fact of the lower court, especially when affirmed by the Court of Appeals,
are binding upon this Court.[7] While there are exceptions to this rule,[8] the
present case does not fall under any one of them, the petitioners claim to
the contrary, notwithstanding.
Being an affirmative allegation, petitioner has the burden of evidence to
prove his claim that the oral compromise entered into by the parties on
August 28, 1995 included the stipulation that the parties would jointly file a
motion to dismiss. This petitioner failed to do. Notably, even the
Metropolitan Trial Court, while ruling in favor of the petitioner and thereby
dismissing the complaint, did not make a factual finding that the
compromise agreement included the condition of the signing of a joint
motion to dismiss.
The Court of Appeals made the factual findings in this wise:

In support of its claim, petitioner presented the testimony of Mr. Jefferson

Rivera who related that respondent Dr. Gueco was aware that the signing
of the draft of the Joint Motion to Dismiss was one of the conditions set by
the bank for the acceptance of the reduced amount of indebtedness and
the release of the car. (TSN, October 23, 1996, pp. 17-21, Rollo, pp. 18,

Page 276 of 344

5). Respondents, however, maintained that no such condition was ever
discussed during their meeting of August 28, 1995 (Rollo, p. 32).

The trial court, whose factual findings are entitled to respect since it has the
opportunity to directly observe the witnesses and to determine by their
demeanor on the stand the probative value of their testimonies (People vs.
Yadao, et al. 216 SCRA 1, 7 [1992]), failed to make a categorical finding on
the issue. In dismissing the claim of damages of the respondents, it merely
observed that respondents are not entitled to indemnity since it was their
unjustified reluctance to sign of the Joint Motion to Dismiss that delayed the
release of the car. The trial court opined, thus:

As regards the third issue, plaintiffs claim for damages is unavailing. First,
the plaintiffs could have avoided the renting of another car and could have
avoided this litigation had he signed the Joint Motion to Dismiss. While it is
true that herein defendant can unilaterally dismiss the case for collection of
sum of money with replevin, it is equally true that there is nothing wrong for
the plaintiff to affix his signature in the Joint Motion to Dismiss, for after all,
the dismissal of the case against him is for his own good and benefit. In
fact, the signing of the Joint Motion to Dismiss gives the plaintiff three (3)
advantages.First, he will recover his car. Second, he will pay his obligation
to the bank on its reduced amount of P150,000.00 instead of its original
claim of P184,985.09. And third, the case against him will be
dismissed. Plaintiffs, likewise, are not entitled to the award of moral
damages and exemplary damages as there is no showing that the
defendant bank acted fraudulently or in bad faith. (Rollo, p. 15)

The Court has noted, however, that the trial court, in its findings of facts,
clearly indicated that the agreement of the parties on August 28, 1995 was
merely for the lowering of the price, hence -

xxx On August 28, 1995, bank representative Jefferson Rivera and

plaintiff entered into an oral compromise agreement, whereby the
original claim of the bank of P184,985.09 was reduced to
P150,000.00 and that upon payment of which, plaintiff was informed
that the subject motor vehicle would be released to him. (Rollo, p.
12)

The lower court, on the other hand, expressly made a finding that petitioner
failed to include the aforesaid signing of the Joint Motion to Dismiss as part
of the agreement. In dismissing petitioners claim, the lower court declared,
thus:

If it is true, as the appellees allege, that the signing of the joint motion was
a condition sine qua non for the reduction of the appellants obligation, it is
only reasonable and logical to assume that the joint motion should have
been shown to Dr. Gueco in the August 28, 1995 meeting. Why Dr. Gueco
was not given a copy of the joint motion that day of August 28, 1995, for his
family or legal counsel to see to be brought signed, together with the

Page 277 of 344

P150,000.00 in managers check form to be submitted on the following day
on August 29, 1995? (sic) [I]s a question whereby the answer up to now
eludes this Courts comprehension. The appellees would like this Court to
believe that Dr. Gueco was informed by Mr. Rivera of the bank requirement
of signing the joint motion on August 28, 1995 but he did not bother to
show a copy thereof to his family or legal counsel that day August 28,
1995. This part of the theory of appellee is too complicated for any simple
oral agreement. The idea of a Joint Motion to Dismiss being signed as a
condition to the pushing through a deal surfaced only on August 29, 1995.

This Court is not convinced by the appellees posturing. Such claim rests on
too slender a frame, being inconsistent with human
experience. Considering the effect of the signing of the Joint Motion to
Dismiss on the appellants substantive right, it is more in accord with human
experience to expect Dr. Gueco, upon being shown the Joint Motion to
Dismiss, to refuse to pay the Managers Check and for the bank to refuse to
accept the manager's check. The only logical explanation for this inaction is
that Dr. Gueco was not shown the Joint Motion to Dismiss in the meeting of
August 28, 1995, bolstering his claim that its signing was never put into
consideration in reaching a compromise. xxx.[9]

We see no reason to reverse.

Anent the issue of award of damages, we find the claim of petitioner
meritorious. In finding the petitioner liable for damages, both the Regional
Trial Court and the Court of Appeals ruled that there was fraud on the part
of the petitioner. The CA thus declared:
The lower court's finding of fraud which became the basis of the award
of damages was likewise sufficiently proven. Fraud under Article 1170 of
the Civil Code of the Philippines, as amended is the deliberate and
intentional evasion of the normal fulfillment of obligation When petitioner
refused to release the car despite respondent's tender of payment in the
form of a manager's check, the former intentionally evaded its obligation
and thereby became liable for moral and exemplary damages, as well as
attorneys fees.[10]
We disagree.
Fraud has been defined as the deliberate intention to cause damage or
prejudice. It is the voluntary execution of a wrongful act, or a willful
omission, knowing and intending the effects which naturally and
necessarily arise from such act or omission; the fraud referred to in Article
1170 of the Civil Code is the deliberate and intentional evasion of the
normal fulfillment of obligation.[11] We fail to see how the act of the
petitioner bank in requiring the respondent to sign the joint motion to
dismiss could constitute as fraud. True, petitioner may have been remiss in
informing Dr. Gueco that the signing of a joint motion to dismiss is a
standard operating procedure of petitioner bank. However, this can not in
anyway have prejudiced Dr. Gueco. The motion to dismiss was in fact also
for the benefit of Dr. Gueco, as the case filed by petitioner against it before

Page 278 of 344

the lower court would be dismissed with prejudice. The whole point of the
parties entering into the compromise agreement was in order that Dr.
Gueco would pay his outstanding account and in return petitioner would
return the car and drop the case for money and replevin before the
Metropolitan Trial Court. The joint motion to dismiss was but a natural
consequence of the compromise agreement and simply stated that Dr.
Gueco had fully settled his obligation, hence, the dismissal of the
case. Petitioner's act of requiring Dr. Gueco to sign the joint motion to
dismiss can not be said to be a deliberate attempt on the part of petitioner
to renege on the compromise agreement of the parties. It should, likewise,
be noted that in cases of breach of contract, moral damages may only be
awarded when the breach was attended by fraud or bad faith.[12] The law
presumes good faith. Dr. Gueco failed to present an iota of evidence to
overcome this presumption. In fact, the act of petitioner bank in lowering
the debt of Dr. Gueco from P184,000.00 to P150,000.00 is indicative of its
good faith and sincere desire to settle the case. If respondent did suffer any
damage, as a result of the withholding of his car by petitioner, he has only
himself to blame. Necessarily, the claim for exemplary damages must
fail. In no way, may the conduct of petitioner be characterized as wanton,
fraudulent, reckless, oppressive or malevolent.[13]
We, likewise, find for the petitioner with respect to the third assigned
error. In the meeting of August 29, 1995, respondent Dr. Gueco delivered a
managers check representing the reduced amount of P150,000.00. Said
check was given to Mr. Rivera, a representative of respondent
bank. However, since Dr. Gueco refused to sign the joint motion to dismiss,
he was made to execute a statement to the effect that he was withholding
the payment of the check.[14]Subsequently, in a letter addressed to Ms.
Desi Tomas, vice president of the bank, dated September 4, 1995, Dr.
Gueco instructed the bank to disregard the hold order letter and demanded
the immediate release of his car,[15] to which the former replied that the
condition of signing the joint motion to dismiss must be satisfied and that
they had kept the checkwhich could be claimed by Dr. Gueco
anytime.[16] While there is controversy as to whether the document
evidencing the order to hold payment of the check was formally offered as
evidence by petitioners,[17] it appears from the pleadings that said check
has not been encashed.
The decision of the Regional Trial Court, which was affirmed in toto by
the Court of Appeals, orders the petitioner:

1. to return immediately the subject car to the appellants in good working

condition. Appellee may deposit the Managers Check the proceeds of
which have long been under the control of the issuing bank in favor of the
appellee since its issuance, whereas the funds have long been paid by
appellants to secure said Managers Check over which appellants have no
control.[18]

Respondents would make us hold that petitioner should return the car
or its value and that the latter, because of its own negligence, should suffer

Page 279 of 344

the loss occasioned by the fact that the check had become stale. [19] It is
their position that delivery of the managers check produced the effect of
payment[20] and, thus, petitioner was negligent in opting not to deposit or
use said check. Rudimentary sense of justice and fair play would not
countenance respondents position.
A stale check is one which has not been presented for payment within a
reasonable time after its issue. It is valueless and, therefore, should not be
paid. Under the negotiable instruments law, an instrument not payable on
demand must be presented for payment on the day it falls due. When the
instrument is payable on demand, presentment must be made within a
reasonable time after its issue. In the case of a bill of exchange,
presentment is sufficient if made within a reasonable time after the last
negotiation thereof.[21]
A check must be presented for payment within a reasonable time after
its issue,[22] and in determining what is a reasonable time, regard is to be
had to the nature of the instrument, the usage of trade or business with
respect to such instruments, and the facts of the particular case. [23] The test
is whether the payee employed such diligence as a prudent man exercises
in his own affairs.[24] This is because the nature and theory behind the use
of a check points to its immediate use and payability. In a case, a check
payable on demand which was long overdue by about two and a half (2-
1/2) years was considered a stale check.[25] Failure of a payee to encash a
check for more than ten (10) years undoubtedly resulted in the check
becoming stale.[26] Thus, even a delay of one (1) week[27] or two (2)
days,[28] under the specific circumstances of the cited cases constituted
unreasonable time as a matter of law.
In the case at bar, however, the check involved is not an ordinary bill of
exchange but a managers check. A managers check is one drawn by the
banks manager upon the bank itself. It is similar to a cashiers check both
as to effect and use. A cashiers check is a check of the banks cashier on
his own or another check. In effect, it is a bill of exchange drawn by the
cashier of a bank upon the bank itself, and accepted in advance by the act
of its issuance.[29] It is really the banks own check and may be treated as a
promissory note with the bank as a maker.[30] The check becomes the
primary obligation of the bank which issues it and constitutes its written
promise to pay upon demand. The mere issuance of it is considered an
acceptance thereof. If treated as promissory note, the drawer would be the
maker and in which case the holder need not prove presentment for
payment or present the bill to the drawee for acceptance.[31]
Even assuming that presentment is needed, failure to present for
payment within a reasonable time will result to the discharge of the drawer
only to the extent of the loss caused by the delay.[32] Failure to present on
time, thus, does not totally wipe out all liability. In fact, the legal situation
amounts to an acknowledgment of liability in the sum stated in the check. In
this case, the Gueco spouses have not alleged, much less shown that they
or the bank which issued the managers check has suffered damage or loss

Page 280 of 344

caused by the delay or non-presentment. Definitely, the original obligation
to pay certainly has not been erased.
It has been held that, if the check had become stale, it becomes
imperative that the circumstances that caused its non-presentment be
determined.[33] In the case at bar, there is no doubt that the petitioner bank
held on the check and refused to encash the same because of the
controversy surrounding the signing of the joint motion to dismiss. We see
no bad faith or negligence in this position taken by the Bank.
WHEREFORE, premises considered, the petition for review is given
due course. The decision of the Court of Appeals affirming the decision of
the Regional Trial Court is SET ASIDE. Respondents are further ordered to
pay the original obligation amounting to P150,000.00 to the petitioner upon
surrender or cancellation of the managers check in the latters possession,
afterwhich, petitioner is to return the subject motor vehicle in good working
condition.
SO ORDERED.

[ GR No. L-41764, Dec 19, 1980 ]

NEW PACIFIC TIMBER v. ALBERTO V. SENERIS +
189 Phil. 516

CONCEPCION, JR., J.:

A petition for certiorari with preliminary injunction to annul and/or modify the
order of the Court of First Instance of Zamboanga City (Branch II) dated
August 28, 1975 denying petitioner's Ex-Parte Motion for Issuance Of
Certificate Of Satisfaction Of Judgment.

Herein petitioner is the defendant in a complaint for collection of a sum of

money filed by the private respondent.[1] On July 19, 1974, a compromise
judgment was rendered by the respondent Judge in accordance with an
amicable settlement entered into by the parties the terms and conditions of
which, are as follows:

That defendant will pay to the plaintiff the amount of Fifty Four
"(1) Thousand Five Hundred Pesos (P54,500.00) at 6% interest per annum
to be reckoned from August 25, 1972;
That defendant will pay to the plaintiff the amount of Six Thousand
Pesos (P6,000.00) as attorney's fees for which P5,000.00 had been
"(2) acknowledged received by the plaintiff under Consolidated Bank and
Trust Corporation Check No. 16-135022 amounting to P5,000.00
leaving a balance of One Thousand Pesos (P1,000.00);
That the entire amount of P54,500.00 plus interest, plus the balance of
"(3) P1,000.00 for attorney's fees will be paid by defendant to the plaintiff
within five months from today, July 19, 1974; and
"(4) Failure on the part of the defendant to comply with any of the above-

Page 281 of 344

 conditions, a writ of execution may be issued by this Court for the
satisfaction of the obligation."[2]

For failure of the petitioner to comply with his judgment obligation, the
respondent Judge, upon motion of the private respondent, issued an order
for the issuance of a writ of execution on December 21, 1974. Accordingly,
a writ of execution was issued for the amount of P63,130.00 pursuant to
which, the Ex-Officio Sheriff levied upon the following personal properties
of the petitioner, to wit:

(1) Unit American Lathe 24"

(1) Unit American Lathe 18" Cracker Wheeler
(1) Unit Rockford Shaper 24"
and set the auction sale thereof on January 15, 1975. However, prior to
January 15, 1975, petitioner deposited with the Clerk of Court, Court of
First Instance, Zamboanga City, in his capacity as Ex-Officio Sheriff of
Zamboanga City, the sum of P63,130.00 for the payment of the judgment
obligation, consisting of the following:

1. P50,000.00 in Cashier's Check No. S-314361 dated January 3, 1975

of the Equitable Banking Corporation; and
2. P13,130.00 in cash.[3]

In a letter dated January 14, 1975, to the Ex-Officio Sheriff,[4] private

respondent through counsel, refused to accept the check as well as the
cash deposit. In the same letter, private respondent requested the
scheduled auction sale on January 15, 1975 to proceed if the petitioner
cannot produce the cash. However, the scheduled auction sale at 10:00
a.m. on January 15, 1975 was postponed to 3:00 o'clock p.m. of the same
day due to further attempts to settle the case. Again, the scheduled
auction sale that afternoon did not push through because of a last ditch
attempt to convince the private respondent to accept the check. The
auction sale was then postponed on the following day, January 16, 1975 at
10:00 o'clock a.m.[5]At about 9:15 a.m., on January 16, 1975, a certain Mr.
Tañedo representing the petitioner appeared in the office of the Ex-Officio
Sheriff and the latter reminded Mr. Tañedo that the auction sale would
proceed at 10:00 o'clock. At 10:00 a.m., Mr. Tañedo and Mr. Librado, both
representing the petitioner requested the Ex-Officio Sheriff to give them
fifteen minutes within which to contact their lawyer which request was
granted. After Mr. Tañedo and Mr. Librado failed to return, counsel for
private respondent insisted that the sale must proceed and the Ex-Officio
Sheriff proceeded with the auction sale.[6] In the course of the proceedings,
Deputy Sheriff Castro sold the levied properties item by item to the private
respondent as the highest bidder in the amount of P50,000.00. As a result
thereof, the Ex-Officio Sheriff declared a deficiency of P13,130.00.[7]
Thereafter, on January 16, 1975, the Ex-Officio Sheriff issued a "Sheriff's
Certificate of Sale" in favor of the private respondent, Ricardo Tong,
married to Pascuala Tong for the total amount of P50,000.00 only.[8]

Page 282 of 344

Subsequently, on January 17, 1975, petitioner filed an ex-parte motion for
issuance of certificate of satisfaction of judgment. This motion was denied
by the respondent Judge in his order dated August 28, 1975. In view
thereof, petitioner now questions said order by way of the present petition
alleging in the main that said respondent Judge capriciously and
whimsically abused his discretion in not granting the motion for issuance of
certificate of satisfaction of judgment for the following reasons: (1) that
there was already a full satisfaction of the judgment before the auction sale
was conducted with the deposit made to the Ex-Officio Sheriff in the
amount of P63,000.00 consisting of P50,000.00 in Cashier's Check and
P13,130.00 in cash; and (2) that the auction sale was invalid for lack of
proper notice to the petitioner and its counsel when the Ex-Officio Sheriff
postponed the sale from June 15, 1975 to January 16, 1976 contrary to
Section 24, Rule 39 of the Rules of Court. On November 10, 1975, the
Court issued a temporary restraining order enjoining the respondent Ex-
Officio Sheriff from delivering the personal properties subject of the petition
to Ricardo A. Tong in view of the issuance of the "Sheriff Certificate of
Sale."

We find the petition to be impressed with merit.

The main issue to be resolved in this instance is as to whether or not the
private respondent can validly refuse acceptance of the payment of the
judgment obligation made by the petitioner consisting of P50,000.00 in
Cashier's Check and P13,130.00 in cash which it deposited with the Ex-
Officio Sheriff before the date of the scheduled auction sale. In upholding
private respondent's claim that he has the right to refuse payment by
means of a check, the respondent Judge cited the following:

Section 63 of the Central Bank Act:

"Sec. 63. Legal Character. - Checks representing deposit money do not

have legal tender power and their acceptance in payment of debts, both
public and private, is at the option of the creditor, Provided, however, that a
check which has been cleared and credited to the account of the creditor
shall be equivalent to a delivery to the creditor in cash in an amount equal
to the amount credited to his account."
Article 1249 of the New Civil Code:

"Art. 1249. - 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.

Page 283 of 344

"In the meantime, the action derived from the original obligation shall be
held in abeyance."
Likewise, the respondent Judge sustained the contention of the private
respondent that he has the right to refuse payment of the amount of
P13,130.00 in cash because the said amount is less than the judgment
obligation, citing the following Article of the New Civil Code:

"Art. 1248. Unless there is an express stipulation to that effect, the creditor
cannot be compelled partially to receive the presentations in which the
obligation consists. Neither may the debtor be required to make partial
payment.

"However, when the debt is in part liquidated and in part unliquidated, the
creditor may demand and the debtor may effect the payment of the former
without waiting for the liquidation of the latter."
It is to be emphasized in this connection that the check deposited by the
petitioner in the amount of P50,000.00 is not an ordinary check but a
Cashier's Check of the Equitable Banking Corporation, a bank of good
standing and reputation. As testified to by the Ex-Officio Sheriff with whom
it has been deposited, it is a certified crossed check.[9] It is a well-known
and accepted practice in the business sector that a Cashier's Check is
deemed as cash. Moreover, since the said check had been certified by the
drawee bank, by the certification, the funds represented by the check are
transferred from the credit of the maker to that of the payee or holder, and
for all intents and purposes, the latter becomes the depositor of the drawee
bank, with rights and duties of one in such situation.[10] Where a check is
certified by the bank on which it is drawn, the certification is equivalent to
acceptance.[11] Said certification "implies that the check is drawn upon
sufficient funds in the hands of the drawee, that they have been set apart
for its satisfaction, and that they shall be so applied whenever the check is
presented for payment. It is an understanding that the check is good then,
and shall continue good, and this agreement is as binding on the bank as
its notes in circulation, a certificate of deposit payable to the order of the
depositor, or any other obligation it can assume. The object of certifying a
check, as regards both parties, is to enable the holder to use it as
money."[12] When the holder procures the check to be certified, "the check
operates as an assignment of a part of the funds to the creditors". [13]
Hence, the exception to the rule enunciated under Section 63 of the Central
Bank Act to the effect "that a check which has been cleared and credited to
the account of the creditor shall be equivalent to a delivery to the creditor in
cash in an amount equal to the amount credited to his account" shall apply
in this case. Considering that the whole amount deposited by the petitioner
consisting of Cashier's Check of P50,000.00 and P13,130.00 in cash
covers the judgment obligation of P63,000.00 as mentioned in the writ of
execution, then, We see no valid reason for the private respondent to have
refused acceptance of the payment of the obligation in his favor. The
auction sale, therefore, was uncalled for. Furthermore, it appears that on

Page 284 of 344

January 17, 1975, the Cashier's Check was even withdrawn by the
petitioner and replaced with cash in the corresponding amount of
P50,000.00 on January 27, 1975 pursuant to an agreement entered into by
the parties at the instance of the respondent Judge. However, the private
respondent still refused to receive the same. Obviously, the private
respondent is more interested in the levied properties than in the mere
satisfaction of the judgment obligation. Thus, petitioner's motion for the
issuance of a certificate of satisfaction of judgment is clearly meritorious
and the respondent Judge gravely abused his discretion in not granting the
same under the circumstances.

In view of the conclusion reached in this instance, We find no more need to

discuss the other ground relied upon in the petition.

It is also contended by the private respondent that appeal and not a special
civil action for certiorari is the proper remedy in this case, and that since the
period to appeal from the decision of the respondent Judge has already
expired, then, the present petition has been filed out of time. The
contention is untenable. The decision of the respondent Judge in Civil
Case No. 250 (166) has long become final and executory and so, the
same is not being questioned herein. The subject of the petition at bar as
having been issued in grave abuse of discretion is the order dated August
28, 1975 of the respondent Judge which was merely issued in execution of
the said decision. Thus, even granting that appeal is open to the petitioner,
the same is not an adequate and speedy remedy for the respondent Judge
had already issued a writ of execution.[14]

WHEREFORE, in view of all the foregoing, judgment is hereby rendered:

1. Declaring as null and void the order of the respondent Judge dated
August 28, 1975;

2. Declaring as null and void the auction sale conducted on January 16,
1975 and the certificate of sale issued pursuant thereto;

3. Ordering the private respondent to accept the sum of P63,130.00

under deposit as payment of the judgment obligation in his favor;

4. Ordering the respondent Judge and respondent Ex-Officio Sheriff to

release the levied properties to the herein petitioner.

The temporary restraining order issued is hereby made permanent.

Costs against the private respondent.

SO ORDERED.

Page 285 of 344

 [ GR No. 101163, Jan 11, 1993 ]
STATE INVESTMENT HOUSE v. CA +

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

Page 286 of 344

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 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."
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,

Page 287 of 344

(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:

"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 accomodated, where the
instrument is made or accepted for his accomodation; (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.

Page 288 of 344

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.
Page 289 of 344
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 mortagaged 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
Page 290 of 344
prejudice to any action for recompense she may pursue against the
VICTORIANOs as Third-Party Defendants.

Costs against private respondent.

SO ORDERED.

[ GR No. 93048, Mar 03, 1994 ]

BATAAN CIGAR v. CA +

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
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 and 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

Page 291 of 344

postdated 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 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, and 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."
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 case) v. Intermediate
Appellate Court[7] wherein we made a discourse on the effects of crossing
of checks.

Page 292 of 344

As a 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 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
postdated crossed checks, issued by Anita Peña 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),
Page 293 of 344
considering that petitioner is not the proper party authorized to make
presentment of the checks in question.
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-consumation 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 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.

Page 294 of 344

 [ GR No. 105188, Jan 23, 1998 ]
MYRON C. PAPA v. A. U. VALENCIA +
348 Phil. 700

KAPUNAN, J.:
In this petition for review on certiorari under Rule 45 of the Rules of Court,
petitioner Myron C. Papa seeks to reverse and set aside 1) the Decision
dated 27 January 1992 of the Court of Appeals which affirmed with
modification the decision of the trial court; and, 2) the Resolution dated 22
April 1992 of the same court, which denied petitioner's motion for
reconsideration of the above decision.

The antecedent facts of this case are as follows:

Sometime in June 1982, herein private respondents A.U. Valencia and Co.,
Inc. (hereinafter referred to as respondent Valencia, for brevity) and Felix
Peñarroyo (hereinafter called respondent Peñarroyo), filed with the
Regional Trial Court of Pasig, Branch 151, a complaint for specific
performance against herein petitioner Myron C. Papa, in his capacity as
administrator of the Testate Estate of one Angela M. Butte.

The complaint alleged that on 15 June 1973, petitioner Myron C. Papa,

acting as attorney-in-fact of Angela M. Butte, sold to respondent Peñarroyo,
through respondent Valencia, a parcel of land, consisting of 286.60 square
meters, located at corner Retiro and Cadiz Streets, La Loma, Quezon City,
and covered by Transfer Certificate of Title No. 28993 of the Register of
Deeds of Quezon City; that prior to the alleged sale, the said property,
together with several other parcels of land likewise owned by Angela M.
Page 295 of 344
Butte, had been mortgaged by her to the Associated Banking Corporation
(now Associated Citizens Bank); that after the alleged sale, but before the
title to the subject property had been released, Angela M. Butte passed
away; that despite representations made by herein respondents to the bank
to release the title to the property sold to respondent Peñarroyo, the bank
refused to release it unless and until all the mortgaged properties of the late
Angela M. Butte were also redeemed; that in order to protect his rights and
interests over the property, respondent Peñarroyo caused the annotation
on the title of an adverse claim as evidenced by Entry No. P.E. - 6118/T-
28993, inscribed on 18 January 1977.

The complaint further alleged that it was only upon the release of the title to
the property, sometime in April 1977, that respondents Valencia and
Peñarroyo discovered that the mortgage rights of the bank had been
assigned to one Tomas L. Parpana (now deceased), as special
administrator of the Estate of Ramon Papa, Jr., on 12 April 1977; that since
then, herein petitioner had been collecting monthly rentals in the amount of
P800.00 from the tenants of the property, knowing that said property had
already been sold to private respondents on 15 June 1973; that despite
repeated demands from said respondents, petitioner refused and failed to
deliver the title to the property. Thereupon, respondents Valencia and
Peñarroyo filed a complaint for specific performance, praying that petitioner
be ordered to deliver to respondent Peñarroyo the title to the subject
property (TCT 28993); to turn over to the latter the sum of P72,000.00 as
accrued rentals as of April 1982, and the monthly rental of P800.00 until the
property is delivered to respondent Peñarroyo; to pay respondents the sum
of P20,000.00 as attorney's fees; and to pay the costs of the suit.

In his Answer, petitioner admitted that the lot had been mortgaged to the
Associated Banking Corporation (now Associated Citizens Bank). He
contended, however, that the complaint did not state a cause of action; that
the real property in interest was the Testate Estate of Angela M. Butte,
which should have been joined as a party defendant; that the case
amounted to a claim against the Estate of Angela M. Butte and should have
been filed in Special Proceedings No. A-17910 before the Probate Court in
Quezon City; and that, if as alleged in the complaint, the property had been
assigned to Tomas L. Parpana, as special administrator of the Estate of
Ramon Papa, Jr., said estate should be impleaded. Petitioner, likewise,
claimed that he could not recall in detail the transaction which allegedly
occurred in 1973; that he did not have TCT No. 28993 in his possession;
that he could not be held personally liable as he signed the deed merely as
attorney-in-fact of said Angela M. Butte. Finally, petitioner asseverated that
as a result of the filing of the case, he was compelled to hire the services of
counsel for a fee of P20,000.00, for which respondents should be held
liable.

Upon his motion, herein private respondent Delfin Jao was allowed to
intervene in the case. Making common cause with respondents Valencia
and Peñarroyo, respondent Jao alleged that the subject lot which had been
Page 296 of 344
sold to respondent Peñarroyo through respondent Valencia was in turn sold
to him on 20 August 1973 for the sum of P71,500.00, upon his paying
earnest money in the amount of P5,000.00. He, therefore, prayed that
judgment be rendered in favor of respondents Valencia and Peñarroyo;
and, that after the delivery of the title to said respondents, the latter in turn
be ordered to execute in his favor the appropriate deed of conveyance
covering the property in question and to turn over to him the rentals which
aforesaid respondents sought to collect from petitioner Myron C. Papa.

Respondent Jao, likewise, averred that as a result of petitioner's refusal to

deliver the title to the property to respondents Valencia and Peñarroyo, who
in turn failed to deliver the said title to him, he suffered mental anguish and
serious anxiety for which he sought payment of moral damages; and,
additionally, the payment of attorney's fees and costs.

For his part, petitioner, as administrator of the Testate Estate of Angela M.

Butte, filed a third-party complaint against herein private respondents,
spouses Arsenio B. Reyes and Amanda Santos (respondent Reyes
spouses, for short). He averred, among others, that the late Angela M.
Butte was the owner of the subject property; that due to non-payment of
real estate tax said property was sold at public auction by the City
Treasurer of Quezon City to the respondent Reyes spouses on 21 January
1980 for the sum of P14,000.00; that the one-year period of redemption
had expired; that respondents Valencia and Peñarroyo had sued petitioner
Papa as administrator of the estate of Angela M. Butte, for the delivery of
the title to the property; that the same aforenamed respondents had
acknowledged that the price paid by them was insufficient, and that they
were willing to add a reasonable amount or a minimum of P55,000.00 to
the price upon delivery of the property, considering that the same was
estimated to be worth P143,000.00; that petitioner was willing to reimburse
respondent Reyes spouses whatever amount they might have paid for
taxes and other charges, since the subject property was still registered in
the name of the late Angela M. Butte; that it was inequitable to allow
respondent Reyes spouses to acquire property estimated to be worth
P143,000.00, for a measly sum of P14,000.00. Petitioner prayed that
judgment be rendered cancelling the tax sale to respondent Reyes
spouses; restoring the subject property to him upon payment by him to said
respondent Reyes spouses of the amount of P14,000.00, plus legal
interest; and, ordering respondents Valencia and Peñarroyo to pay him at
least P55,000.00 plus everything they might have to pay the Reyes
spouses in recovering the property.

Respondent Reyes spouses in their Answer raised the defense of

prescription of petitioner's right to redeem the property.

At the trial, only respondent Peñarroyo testified. All the other parties only
submitted documentary proof.

On 29 June 1987, the trial court rendered a decision, the dispositive portion
Page 297 of 344
of which reads:

WHEREUPON, judgment is hereby rendered as follows:

1) Allowing defendant to redeem from third-party defendants and ordering
the latter to allow the former to redeem the property in question, by paying
the sum of P14,000.00 plus legal interest of 12% thereon from January 21,
1980;
2) Ordering defendant to execute a Deed of Absolute Sale in favor of
plaintiff Felix Peñarroyo covering the property in question and to deliver
peaceful possession and enjoyment of the said property to the said plaintiff,
free from any liens and encumbrances;

Should this not be possible, for any reason not attributable to defendant,
said defendant is ordered to pay to plaintiff Felix Peñarroyo the sum of
P45,000.00 plus legal interest of 12% from June 15, 1973;
3) Ordering plaintiff Felix Peñarroyo to execute and deliver to intervenor a
deed of absolute sale over the same property, upon the latter's payment to
the former of the balance of the purchase price of P71,500.00;

Should this not be possible, plaintiff Felix Peñarroyo is ordered to pay

intervenor the sum of P5,000.00 plus legal interest of 12% from August 23,
1973; and
4) Ordering defendant to pay plaintiffs the amount of P5,000.00 for and as
attorney's fees and litigation expenses.

SO ORDERED.[1]
Petitioner appealed the aforesaid decision of the trial court to the Court of
Appeals, alleging among others that the sale was never "consummated" as
he did not encash the check (in the amount of P40,000.00) given by
respondents Valencia and Peñarroyo in payment of the full purchase price
of the subject lot. He maintained that what said respondents had actually
paid was only the amount of P5,000.00 (in cash) as earnest money.

Respondent Reyes spouses, likewise, appealed the above decision.

However, their appeal was dismissed because of failure to file their
appellants' brief.

On 27 January 1992, the Court of Appeals rendered a decision, affirming

with modification the trial court's decision, thus:

WHEREFORE, the second paragraph of the dispositive portion of the

appealed decision is MODIFIED, by ordering the defendant-appellant to
deliver to plaintiff-appellees the owner's duplicate of TCT No. 28993 of
Angela M. Butte and the peaceful possession and enjoyment of the lot in
question or, if the owner's duplicate certificate cannot be produced, to
authorize the Register of Deeds to cancel it and issue a certificate of title in
the name of Felix Peñarroyo. In all other respects, the decision appealed
from is AFFIRMED. Costs against defendant-appellant Myron C. Papa.

Page 298 of 344

SO ORDERED.[2]
In affirming the trial court's decision, respondent court held that contrary to
petitioner's claim that he did not encash the aforesaid check, and therefore,
the sale was not consummated, there was no evidence at all that petitioner
did not, in fact, encash said check. On the other hand, respondent
Peñarroyo testified in court that petitioner Papa had received the amount of
P45,000.00 and issued receipts therefor. According to respondent court,
the presumption is that the check was encashed, especially since the
payment by check was not denied by defendant-appellant (herein
petitioner) who, in his Answer, merely alleged that he "can no longer recall
the transaction which is supposed to have happened 10 years ago."[3]

On petitioner's claim that he cannot be held personally liable as he had

acted merely as attorney-in-fact of the owner, Angela M. Butte, respondent
court held that such contention is without merit. This action was not brought
against him in his personal capacity, but in his capacity as the administrator
of the Testate Estate of Angela M. Butte.[4]

On petitioner's contention that the estate of Angela M. Butte should have

been joined in the action as the real party in interest, respondent court held
that pursuant to Rule 3, Section 3 of the Rules of Court, the estate of
Angela M. Butte does not have to be joined in the action. Likewise, the
estate of Ramon Papa, Jr., is not an indispensable party under Rule 3,
Section 7 of the same Rules. For the fact is that Ramon Papa, Jr., or his
estate, was not a party to the Deed of Absolute Sale, and it is basic law that
contracts bind only those who are parties thereto.[5]

Respondent court observed that the conditions under which the mortgage
rights of the bank were assigned are not clear. In any case, any obligation
which the estate of Angela M. Butte might have to the estate of Ramon
Papa, Jr. is strictly between them. Respondents Valencia and Peñarroyo
are not bound by any such obligation.

Petitioner filed a motion for reconsideration of the above decision, which

motion was denied by respondent Court of Appeals.

Hence, this petition wherein petitioner raises the following issues:

I. THE CONCLUSION OR FINDING OF THE COURT OF APPEALS THAT

THE SALE IN QUESTION WAS CONSUMMATED IS GROUNDED ON
SPECULATION OR CONJECTURE, AND IS CONTRARY TO THE
APPLICABLE LEGAL PRINCIPLE.
II. THE COURT OF APPEALS, IN MODIFYING THE DECISION OF THE
TRIAL COURT, ERRED BECAUSE IT, IN EFFECT, CANCELLED OR
NULLIFIED AN ASSIGNMENT OF THE SUBJECT PROPERTY IN FAVOR
OF THE ESTATE OF RAMON PAPA, JR. WHICH IS NOT A PARTY IN
THIS CASE.

Page 299 of 344

III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
ESTATE OF ANGELA M. BUTTE AND THE ESTATE OF RAMON PAPA,
JR. ARE INDISPENSABLE PARTIES IN THIS CASE.[6]
Petitioner argues that respondent Court of Appeals erred in concluding that
the alleged sale of the subject property had been consummated. He
contends that such a conclusion is based on the erroneous presumption
that the check (in the amount of P40,000.00) had been cashed, citing Art.
1249 of the Civil Code, which provides, in part, that payment by checks
shall produce the effect of payment only when they have been cashed or
when through the fault of the creditor they have been impaired.[7] Petitioner
insists that he never cashed said check; and, such being the case, its
delivery never produced the effect of payment. Petitioner, while admitting
that he had issued receipts for the payments, asserts that said receipts,
particularly the receipt of PCIB Check No. 761025 in the amount of
P40,000.00, do not prove payment. He avers that there must be a showing
that said check had been encashed. If, according to petitioner, the check
had been encashed, respondent Peñarroyo should have presented PCIB
Check No. 761025 duly stamped received by the payee, or at least its
microfilm copy.

Petitioner finally avers that, in fact, the consideration for the sale was still in
the hands of respondents Valencia and Peñarroyo, as evidenced by a letter
addressed to him in which said respondents wrote, in part:
x x x. Please be informed that I had been authorized by Dr. Ramon Papa,
Jr., heir of Mrs. Angela M. Butte to pay you the aforementioned amount of
P75,000.00 for the release and cancellation of subject property's mortgage.
The money is with me and if it is alright with you, I would like to tender the
payment as soon as possible. x x x.[8]
We find no merit in petitioner's arguments.

It is an undisputed fact that respondents Valencia and Peñarroyo had given

petitioner Myron C. Papa the amounts of Five Thousand Pesos (P5,000.00)
in cash on 24 May 1973, and Forty Thousand Pesos (P40,000.00) in check
on 15 June 1973, in payment of the purchase price of the subject lot.
Petitioner himself admits having received said amounts,[9] and having
issued receipts therefor.[10] Petitioner's assertion that he never encashed
the aforesaid check is not subtantiated and is at odds with his statement in
his answer that "he can no longer recall the transaction which is supposed
to have happened 10 years ago." After more than ten (10) years from the
payment in part by cash and in part by check, the presumption is that the
check had been encashed. As already stated, he even waived the
presentation of oral evidence.

Granting that petitioner had never encashed the check, his failure to do so
for more than ten (10) years undoubtedly resulted in the impairment of the
check through his unreasonable and unexplained delay.

Page 300 of 344

While it is true that the delivery of a check produces the effect of payment
only when it is cashed, pursuant to Art. 1249 of the Civil Code, the rule is
otherwise if the debtor is prejudiced by the creditor's unreasonable delay in
presentment. The acceptance of a check implies an undertaking of due
diligence in presenting it for payment, and if he from whom it is received
sustains loss by want of such diligence, it will be held to operate as actual
payment of the debt or obligation for which it was given.[11] It has, likewise,
been held that if no presentment is made at all, the drawer cannot be held
liable irrespective of loss or injury[12] unless presentment is otherwise
excused. This is in harmony with Article 1249 of the Civil Code under which
payment by way of check or other negotiable instrument is conditioned on
its being cashed, except when through the fault of the creditor, the
instrument is impaired. The payee of a check would be a creditor under this
provision and if its non-payment is caused by his negligence, payment will
be deemed effected and the obligation for which the check was given as
conditional payment will be discharged.[13]

Considering that respondents Valencia and Peñarroyo had fulfilled their

part of the contract of sale by delivering the payment of the purchase price,
said respondents, therefore, had the right to compel petitioner to deliver to
them the owner's duplicate of TCT No. 28993 of Angela M. Butte and the
peaceful possession and enjoyment of the lot in question.

With regard to the alleged assignment of mortgage rights, respondent

Court of Appeals has found that the conditions under which said mortgage
rights of the bank were assigned are not clear. Indeed, a perusal of the
original records of the case would show that there is nothing there that
could shed light on the transactions leading to the said assignment of
rights; nor is there any evidence on record of the conditions under which
said mortgage rights were assigned. What is certain is that despite the said
assignment of mortgage rights, the title to the subject property has
remained in the name of the late Angela M. Butte.[14] This much is admitted
by petitioner himself in his answer to respondents' complaint as well as in
the third-party complaint that petitioner filed against respondent-spouses
Arsenio B. Reyes and Amanda Santos.[15] Assuming arquendo that the
mortgage rights of the Associated Citizens Bank had been assigned to the
estate of Ramon Papa, Jr., and granting that the assigned mortgage rights
validly exist and constitute a lien on the property, the estate may file the
appropriate action to enforce such lien. The cause of action for specific
performance which respondents Valencia and Peñarroyo have against
petitioner is different from the cause of action which the estate of Ramon
Papa, Jr. may have to enforce whatever rights or liens it has on the
property by reason of its being an alleged assignee of the bank's rights of
mortgage.

Finally, the estate of Angela M. Butte is not an indispensable party. Under

Section 3 of Rule 3 of the Rules of Court, an executor or administrator may
sue or be sued without joining the party for whose benefit the action is

Page 301 of 344

presented or defended, thus:

Sec. 3. Representative parties. - A trustee of an express trust, a guardian,

executor or administrator, or a party authorized by statute, may sue or be
sued without joining the party for whose benefit the action is presented or
defended; but the court may, at any stage of the proceedings, order such
beneficiary to be made a party. An agent acting in his own name and for
the benefit of an undisclosed principal may sue or be sued without joining
the principal except when the contract involves things belonging to the
principal.[16]
Neither is the estate of Ramon Papa, Jr. an indispensable party without
whom, no final determination of the action can be had. Whatever prior and
subsisting mortgage rights the estate of Ramon Papa, Jr. has over the
property may still be enforced regardless of the change in ownership
thereof.

WHEREFORE, the petition for review is hereby DENIED and the Decision
of the Court of Appeals, dated 27 January 1992 is AFFIRMED.
SO ORDERED.
[ G.R. NO. 156294, November 29, 2006 ]
MELVA THERESA ALVIAR GONZALES, PETITIONER, VS. RIZAL
COMMERCIAL BANKING CORPORATION, RESPONDENT.

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 attorney's 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 check's value
without awaiting the clearing period, Gonzales presented the foreign check
to Olivia Gomez, the RCBC's Head of Retail Banking. After examining this,

Page 302 of 344

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 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 latter's 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
attorney's 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,[2] held two of the three
defendants liable as follows:

Page 303 of 344

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.
3. To pay the amount of P40,000.00 as and for attorney's fees; and to
4.
5. Pay the costs of this suit.

SO ORDERED.
On appeal, the CA, except for the award of attorney's fees, affirmed the
RTC judgment.

Hence, this recourse by the petitioner on her submission that the CA erred
6

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 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
Page 304 of 344
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 Alviar's and the petitioner's 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

Page 305 of 344

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.
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 petitioner's counterclaim against RCBC for the amount of

P12,822.20 which it admittedly deducted from petitioner's salary, the Court
must order the return thereof to the petitioner, with legal interest of 12% per
annum, notwithstanding the petitioner's 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
rank-and-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 petitioner's apparent
acquiescence to the salary deduction as being an entirely free and

Page 306 of 344

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 attorney's 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. Petitioner's 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 attorney's fees.

Costs against the respondent.

SO ORDERED.

[ G.R. NO. 148211, July 25, 2006 ]

SINCERE Z. VILLANUEVA, PETITIONER, VS. MARLYN P. NITE,*
RESPONDENT.

CORONA, J.:
In this petition for review on certiorari under Rule 45, petitioner submits that
the Court of Appeals (CA) erred in annulling and setting aside the Regional
Trial Court (RTC) decision on the ground of extrinsic fraud.

The facts follow.[1]

Respondent allegedly took out a loan of P409,000 from petitioner. To

secure the loan, respondent issued petitioner an Asian Bank Corporation
(ABC) check (Check No. AYA 020195) in the amount of P325,500 dated
February 8, 1994. The date was later changed to June 8, 1994 with the
consent and concurrence of petitioner.

The check was, however, dishonored due to a material alteration when

petitioner deposited the check on due date. On August 24, 1994,
respondent, through her representative Emily P. Abojada, remitted
P235,000 to petitioner as partial payment of the loan. The balance of P174,
000 was due on or before December 8, 1994.

On August 24, 1994, however, petitioner filed an action for a sum of money
and damages (Civil Case No. Q-94-21495) against ABC for the full amount
of the dishonored check. And in a decision dated May 23, 1997, the RTC of
Quezon City, Branch 101 ruled in his favor.[2] When respondent went to
Page 307 of 344
ABC Salcedo Village Branch on June 30, 1997 to withdraw money from her
account, she was unable to do so because the trial court had ordered ABC
to pay petitioner the value of respondent's ABC check.

On August 25, 1997, ABC remitted to the sheriff a manager's check

amounting to P325,500 drawn on respondent's account. The check was
duly received by petitioner on the same date.

Respondent then filed a petition in the CA seeking to annul and set aside
the trial court's decision ordering ABC to pay petitioner the value of the
ABC check.[3] The CA ruled:

WHEREFORE, premises considered, the petition is GRANTED and the

Decision dated May 23, 1997 of the public respondent is hereby
ANNULLED and SET ASIDE for extrinsic fraud.

[Petitioner] Villanueva is hereby ordered to pay [Nite] -

1) the sum of [P146,500] as actual damages plus interest at 12% per

annum from August 25, 1997 until full payment;
2) the sum of [P75,000] as moral damages;
3) the sum of [P50,000] as exemplary damages; and
4) the sum of [P50,000] as attorney's fees and cost of suit.

SO ORDERED.[4]
Thus, this petition. We find for respondent.

Annulment of judgment is a remedy in law independent of the case where

the judgment sought to be annulled is promulgated. It can be filed by one
who was not a party to the case in which the assailed judgment was
rendered. Section 1 of Rule 47 provides:

Section 1. Coverage. - This Rule shall govern the annulment by the Court
of Appeals of judgments or final orders and resolutions in civil actions of
Regional Trial Courts for which the ordinary remedies of new trial, appeal,
petition for relief or other appropriate remedies are no longer available
through no fault of the petitioner.
Respondent may avail of the remedy of annulment of judgment under Rule
47. The ordinary remedies of new trial, appeal and petition for relief were
not available to her for the simple reason that she was not made a party to
the suit against ABC. Thus, she was neither able to participate in the
original proceedings nor resort to the other remedies because the case was
filed when she was abroad.

Annulment of judgment may be based only on extrinsic fraud and lack of

jurisdiction.[5] Extrinsic or collateral fraud pertains to such fraud which
prevents the aggrieved party from having a trial or presenting his case to

Page 308 of 344

the court, or is used to procure the judgment without fair submission of the
controversy.[6] This refers to acts intended to keep the unsuccessful party
away from the courts as when there is a false promise of compromise or
when one is kept in ignorance of the suit.[7]

We uphold the appellate court's finding of extrinsic fraud:

Barely 6 days after receipt of the partial payment of P235,000.00 and

agreeing that the balance of P174,000.00 shall be paid on or before
December 8, 1994, [Sincere] filed his complaint against [ABC] for the full
amount of the dishonored check in the sum of P320,500.00 without
impleading petitioner. The apparent haste by which [Sincere] filed his
complaint and his failure to implead [Marlyn] clearly shows his intent to
prevent [Marlyn] from opposing his action.

[A]t the time news about [Marlyn] having left the country was widespread,
appearing even in print media as early as May 1994, [Marlyn] paid
[Sincere] the amount of P235,000.00 as partial payment on [August 18,
1994], through a representative.

Notwithstanding the foregoing, SIX (6) days later or on [August 24, 1994,
Sincere] instituted an action for collection with damages for the whole
amount of the issued check.

[Sincere] does not deny knowledge of such payment neither of the fact that
he concurred in settling the balance of P174,000.00 on December 8, 1994.

[His] actuation and pronouncement shows not only bad faith on his part but
also of his fraudulent intention to completely exclude [Marlyn] from the
proceedings in the court a quo. By doing what he did he prevented the [trial
court] from fully appreciating the particulars of the case.[8]
In any event, the RTC decision may be annulled for lack of jurisdiction over
the person of respondent. The pertinent provisions of the Negotiable
Instruments Law are enlightening:

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.[9] (emphasis ours)

SEC. 189. When check operates as an assignment. - A check of itself does

not operate as an assignment of any part of the funds to the credit of the
drawer with the bank, and the bank is not liable to the holder, unless and
until it accepts or certifies the check. (emphasis ours)
If a bank refuses to pay a check (notwithstanding the sufficiency of funds),
the payee-holder cannot, in view of the cited sections, sue the bank. The
payee should instead sue the drawer who might in turn sue the bank.

Page 309 of 344

Section 189 is sound law based on logic and established legal principles:
no privity of contract exists between the drawee-bank and the payee.
Indeed, in this case, there was no such privity of contract between ABC
and petitioner.

Petitioner should not have sued ABC. Contracts take effect only between
the parties, their assigns and heirs, except in cases where the rights and
obligations arising from the contract are not transmissible by their nature, or
by stipulation or by provision of law.[10] None of the foregoing exceptions to
the relativity of contracts applies in this case.

The contract of loan was between petitioner and respondent. No collection

suit could prosper without respondent who was an indispensable party.
Rule 3, Sec. 7 of the Rules of Court states:

Sec. 7. Compulsory joinder of indispensable parties. - Parties in interest

without whom no final determination can be had of an action shall be joined
either as plaintiffs or defendants. (emphasis ours)
An indispensable party is one whose interest in the controversy is such that
a final decree will necessarily affect his rights. The court cannot proceed
without his presence.[11] If an indispensable party is not impleaded, any
judgment is ineffective.[12] On this, Aracelona v. Court of Appeals[13]
declared:

Rule 3, Section 7 of the Rules of Court defines indispensable parties as

parties-in-interest without whom there can be no final determination of an
action. As such, they must be joined either as plaintiffs or as defendants.
The general rule with reference to the making of parties in a civil action
requires, of course, the joinder of all necessary parties where possible, and
the joinder of all indispensable parties under any and all conditions, their
presence being sine qua non for the exercise of judicial power. It is
precisely "when an indispensable party is not before the court (that) the
action should be dismissed." The absence of an indispensable party
renders all subsequent actions of the court null and void for want of
authority to act, not only as to the absent parties but even as to those
present.
WHEREFORE, the petition is hereby DENIED. The decision of the Court of
Appeals in CA-G.R. SP No. 44971 is AFFIRMED in toto.

Costs against petitioner.

SO ORDERED.

Page 310 of 344

 [ GR NO. 156207, Sep 15, 2006 ]
EQUITABLE PCI BANK v. ROWENA ONG +
533 Phil. 415

CHICO-NAZARIO, J.:
On 29 November 1991, Warliza Sarande deposited in her account at
Philippine Commercial International (PCI) Bank Magsaysay Avenue, Santa
Ana District, Davao City Branch, under Account No. 8502-00347-6, a PCI
Bank General Santos City Branch, TCBT[1] Check No. 0249188 in the
amount of P225,000.00. Upon inquiry by Serande at PCI Bank on 5
December 1991 on whether TCBT Check No. 0249188 had been cleared,
she received an affirmative answer. Relying on this assurance, she issued
two checks drawn against the proceeds of TCBT Check No. 0249188. One
of these was PCI Bank Check No. 073661 dated 5 December 1991 for
P132,000.00 which Sarande issued to respondent Rowena Ong Owing to a
business transaction. On the same day, Ong presented to PCI Bank
Magsaysay Avenue Branch said Check No. 073661, and instead of
encashing it, requested PCI Bank to convert the proceeds thereof into a
manager's check, which the PCI Bank obliged. Whereupon, Ong was
issued PCI Bank Manager's Check No. 10983 dated 5 December 1991 for
the sum of P132,000.00, the value of Check No. 073661.

The next day, 6 December 1991, Ong deposited PCI Bank Manager's
Check No. 10983 in her account with Equitable Banking Corporation Davao
City Branch. On 9 December 1991, she received a check return-slip
informing her that PCI Bank had stopped the payment of the said check on

Page 311 of 344

the ground of irregular issuance. Despite several demands made by her to
PCI Bank for the payment of the amount in PCI Bank Manager's Check No.
10983, the same was met with refusal; thus, Ong was constrained to file a
Complaint for sum of money, damages and attorney's fees against PCI
Bank.[2]

From PCI Bank's version, TCBT-General Santos City Check No. 0249188
was returned on 5 December 1991 at 5:00 pm on the ground that the
account against which it was drawn was already closed. According to PCI
Bank, it immediately gave notice to Sarande and Ong about the return of
Check No. 0249188 and requested Ong to return PCI Bank Manager's
Check No. 10983 inasmuch as the return of Check No. 0249188 on the
ground that the account from which it was drawn had already been closed
resulted in a failure or want of consideration for the issuance of PCI Bank
Manager's Check No. 10983.[3]

After the pre-trial conference, Ong filed a motion for summary judgment.[4]
Though they were duly furnished with a copy of the motion for summary
judgment, PCI Bank and its counsel failed to appear at the scheduled
hearing.[5] Neither did they file any written comment or opposition thereto.
The trial court thereafter ordered Ong to formally offer her exhibits in
writing, furnishing copies of the same to PCI Bank which was directed to
file its comment or objection.[6]

Ong complied with the Order of the trial court, but PCI Bank failed to file
any comment or objection within the period given to it despite receipt of the
same order.[7] The trial court then granted the motion for summary
judgment and in its Order dated 2 March 1995, it held:

IN THE LIGHT OF THE FOREGOING, the motion for summary judgment is

GRANTED, ordering defendant Philippine Commercial International Bank
to pay the plaintiff the amount of ONE HUNDRED THIRTY-TWO
THOUSAND PESOS (P132,000.00) equivalent to the amount of PCIB
Manager's Check No. 10983.

Set the reception of the plaintiff's evidence with respect to the damages
claimed in the complaint.[8]
PCI Bank filed a Motion for Reconsideration which the trial court denied in
its Order dated 11 April 1996.[9] After the reception of Ong's evidence in
support of her claim for damages, the trial court rendered its Decision[10]
dated 3 May 1999 wherein it ruled:

IN LIGHT OF THE FOREGOIN CONSIDERATION, and as plaintiff has

preponderantly established by competent evidence her claims in the
Complaint, judgment in hereby rendered for the plaintiff against the
defendant-bank ordering the latter:

Page 312 of 344

 1. To pay the plaintiff the sum of FIFTY THOUSAND PESOS
(P50,000.00) in the concept of moral damages;
2. To pay the plaintiff the sum of TWENTY THOUSAND PESOS
(P20,000.00) as exemplary damages;
3. To pay the plaintiff the sum of THREE THOUSAND FIVE HUNDRED
PESOS (P3,500.00) representing actual expenses;
4. To pay the plaintiff the sum of TWENTY THOUSAND PESOS
(P20,000.00) as and for attorney's fee's; and
5. To pay the costs.[11]

From this decision, PCI Bank sought recourse before the Court of Appeals.
In a Decision[12] dated 29 October 2002, the appellate court denied the
appeal of PCI Bank and affirmed the orders and decision of the trial court.

Unperturbed, PCI Bank then filed the present petition for review before this
Court and raised the following issues:

1. WHETHER OR NOT THE COURT OF APPEALS COMMITTED A

GRAVE AND REVERSIBLE ERROR WHEN IT SUSTAINED THE
LOWER COURT'S ORDER DATED 2 MARCH 1999 GRANTING
RESPONDENT'S MOTION FOR SUMMARY JUDGMENT
NOTWITHSTANDING THE GLARING FACT THAT THERE ARE
GENUINE, MATERIAL AND FACTUAL ISSUES WHICH REQUIRE
THE PRESENTATION OF EVIDENCE.

2. WHETHER OR NOT THE COURT OF APPEALS WAS IN ERROR

WHEN IT SUSTAINED THE LOWER COURT'S DECISION DATED 3
MAY 1999 GRANTING THE RELIEFS PRAYED FOR IN
RESPONDENT ONG'S COMPLAINT INSPITE OF THE FACT THAT
RESPONDENT ONG WOULD BE "UNJUSTLY ENRICHED" AT THE
EXPENSE OF PETITIONER BANK, IF PETITIONER BANK WOULD
BE REQUIRED TO PAY AN UNFUNDED CHECK.

3. WHETHER OR NOT THE COURT OF APPEALS COMMITTED

REVERSIBLE ERRORS WHEN IT AFFIRMED THE COURT A
QUO'S DECISIION DATED 3 MAY 1999 AWARDING DAMAGES TO
RESPONDENT ONG AND HOLDING THAT RESPONDENT ONG
HAD PREPONDERANTLY ESTABLISHED BY COMPETENT
EVIDENCE HER CLAIMS IN THE COMPLAINT INSPITE OF THE
FACT THAT THE EVIDENCE ON RECORD DOES NOT JUSTIFY
THE AWARD OF DAMAGES.

4. WHETHER OR NOT THE COURT OF APPEALS COMMITTED A

REVERSIBLE ERROR WHEN IT AFFIRMED THE LOWER
COURT'S FACTUAL FINDING IN ITS DECISION DATED 3 MAY
1999 HOLDING RESPONDENT ONG A "HOLDER IN DUE
COURSE" INSPITE OF THE FACT THAT THE REQUISITE OF
"GOOD FAITH" AND FOR VALUE IS LACKING AND DESPITE THE

Page 313 of 344

 ABSENCE OF A PROPER TRIAL TO DETERMINE SUCH FACTUAL
ISSUE.

5. WHETHER OR NOT THE COURT OF APPEALS COMMITTED A

REVERSIBLE ERROR WHEN IT UPHELD THE LOWER COURT'S
DECISION DATED 3 MAY 1999 DENYING PETITIONER EPCI
BANK'S COUNTERCLAIM INSPITE OF THE FACT THAT IT WAS
SHOWN THAT RESPONDENT ONG'S COMPLAINT LACKS
MERIT.[13]

We affirm the Decision of the trial court and the Court of Appeals.

The provision on summary judgment is found in Section 1, Rule 35 of the

1997 Rules of Court:

SECTION 1. Summary judgment for claimant. - A party seeking to recover

upon a claim, counterclaim, or cross-claim or to obtain a declaratory relief
may, at any time after the pleading in answer thereto has been served,
move with supporting affidavits, depositions or admissions for a summary
judgment in his favor upon all or any part thereof.
Thus, it has been held that a summary judgment is proper where, upon a
motion filed after the issues had been joined and on the basis of the
pleadings and papers filed, the court finds that there is no genuine issue as
to any material fact to except as to the amount of damages. A genuine
issue has been defined as an issue of fact which calls for the presentation
of evidence, as distinguished from an issue which is sham, fictitious,
contrived and patently unsubstantial so as not to constitute a genuine issue
for trial.[14]

A court may grant summary judgment to settle expeditiously a case if, on

motion of either party, there appears from the pleadings, depositions,
admissions, and affidavits that no important issues of fact are involved,
except the amount of damages.[15] Rule 35, Section 3, of the Rules of Court
provides two requisites for summary judgment to be proper: (1) there must
be no genuine issue as to any material fact, except for the amount of
damages; and (2) the party presenting the motion for summary judgment
must be entitled to a judgment as a matter of law.[16]

Certainly, when the facts as pleaded appear uncontested or undisputed,

then there's no real or genuine issue or question as to the facts, and
summary judgment is called for.[17]

By admitting it committed an error, clearing the check of Sarande and

issuing in favor of Ong not just any check but a manager's check for that
matter, PCI Bank's liability is fixed. Under the circumstances, we find that
summary judgment was proper and a hearing would serve no purpose.
That summary judgment is appropriate was incisively expounded by the

Page 314 of 344

trial court when it made the following observation:

[D]efendant-bank had certified plaintiff's PCIB Check No. 073661 and since
certification is equivalent to acceptance, defendant-bank as drawee bank is
bound on the instrument upon certification and it is immaterial to such
liability in favor of the plaintiff who is a holder in due course whether the
drawer (Warliza Sarande) had funds or not with the defendant-bank
(Security vs. State Bank, 154 N.W. 282) or the drawer was indebted to the
bank for more than the amount of the check (Nat. Bank vs. Schmelz, Nat.
Bank, 116 S.E. 880) as the certifying bank as all the liabilities under Sec.
62 of the Negotiable Instruments Law which refers to liability of acceptor
(Title Guarantee vs. Emadee Realty Corp., 240 N.Y. 36).

It may be true that plaintiff's PCIB Check No. 073661 for P132,000.00
which was paid to her by Warliza Sarande was actually not funded but
since plaintiff became a holder in due course, defendant-bank cannot
interpose a defense of want or lack of consideration because that defense
is equitable or personal and cannot prosper against a holder in due course
pursuant to Section 28 of the Negotiable Instruments Law. Therefore, when
the aforementioned check was endorsed and presented by the plaintiff and
certified to and accepted by defendant-bank in the purchase of PCIB
Manager's Check No. 1983 in the amount of P132,000.00, there was a
valid consideration.[18]
The property of summary judgment was further explained by this Court
when it pronounced that:

The theory of summary judgment is that although an answer may on its

face appear to tender issues - requiring trial - yet if it is demonstrated by
affidavits, depositions, or admissions that those issues are not genuine, but
sham or fictitious, the Court is unjustified in dispensing with the trial and
rendering summary judgment for plaintiff. The court is expected to act
chiefly on the basis of the affidavits, depositions, admissions submitted by
the movant, and those of the other party in opposition thereto. The hearing
contemplated (with 10-day notice) is for the purpose of determining
whether the issues are genuine or not, not to receive evidence on the
issues set up in the pleadings. A hearing is not thus de riguer. The matter
may be resolved, and usually is, on the basis of affidavits, depositions,
admissions. This is not to say that a hearing may be regarded as a
superfluity. It is not, and the Court has plenary discretion to determine the
necessity therefore.[19]
The second and fourth issues are inter-related and so they shall be
resolved together. The second issue has reference to PCI Bank's claim of
unjust enrichment on the part of Ong if it would be compelled to make good
the manager's check it had issued. As asserted by PCI Bank under the
fourth issue, Ong is not a holder in due course because the manager's
check was drawn against a closed account; therefore, the same was issued
without consideration.

Page 315 of 344

On the matter of unjust enrichment, the fundamental doctrine of unjust
enrichment is the transfer of value without just cause or consideration. The
elements of this doctrine are: enrichment on the part of the defendant;
impoverishment on the part of the plaintiff; and lack of cause. The main
objective is to prevent one to enrich himself at the expense of another.[20] It
is based on the equitable postulate that it is unjust for a person to retain
benefit without paying for it.[21] It is well to stress that the check of Sarande
had been cleared by the PCI Bank for which reason the former issued the
check to Ong. A check which has been cleared and credited to the account
of the creditor shall be equivalent to a delivery to the creditor of cash in an
amount equal to the amount credited to his account.[22]

Having cleared the check earlier, PCI Bank, therefore, became liable to
Ong and it cannot allege want or failure of consideration between it and
Sarande. Under settled jurisprudence, Ong is a stranger as regards the
transaction between PCI Bank and Sarande.[23]

PCI Bank next insists that since there was no consideration for the
issuance of the manager's check, ergo, Ong is not a holder in due course.
This claim is equally without basis. Pertinent provisions of the Negotiable
Instruments Law are hereunder quoted:

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 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 same law provides further:

Sec. 24. Presumption of consideration. - Every negotiable instrument is

deemed prima facie to have been issued for a valuable consideration; and
every person whose signature appears thereon to have become a party
thereto for value.

Sec. 26. What constitutes holder for value. - Where value has at any time
been given for the instrument, the holder is deemed a holder for value in
respect to all parties who become such prior to that time.

Sec. 28. Effect of want of consideration. - Absence or failure of

consideration is a matter of defense as against any person not a holder in
due course; and partial failure of consideration is a defense pro tanto,
whether the failure is an ascertained and liquidated amount or otherwise.
Page 316 of 344
Easily discernible is that what Ong obtained from PCI Bank was not just
any ordinary check but a manager's check. A manager's check is an order
of the bank to pay, drawn upon itself, committing in effect its total
resources, integrity and honor behind its issuance. By its peculiar character
and general use in commerce, a manager's check is regarded substantially
to be as good as the money it represents.[24]

A manager's check stands on the same footing as a certified check.[25] The

effect of certification is found in Section 187, Negotiable Instruments Law.

Sec. 187. Certification of check; effect of. - Where a check is certified by

the bank on which it is drawn, the certification is equivalent to an
acceptance.[26]
The effect of issuing a manager's check was incontrovertibly elucidated
when we declared that:

A manager's check is one drawn by the bank's manager upon the bank
itself. It is similar to a cashier's check both as to effect and use. A cashier's
check is a check of the bank's cashier on his own or another check. In
effect, it is a bill of exchange drawn by the cashier of a bank upon the bank
itself, and accepted in advance by the act of its issuance. It is really the
bank's own check and may be treated as a promissory note with the bank
as a maker. The check becomes the primary obligation of the bank which
issues it and constitutes its written promise to pay upon demand. The mere
issuance of it is considered an acceptance thereof. x x x.[27]
In the case of New Pacific Timber & Supply Co., Inc. v. Seneris [28] :

[S]ince the said check had been certified by the drawee bank, by the
certification, the funds represented by the check are transferred from the
credit of the maker to that of the payee or holder, and for all intents and
purposes, the latter becomes the depositor of the drawee bank, with rights
and duties of one in such situation. Where a check is certified by the bank
on which it is drawn, the certification is equivalent to acceptance. Said
certification "implies that the check is drawn upon sufficient funds in the
hands of the drawee, that they have been set apart for its satisfaction, and
that they shall be so applied whenever the check is presented for payment.
It is an understanding that the check is good then, and shall continue good,
and this agreement is as binding on the bank as its notes circulation, a
certificate of deposit payable to the order of depositor, or any other
obligation it can assume. The object of certifying a check, as regards both
parties, is to enable the holder to use it as money." When the holder
procures the check to be certified, "the check operates as an assignment of
a part of the funds to the creditors." Hence, the exception to the rule
enunciated under Section 63 of the Central Bank Act to the effect "that a
check which has been cleared and credited to the account of the creditor
shall be equivalent to a delivery to the creditor in cash in an amount equal
to the amount credited to his account" shall apply in this case x x x.

Page 317 of 344

By accepting PCI Bank Check No. 073661 issued by Sarande to Ong and
issuing in turn a manager's check in exchange thereof, PCI Bank assumed
the liabilities of an acceptor under Section 62 of the Negotiable Instruments
Law which states:

Sec. 62. Liability of acceptor. - The acceptor by accepting the instruments

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.
With the above jurisprudential basis, the issues on Ong being not a holder
in due course and failure or want of consideration for PCI Bank's issuance
of the manager's check is out of sync.

Section 2, of Republic Act No. 8791, The General Banking Law of 2000
decrees:

SEC. 2. Declaration of Policy. - The State recognizes the vital role of banks
in providing an environment conducive to the sustained development of the
national economy and the fiduciary nature of banking that requires high
standards of integrity and performance. In furtherance thereof, the State
shall promote and maintain a stable and efficient banking and financial
system that is globally competitive, dynamic and responsive to the
demands of a developing economy.
In Associated Bank v. Tan,[29] it was reiterated:

"x x x the degree of diligence required of banks is more than that of a good
father of a family where the fiduciary nature of their relationship with their
depositors is concerned." Indeed, the banking business is vested with the
trust and confidence of the public; hence the "appropriate standard of
diligence must be very high, if not the highest degree of diligence."
Measured against these standards, the next question that needs to be
addressed is: Did PCI Bank exercise the requisite degree of diligence
required of it? From all indications, it did not. PCI Bank distinctly made the
following uncontested admission:

1. On 29 November 1991, one Warliza Sarande deposited to her

savings account with PCI Bank's Magsaysay Avenue Branch, TCBT-
General Santos Branch Check No. 0249188 for P225,000.00. Said
check, however, was inadvertently sent by PCI Bank through
local clearing when it should have been sent through inter-
regional clearing since the check was drawn at TCBT-General

Page 318 of 344

 Santos City.

2. On 5 December 1991, Warliza Sarande inquired whether TCBT

Check No. 0249188 had been cleared. Not having received any
advice from the drawee bank within the regular clearing period for the
return of locally cleared checks, and unaware then of the error of not
having sent the check through inter-regional clearing, PCI Bank
advised her that Check No. 024188 is treated as cleared. x x x.[30]
(Emphasis supplied.)

From the foregoing, it is palpable and readily apparent that PCI Bank failed
to exercise the highest degree of care[31] required of it under the law.

In the case of Philippine National Bank v. Court of Appeals,[32] we declared:

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 ubiquitous presence among the people, who have come to regard them
with respect and even gratitude and, most of all, confidence.
Having settled the other issues, we now resolve the question on the award
of moral and exemplary damages by the trial court to the respondent.

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
defendant's wrongful act or omission.[33] The requisites for an award of
moral damages are well-defined, thus, firstly, evidence of besmirched
reputation or physical, mental or psychological suffering sustained by the
claimant; secondly, a culpable act or omission factually established; thirdly,
proof that the wrongful act or omission of the defendant is the proximate
cause of the damages sustained by the claimant; and fourthly, that the
case is predicated on any of the instances expressed or envisioned by
Article 2219[34] and Article 2220[35] of the Civil Code. All these elements are
present in the instant case.[36]

In the first place, by refusing to make good the manager's check it has
issued, Ong suffered embarrassment and humiliation arising from the
dishonor of the said check.[37] Secondly, the culpable act of PCI Bank in
having cleared the check of Serande and issuing the manager's check to
Ong is undeniable. Thirdly, the proximate cause of the loss is attributable to
PCI Bank. Proximate cause is defined as 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.[38] In this case, the proximate cause of the loss is the act of PCI
Bank in having cleared the check of Sarande and its failure to exercise that

Page 319 of 344

degree of diligence required of it under the law which resulted in the loss to
Ong.

On exemplary damages, Article 2229 of the Civil Code states:

Art. 2229. Exemplary or corrective damages are imposed, by way of

example or correction for the public good, in addition to the moral,
temperate, liquidated or compensatory damages.
The law allows the grant of exemplary damages to set an example for the
public good. 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 ubiquitous presence among the people, who have
come to regard them with respect and even gratitude and most of all,
confidence. For this reason, banks should guard against injury attributable
to negligence or bad faith on its part.[39] Without a doubt, it has been
repeatedly emphasized that since the banking business is impressed with
public interest, of paramount importance thereto is the trust and confidence
of the public in general. Consequently, the highest degree of diligence is
expected, and high standards of integrity and performance are even
required of it.[40] Having failed in this respect, the award of exemplary
damages is warranted.

Article 2216 of the Civil Code provides:

ART. 2216. No proof of pecuniary loss is necessary in order that moral,

nominal, temperate, liquidated or exemplary damages may be adjudicated.
The assessment of such damages, except liquidated ones, is left to the
discretion of the court, according to the circumstances of each case.
Based on the above provision, the determination of the amount to be
awarded (except liquidated damages) is left to the sound discretion of the
court according to the circumstances of each case.[41] In the case before
us, we find that the award of moral damages in the amount of P50,000.00
and exemplary damages in the amount of P20,000.00 is reasonable and
justified.

With the above disquisition, there is no necessity of further discussing the

last issue on the PCI Bank's counterclaim based on the supposed lack of
merit of Ong's complaint.

WHEREFORE, premises considered, the Petition is DENIED and the

Decision of the Court of Appeals dated 29 October 2002 in CA-G.R. CV
No. 65000 affirming the Decision dated 3 may 1999, of the Regional Trial
Court of Davao City, Branch 14, in Civil Case No. 21458-92, are
AFFIRMED.

Page 320 of 344

SO ORDERED.

[ GR NO. 164358, Dec 20, 2006 ]

THERESA MACALALAG v. PEOPLE +
540 Phil. 410

CHICO-NAZARIO, J.:
This Petition for Review seeks to set aside the Court of Appeals' 10
October 2003 Decision[1] convicting petitioner Theresa Macalalag
(Macalalag) of Violation of Batas Pambansa Blg. 22, and its 13 May 2004
Resolution denying her Motion for Reconsideration.

The factual and procedural antecedents of this case are as follows:

On two separate occasions, particularly on 30 July 1995 and 16 October

1995, petitioner Theresa Macalalag obtained loans from Grace Estrella
(Estrella), each in the amount of P100,000.00, each bearing an interest of
10% per month. Macalalag consistently paid the interests starting 30
August 1995. Finding the interest rates so burdensome, Macalalag
requested Estrella for a reduction of the same to which the latter agreed.
On 16 April 1996 and 1 May 1996, Macalalag executed
Acknowledgment/Affirmation Receipts promising to pay Estrella the face
value of the loans in the total amount of P200,000.00 within two months
from the date of its execution plus 6% interest per month for each loan.
Under the two Acknowledgment/Affirmation Receipts, she further obligated
herself to pay for the two (2) loans the total sum of P100,000.00 as

Page 321 of 344

liquidated damages and attorney's fees in the total sum of P40,000.00 as
stipulated by the parties the moment she breaches the terms and
conditions thereof.

As security for the payment of the aforesaid loans, Macalalag issued two
Philippine National Bank (PNB) Checks (Check No. C-889835 and No.
889836) on 30 June 1996, each in the amount of P100,000.00, in favor of
Estrella. However, when Estrella presented said checks for payment with
the drawee bank, the same were dishonored for the reason that the
account against which the same was drawn was already closed. Estrella
sent a notice of dishonor and demand to make good the said checks to
Macalalag, but the latter failed to do so. Hence, Estrella filed two criminal
complaints for Violation of Batas Pambansa Blg. 22 before the Municipal
Trial Court in Cities (MTCC) of Bacolod City, docketed as Criminal Cases
No. 76367 and No. 76368.

When arraigned, Macalalag entered a plea of "not guilty." On trial,

Macalalag admitted her indebtedness and the issuance of the two PNB
checks. She, however, stated that she already made payments over and
above the value of the said checks. According to her, she made a total
payment of P355,837.98, including the payment of P199,837.98 made
during the pendency of the cases. Estrella admitted the payment of
P199,837.98 but claimed that the same amount was applied to the
payment of the interest.

On 5 February 2001, the MTCC of Bacolod City rendered its Decision,

disposing of the case as follows:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered

declaring the accused Theresa Macalalag guilty beyond reasonable doubt
of the crime charged. Pursuant however to Eduardo Vaca vs. Court of
Appeals case (G.R. No. 131714, November 16, 1998[,] 298 SCRA 656)
and the Rosa Lim vs. People x x x case (G.R. No. 130038, September 18,
2000) where the Supreme Court deleted these penalty of imprisonment, the
penalty therefore imposable is a fine of P100,000.00 for each of the two (2)
checks and subsidiary imprisonment in case of insolvency or failure to pay
said fine.

As she is criminally liable, she is likewise ordered to pay as civil indemnity

the total amount of P200,000.00 with interest at the legal rate from the time
of the filing of the informations until the amount is fully paid; less whatever
amount was thus far paid and validly deducted from the principal sum
originally claimed.[2]
Petitioner Macalalag appealed with the Regional Trial Court (RTC) of
Bacolod City, which affirmed in toto the MTCC Decision. Petitioner
Macalalag appealed anew with the Court of Appeals, which affirmed the
RTC and the MTCC decisions with modification to the effect that, among
other things, accused was convicted only of one (1) count of Violation of

Page 322 of 344

Batas Pambansa Blg. 22, corresponding to the issuance of the second
check. The decretal portion of the Court of Appeals Decision reads:

WHEREFORE, foregoing premises considered, the petition is PARTLY

GRANTED. Accordingly, the dispositive portion of the February 9, 2001
Decision of the Municipal Trial Court in Cities of Bacolod City, Branch 3, as
affirmed by the Regional Trial Court of Bacolod City, Branch 43, is hereby
MODIFIED to read as follows:

"WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered

declaring the accused Theresa Macalalag guilty beyond reasonable doubt
of the crime charged. Pursuant however to Eduardo Vaca vs. Court of
Appeals case (G.R. No. 131714, November 16, 1998[,] 298 SCRA 659)
and the Rosa Lim vs. People of the Philippines case (G.R. No. 130038,
September 18, 2000) where the Supreme Court deleted the penalty of
imprisonment, the penalty therefore imposable is a fine of P100,000.00 for
the second check and subsidiary imprisonment in case of insolvency or
failure to pay said fine.

As she is criminally liable, she is likewise ordered to pay civil indemnity in

the amount of P100,000.00 with interest at the legal rate from the time of
the filing of the information until the amount is fully paid; less P195,837.98,
the amount credited to the accused after paying the first loan, to be applied
to the second loan."[3]
In acquitting petitioner Macalalag of one count of violation of Batas
Pambansa Blg. 22, the Court of Appeals reversed the RTC ruling which
held that Medel v. Court of Appeals[4] is not applicable as it applies only in
civil cases where the validity of the interest rate is in issue, and cannot be
applied in criminal cases for violation of Batas Pambansa Blg. 22.[5] In
Medel, we held that, while the Usury Law is now legally inexistent, the
stipulated rate of interest at 5.5% per month is iniquitous or
unconscionable, which the court could equitably reduce.

The Court of Appeals was correct in applying Medel to the case at bar. The
criminal action for violation of Batas Pambansa Blg. 22 is deemed to
include the corresponding civil action.[6] In fact, no reservation to file such
civil action shall be allowed.[7] Verily then, whether the interest is
unconscionable or not can be determined in the instant case. Furthermore,
in all criminal prosecutions, any doubt should be resolved in favor of the
accused and strictly against the State. Following this principle, the issue of
whether the Medel case should be applied in favor of Macalalag should be
resolved in her favor.

The stipulated interest of 10% per month, and even the reduced rate of 6%
per month, are higher than the interest rates declared unconscionable in
Medel and in several other cases with allegations of unconscionable
interests. Such cases were synthesized by then Associate Justice (now

Page 323 of 344

Chief Justice) Reynato Puno in Ruiz v. Court of Appeals[8]:

The foregoing rates of interests and surcharges are in accord with Medel
vs. Court of Appeals, Garcia vs. Court of Appeals, Bautista vs. Pilar
Development Corporation, and the recent case of Spouses Solangon vs.
Salazar. This Court invalidated a stipulated 5.5% per month or 66% per
annum interest on a P500,000.00 loan in Medel and a 6% per month or
72% per annum interest on a P60,000.00 loan in Solangon for being
excessive, iniquitous, unconscionable and exorbitant. In both cases, we
reduced the interest rate to 12% per annum. We held that while the Usury
Law has been suspended by Central Bank Circular No. 905, s. 1982,
effective on January 1, 1983, and parties to a loan agreement have been
given wide latitude to agree on any interest rate, still stipulated interest
rates are illegal if they are unconscionable. Nothing in the said circular
grants lenders carte blanche authority to raise interest rates to levels which
will either enslave their borrowers or lead to a hemorrhaging of their assets.
On the other hand, in Bautista vs. Pilar Development Corp., this Court
upheld the validity of a 21% per annum interest on a P142,326.43 loan, and
in Garcia vs. Court of Appeals, sustained the agreement of the parties to a
24% per annum interest on an P8,649,250.00 loan. It is on the basis of
these cases that we reduce the 36% per annum interest to 12%. An
interest of 12% per annum is deemed fair and reasonable. While it is true
that this Court invalidated a much higher interest rate of 66% per annum in
Medel and 72% in Solangon it has sustained the validity of a much lower
interest rate of 21% in Bautista and 24% in Garcia. We still find the 36%
per annum interest rate in the case at bar to be substantially greater than
those upheld by this Court in the two (2) aforecited cases.
Applying Medel, therefore, the Court of Appeals convicted petitioner
Macalalag of one count of Batas Pambansa Blg. 22 and computed her civil
liability as follows:

Thus, applying the Medel doctrine, the interest rate imposed by Estrella on
the loans of Macalalag should be reduced to 12% per annum only plus 1%
a month penalty charge as liquidated damages on each loan.

We now proceed to the determination of whether Macalalag had already

paid her obligations to Estrella.

There is no dispute that Macalalag obtained the first P100,000.00 loan from
Estrella on July 30, 1995. The said amount multiplied by 1% interest per
month until July 1, 1996, the time the check representing the said amount
was dishonored (P100,000.00 x 1% x 11 + P100,000.00), would be
P111,000.00.

The second loan of P100,000.00 was obtained on October 16, 1995 and
the check that was issued for the payment of the said loan was also
dishonored on July 1, 1996. Using the above formula (P100,000.00 x 1% x
8.5 + P100,000.00), Macalalag's obligation would only be P108,500.00.

Page 324 of 344

Thus, when the checks were dishonored, Macalalag's total obligation to
Estrella was P219,500.00.

In the instant case, it has been established that Macalalag made a total
payment of P355,837.98 (P199,837.98 plus P156,000.00) (See 275-276,
Records). The P156,000.00 was paid starting August 30, 1995 until June
15, 1996 while the amount of P199,837.98 was paid to complainant
sometime in 1997 considering that the acknowledgment receipt was dated
January 5, 1998.

In the Acknowledgment/Affirmation Receipts, Macalalag promised to pay

Estrella the principal loans within two (2) months after the execution of said
documents. Thus, the two (2) loans of P100,000.00 each, or a total of
P200,000.00, were demandable only on June 16, 1996 and July 1, 1996,
respectively. Hence, the total amount of P156,000.00 already paid by
Macalalag to Estrella could very well be applied to the face value of the first
loan which fell due on June 16, 1996, including the 1% interest rate per
month on the two (2) loans or a total of 2% per month. Thus, Macalalag
could no longer be held liable for violation of B.P. Blg. 22 insofar as the first
check is concerned since the same was already paid prior to its
presentment for payment.

However, with respect to the second check, there is no doubt that

Macalalag is liable under B.P. Blg. 22. Macalalag admitted having issued
the said check and that said check, when presented for payment for
payment with the drawee bank bounced for the reason "account closed".
Despite notice of dishonor, Macalalag failed to make good the said check.
All the elements of violation of B.P. Blg. 22, viz: a) the making, drawing or
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 the issue he does not have
sufficient funds in, or credit with, the drawee bank for the payment of the
check in full upon its presentment; and, c) the 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 (Sycip, Jr. vs. Court of Appeals, 328 SCRA 447),
are, therefore, present.

In view of the foregoing, the penalty imposed on Macalalag by the trial

court should be modified. In accordance with the Vaca vs. Court of Appeals
(294 SCRA 656) case, Macalalag should be meted the penalty of fine
amounting to P100,000.00 only corresponding to the face value of the
second check with subsidiary imprisonment in case of insolvency. Likewise,
Macalalag should pay the civil indemnity in the total amount of P100,000.00
with interest at the legal rate from the time of the filing of the Information
until fully satisfied less the amount of P195,837.98 which amount should be
credited to her. This amount represents the balance after full payment of
the first loan computed as follows:

Page 325 of 344

P355,837.98 - total amount paid by petitioner to private complainant

(P199,837.98 and P156,000.00)

LESS:

P160,000.00 - to fully pay the first loan (P100,000.00 face value of the loan
plus interests at P21,000.00 and P39,000.00)
__________________
P195,837.98 - amount to be credited to petitioner to be applied to pay the
second loan.[9]
We have repeatedly held that there is no violation of Batas Pambansa Blg.
22 if the complainant was actually told by the drawer that he has no
sufficient funds in a bank.[10] Where, as in the case at bar, the checks were
issued as security for a loan, payment by the accused of the amount of the
check prior to its presentation for payment would certainly serve the same
purpose.

Batas Pambansa Blg. 22 was not intended to shelter or favor nor

encourage users of the banking system to enrich themselves through the
manipulation and circumvention of the noble purpose and objectives of the
law.[11] Such manipulation is manifest when payees of checks issued as
security for loans present such checks for payment even after the payment
of such loans.

Petitioner Macalalag, however, claims that she should not be convicted of

even one count of Violation of Batas Pambansa Blg. 22. Petitioner
Macalalag claims that: (1) the payment of the accounts before the checks
became due and demandable and/or before the same are presented for
payment would exempt the petitioner from Violation of Batas Pambansa
Blg. 22;[12] (2) the redeemable value of the check is limited only to its face
value and does not include interest;[13] and (3) partial redemption of the
check will exempt the accused from criminal liability for Violation of Batas
Pambansa Blg. 22.[14]

Petitioner Macalalag claims that, considering that she had already paid
P156,000.00 at the time the subject checks were presented for payment,
the amount of P100,000.00 should be applied for redemption of the first
check and the remaining amount of P56,000.00 should be treated as partial
redemption of the second check. Petitioner Macalalag posits that said
partial redemption exempts her from criminal liability because it was made
before the check was presented for payment.

The petition must fail.

Even if we agree with petitioner Macalalag that the interests on her loans
should not be imputed to the face value of the checks she issued, petitioner
Macalalag is still liable for Violation of Batas Pambansa Blg. 22. Petitioner
Macalalag herself declares that before the institution of the two cases

Page 326 of 344

against her, she has made a total payment of P156,000.00. Applying this
amount to the first check (No. C-889835), what will be left is P56,000.00,
an amount insufficient to cover her obligation with respect to the second
check. As stated above, when Estrella presented the checks for payment,
the same were dishonored on the ground that they were drawn against a
closed account. Despite notice of dishonor, petitioner Macalalag failed to
pay the full face value of the second check issued.

Only a full payment of the face value of the second check at the time of its
presentment or during the five-day grace period[15] could have exonerated
her from criminal liability. A contrary interpretation would defeat the
purpose of Batas Pambansa Blg. 22, that of safeguarding the interest of the
banking system and the legitimate public checking account user,[16] as the
drawer could very well have himself exonerated by the mere expediency of
paying a minimal fraction of the face value of the check.

Neither could petitioner Macalalag's subsequent payment of P199,837.98

during the pendency of the cases against her before the MTCC result in
freeing her from criminal liability because the same had already attached
after the check was dishonored. Said subsequent payments can only affect
her civil, not criminal, liability. A subsequent payment by the accused would
not obliterate the criminal liability theretofore already incurred.[17]

It is well to note that the gravamen of Batas Pambansa Blg. 22 is the

issuance of a check, not the nonpayment of an obligation.[18] The law has
made the act of issuing a bum check a malum prohibitum.[19] Consequently,
the lack of criminal intent on the part of the accused is irrelevant,[20] and the
accused will be convicted for violation thereof as long as the following
elements are proven:

1. The accused makes, draws or issues any check to apply to account

or for value;
2. The accused knows at the time of the issuance that he or she does
not have sufficient funds in, or credit with, the drawee bank for the
payment of the check in full upon its presentment; and
3. The check is subsequently dishonored by the drawee bank for
insufficiency of funds or credit, or it would have been dishonored for
the same reason had not the drawer, without any valid reason,
ordered the bank to stop payment.[21]

All these elements have been conclusively proven in Court, the second
element by the prima facie evidence established by Section 2 of Batas
Pambansa Blg. 22, which provides:

SEC. 2. Evidence of knowledge of insufficient funds. the making, drawing

and issuance of a check payment of which is refused by the drawee
because of insufficient funds in or credit with such bank, when presented
within ninety (90) days from the date of the check, shall be prima facie

Page 327 of 344

evidence of knowledge of such insufficiency of funds or credit unless such
maker or drawer pays the holder thereof the amount due thereon, or makes
arrangements for payment in full by the drawee of such check within five
(5) banking days after receiving notice that such check has not been paid
by the drawee.
WHEREFORE, the Petition is DENIED. The Court of Appeals Decision
dated 10 October 2003 and Resolution dated 13 May 2004, affirming the
conviction of petitioner Theresa Macalalag of one count of Violation of
Batas Pambansa Blg. 22, are AFFIRMED. No costs.

SO ORDERED.

[ G.R. No. 196853, July 13, 2015 ]

ROBERT CHUA, PETITIONER, VS. PEOPLE OF THE PHILIPPINES,
RESPONDENT.

DEL CASTILLO, J.:

Petitioner Robert Chua (Chua) was charged with 54 counts of violation of

Batas Pambansa Blg. 22 (BP 22) for issuing checks which were dishonored
for either being drawn against insufficient funds or closed account.

Factual Antecedents

Chua and private complainant Philip See (See) were long-time friends and
neighbors. On different dates from 1992 until 1993, Chua issued several
postdated PSBank checks of varying amounts to See pursuant to their
rediscounting arrangement at a 3% rate, to wit:

PSBANK CHECK
DATED AMOUNT
NO.

1 018062 December 25, 1993 Php300,000.00

2 018061 December 23, 1993 Php350,000.00

Page 328 of 344

3 017996 December 16, 1993 Php100,000.00

4 017992 December 14, 1993 Php200,000.00

5 017993 December 14, 1993 Php200,000.00

6 018138 November 22,1993 Php 6,000.00

7 018122 November 19, 1993 Php 13,000.00

8 018120 November 18, 1993 Php 6,000.00

9 018162 November 22, 1993 Php 10,800.00

10 018069 November 17, 1993 Php 9,744.25

11 018117 November 17, 1993 Php 8,000.00

12 018149 November 28, 1993 Php 6,000.00

13 018146 November 27, 1993 Php 7,000.00

14 006478 November 26, 1993 Php200,000.00

15 018148 November 26, 1993 Php300,000.00

16 018145 November 26, 1993 Php 7,000.00

17 018137 December 10, 1993 Php150,000.00

18 017991 December 10, 1993 Php150,000.00

19 018151 December 10, 1993 Php150,000.00

20 017962 December 08, 1993 Php150,000.00

21 018165 December 08, 1993 Php 14,000.00

22 018154 December 07, 1993 Php100,000.00

23 018164 December 07, 1993 Php 14,000.00

24 018157 December 07, 1993 Php600,000.00

25 018161 December 06, 1993 Php 12,000.00

26 018160 December 05, 1993 Php 12,000.00

27 018033 November 09, 1993 Php 3,096.00

28 018032 November 08, 1993 Php 12,000.00

29 018071 November 06, 1993 Php150,000.00

Page 329 of 344

30 018070 November 06, 1993 Php150,000.00

31 006210 October 21, 1993 Php100,000.00

32 006251 October 18, 1993 Php200,000.00

33 006250 October 18, 1993 Php200,000.00

34 017971 October 13, 1993 Php400,000.00

35 017972 October 12, 1993 Php335,450.00

36 017973 October 11, 1993 Php464,550.00

37 006433 September 24, 1993 Php520,000.00

38 006213 August 30, 1993 Php100,000.00

39 017976 December 13, 1993 Php100,000.00

40 018139 December 13, 1993 Php125,000.00

41 018141 December 13, 1993 Php175,000.00

42 018143 December 13, 1993 Php300,000.00

43 018121 December 10, 1993 Php166,934.00

44 018063 November 12, 1993 Php 12,000.00

45 018035 November 11, 1993 Php 7,789.00

46 017970 November 11, 1993 Php600,000.00

47 018068 November 18, 1993 Php 7,800.00

48 017956 November 10, 1993 Php800,000.00

49 018034 November 10, 1993 Php 7,116.00

50 017907 December 1, 1993 Php200,000.00

51 018152 November 30, 1993 Php 6,000.00

52 018067 November 30, 1993 Php 7,800.00

53 006490 November 29, 1993 Php100,000.00

54 018150 November 29, 1993 Php 6,000.00[1]

However, See claimed that when he deposited the checks, they were
dishonored either due to insufficient funds or closed account. Despite
demands, Chua failed to make good the checks. Hence, See filed on

Page 330 of 344

December 23, 1993 a Complaint[2] for violations of BP 22 before the Office
of the City Prosecutor of Quezon City. He attached thereto a demand
letter[3] dated December 10, 1993.

In a Resolution[4] dated April 25, 1994, the prosecutor found probable

cause and recommended the filing of charges against Chua. Accordingly,
54 counts of violation of BP 22 were filed against him before the
Metropolitan Trial Court (MeTC) of Quezon City.

Proceedings before the Metropolitan Trial Court

During the course of the trial, the prosecution formally offered as its
evidence[5] the demand letter dated December 10, 1993 marked as Exhibit
"B."[6] Chua, however, objected[7] to its admissibility on the grounds that it is
a mere photocopy and that it does not bear any proof that he actually
received it. In view of these, Chua filed on April 14, 1999 a Motion to
Submit Demurrer to Evidence.[8] Per Chua's allegation, however, the MeTC
failed to act on his motion since the judge of said court vacated his post.

Several years later, the prosecution filed a Motion to Re-Open Presentation

of Prosecution's Evidence and Motion to Allow Prosecution to Submit
Additional Formal Offer of Evidence[9] dated March 28, 2003. It averred that
while See was still trying to locate a demand letter dated November 30,
1993 (which it alleged to Irave been personally served upon Chua), the
prosecution nevertheless decided to rest its case on February 24, 1999 so
as not to further delay the proceedings. However, sometime in February
2002, See decided to have his house rented out such that he emptied it
with all his belongings and had it cleaned. It was during this time that he
found the demand letter dated November 30, 1993.[10] The prosecution thus
prayed that it be allowed to submit a supplemental offer of evidence to
include said demand letter dated November 30, 1993 as part of its
evidence. Again, the records of the case bear no copy of an MeTC Order or
Resolution granting the aforesaid motion of the prosecution. Nevertheless,
extant on records is a Formal Offer of Evidence[11] filed by the private
prosecutor submitting the demand letter dated November 30, 1993 as
additional evidence. In his objection thereto,[12] Chua averred that the
papers on which the demand letter dated November 30, 1993 are written
were given to him as blank papers. He affixed his signature thereon
purportedly to give See the authority to retrieve a car which was supposed
to serve as payment for Chua's obligation to See. In an Order[13] dated
November 18, 2005, the MeTC refused to take cognizance of the
supplemental formal offer on the ground that the same was filed by the

Page 331 of 344

private prosecutor without the conformity of the public prosecutor. Be that
as it may, the demand letter dated November 30, 1993 eventually found its
way into the records of this case as Exhibit "SSS."[14]

Later, the defense, with leave of court, filed a Demurrer to Evidence.[15] It

again pointed out that the demand letter dated December 10, 1993
attached to See's affidavit-complaint is a mere photocopy and not
accompanied with a Post Office Registry Receipt and Registry Return
Receipt. Most importantly, it does not contain Chua's signature that would
serve as proof of his actual receipt thereof. In view of these, the defense
surmised that the prosecution fabricated the demand letter dated
November 30, 1993 to remedy the lack of a proper notice of dishonor upon
Chua. At any rate, it argued that while the November 30, 1993 demand
letter contains Chua's signature, the same should not be given any
probative value since it does not contain the date when he allegedly
received the same. Hence, there is simply no way of reckoning the crucial
five-day period that the law affords an issuer to make good the check from
the date of his notice of its dishonor.

In an Order[16] dated January 12, 2007, the MeTC denied the defense's
Demurrer to Evidence. The Motion for Reconsideration thereto was
likewise denied in an Order[17] dated May 23, 2007. Hence, the trial of the
case proceeded.

In a Consolidated Decision[18] dated May 12, 2008, the MeTC convicted

Chua of 54 counts of violation of BP 22 after it found all the elements of the
offense obtaining in the case. Anent Chua's receipt of the notice of
dishonor, it ratiocinated, viz.:

x x x x

The prosecution had proved also that private complainant personally sen[t]
a written notice of dishonor of the subject check to the accused and that the
latter personally received the same. In fact, the defense stipulated in open
court the existence of the said demand letter and the signature of the
accused as reflected in the face of the demand letter, x x x In view of that
stipulation, the defense is now estopped [from] denying its receipt thereof.
Although there was no date when accused received the demand letter x x x
the demand letter was dated, thus it is presumed that the accused received
the said demand letter on the date reflected on it. It has been said that
"admission verbal or written made by the party in the course of the
proceedings in the same case does not require proof." x xx

Page 332 of 344

[In spite of] receipt thereof, the accused failed to pay the amount of the
checks or make arrangement for its payment [w]ithin five (5) banking days
after receiving notice that the said checks have not been paid by the
drawee bank. As a result, the presumption of knowledge as provided for in
Section 2 of Batas Pambansa Bilang 22 which was the basis of reckoning
the crucial five (5) day period was established.[19]

Hence, the dispositive portion of the MeTC Decision:

WHEREFORE, premises considered, this court finds accused Robert Chua

GUILTY, beyond reasonable doubt, of fifty four (54) counts of Violation of
Batas Pambansa Bilang 22 and hereby sentence[s] him to suffer the
penalty of six (6) months imprisonment for each case and to restitute to the
private complainant the total amount of the face value of all the subject
checks in these cases with legal interest of 12% per annum reckoned from
the filing of the informations until the full amount is fully paid and to pay the
costs of suit.

SO ORDERED.[20]

Ruling of the Regional Trial Court (RTC)

Aggrieved, Chua appealed to the RTC where he argued that: (1) the
complaint was prematurely filed since the demand letter dated December
10, 1993 had not yet been sent to him at the time of filing of the Complaint;
(2) the demand letter dated November 30, 1993 has no probative value
since it lacked proof of the date when Chua received the same; and, (3)
since Chua was acquitted in two other BP 22 cases involving the same
parties, facts and issues, he should likewise be acquitted in the present
case based on the principle of stare decisis.

In a Decision[21] dated July 1, 2009, the RTC likewise found all the elements
of BP 22 to have been sufficiently established by the prosecution, to wit:

(1) the making, drawing, and issuance of any check to apply for account or
for value;

(2) 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 the check in full upon its presentment;

(3) the subsequent dishonor of the check by the drawee bank for
insufficient funds or credit or dishonor for the same reason had not the
drawer, without any valid cause ordered the bank to stop payment.

Page 333 of 344

As to first element, the RTC held that the evidence shows that Chua issued
the checks in question. Next, on the basis of the demand letter dated
November 30, 1993 bearing Chua's signature as proof of receipt thereof, it
was likewise established that he had knowledge of the insufficiency of his
funds with the drawee bank at the time he issued the checks, thus,
satisfying the second element. It expounded:

Thus, in order to create the prima facie presumption that the issuer knew of
the insufficiency of funds, it must be shown that he or she received a notice
of dishonor and, within five banking days thereafter, failed to satisfy the
amount of the check or make arrangement for its payment, x x x

In the present case, a demand letter (Exh. "SSS") was sent to accused-
appellant informing him of the dishonor of the check and demanding he
make good of the checks. The prosecution offered this in evidence, and the
accused's signature thereon evidences his receipt of the said demand
letter. Accused-appellant argues that there is no proof that he received the
same considering that there is no date on his signature appearing on the
document. But as borne out by the records of the proceedings, the defense
even stipulated in open court the existence of the demand letter, x x x

Thus, considering that the demand letter was dated November 30, 1993,
the reckoning of the crucial five day period was established. Accused failed
to make arrangement for the payment of the amount of check within five-
day period from notice of the checks' dishonor.[22]

Finally, the RTC ruled that the prosecution was able to prove the existence
of the third element when it presented a bank employee who testified that
the subject checks were dishonored due to insufficiency of funds or closed
account.

Anent the defense's invocation of the principle of stare decisis, the RTC
found the same inapplicable since there is a distinction between the
present case and the other cases where Chua was acquitted. In the instant
case, the prosecution, as mentioned, was able to establish the second
element of the offense by way of the demand letter dated November 30,
1993 duly received by Chua. Whereas in the other cases where Chua was
acquitted, there was no proof that he received a demand letter.

Hence, the dispositive portion of the RTC Decision:

WHEREFORE, the appealed decision dated May 12, 2008 is hereby

AFFIRMED.

Page 334 of 344

SO ORDERED.[23]

Ruling of the Court of Appeals (CA)

Before the CA, Chua argued against the probative value of the demand
letter dated November 30, 1993 by pointing out that: (1) for more than 10
years from the time the case was filed, the prosecution never adverted to
its existence. He thus surmised that this was because the document was
not really missing but in fact inexistent - a mere afterthought as to make it
appear that the second element of the offense is obtaining in the case; (2)
the subject demand letter is not a newly discovered evidence as it could
have been discovered earlier through the exercise of due diligence; and,
(3) his counsel's admission of the physical existence of the subject demand
letter and Chua's signature thereon does not carry with it the admission of
its contents and his receipt of the same.

Unpersuaded, the CA, in its November 11, 2010 Decision[24] brushed aside
Chua's arguments in this wise:

x x x [A]s aptly pointed out by the Solicitor General, See could not have
waited for a decade just to fabricate an evidence against petitioner. The
contention that petitioner's counsel was tricked by the prosecution into
stipulating on the admissibility of the demand letter is without basis. Once
validly entered into, stipulations will not be set aside unless for good cause.
They should be enforced especially when they are not false, unreasonable
or against good morals and sound public policy. When made before the
court, they are conclusive. And the party who validly made them can be
relieved therefrom only upon a showing of collusion, duress, fraud,
misrepresentation as to facts, and undue influence; or upon a showing of
sufficient cause on such terms as will serve justice in a particular case.
Moreover, the power to relieve a party from a stipulation validly made lies in
the court's sound discretion which, unless exercised with grave abuse, will
not be disturbed on appeal.[25]

And just like the MeTC and the RTC, the CA concluded that the
prosecution clearly established all the elements of the offense of violation
of BP 22. Ultimately, it ruled as follows:

WHEREFORE, the instant petition is hereby DENIED for lack of merit. The
assailed decision dated July 1, 2009 and order dated October 30, 2009 of
the RTC of Quezon City, Branch 219, are hereby AFFIRMED.

SO ORDERED.[26]

Page 335 of 344

Chua filed a Motion for Reconsideration,[27] but the same was denied in a
Resolution[28] dated May 4, 2011.

Hence, this Petition for Review on Certiorari.

Issues

I
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT UPHELD THE
RULINGS OF THE TRIAL COURTS THAT THE ACCUSED AT THE TIME
OF THE ISSUANCE OF THE DISHONORED CHECKS HAD
KNOWLEDGE OF THE INSUFFICIENCY OF FUNDS FOR THE
PAYMENT OF THE CHECKS UPON THEIR PRESENTMENT, BASED
MERELY ON THE PRESUMPTION THAT THE DATE OF THE
PREPARATION OF THE LETTER IS THE DATE OF RECEIPT BY THE
ADDRESSEE.

II
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT
CONSIDERED THE DEMAND LETTER DATED 30 NOVEMBER 1993 AS
A NEWLY-DISCOVERED EVIDENCE.[29]

The Parties y Arguments

Chua asserts that the second element of the offense charged, i.e.,
knowledge of the maker, drawer, or issuer that at the time of issue there
are no sufficient funds in or credit with the drawee bank for the payment of
such check in full upon its presentment, was not proved by the prosecution.
He argues that the presumption that the issuer had knowledge of the
insufficiency of funds only arises after it is proved that the issuer actually
received a notice of dishonor and within five days from receipt thereof failed
to pay the amount of the check or make arrangement for its payment. Here,
the date when Chua allegedly received the demand letter dated November
30, 1993 was not established by the prosecution. Citing Danao v. Court of
Appeals,[30] he thus contends that since there is no date of receipt from
which to reckon the aforementioned five-day period, the presumption that
he has knowledge of the insufficiency of funds at the time of the issuance
of the checks did not arise.

In any case, Chua argues that the demand letter dated November 30, 1993
is not a newly discovered evidence. He points out that a newly discovered
evidence is one which could not have been discovered even in the exercise
of due diligence in locating the same. In this case, See claims that he only
found the letter after having his house cleaned. This means that he could
have found it early on had he exercised due diligence, which, however, was

Page 336 of 344

neither shown by the prosecution.

On the other hand, respondent People of the Philippines, through the Office
of the Solicitor General (OSG), avers that Chua's contention that there is no
proof of the date when he actually received the demand letter dated
November 30, 1993 involves a factual issue which is not within the province
of a certiorari petition. As to the matter of whether the subject demand letter
is a newly discovered evidence, the OSG calls attention to the fact that the
MeTC, RTC and the CA all considered the said document as a newly
discovered evidence. Hence, such fir ding deserves full faith and credence.
Besides, Chua was correctly convicted for violation of BP 22 since all the
elements of the offense were sufficiently proven by the prosecution.

Our Ruling

The Petition is impressed with merit.

The issues raised by Chua involve questions of law.

The OSG argues that the issues raised by Chua involve questions of fact
which are not within the province of the present petition for review on
certiorari. The Court, however, upon perusal of the petition, finds that the
issues raised and the arguments advanced by Chua in support thereof,
concern questions of law. "Jurisprudence dictates that there is a 'question
of law' when the doubt or difference arises as to what the law is on a
certain set of facts or circumstances; on the other hand, there is a 'question
of fact' when the issue raised on appeal pertains to the truth or falsity of the
alleged facts. The test for determining whether the supposed error was one
of 'law' or 'fact' is not the appellation given by the parties raising the same;
rather, it is whether the reviewing court can resolve the issues raised
without evaluating the evidence, in which case, it is a question of law;
otherwise, it is one of fact. In other words, where there is no dispute as to
the facts, the question of whether or not the conclusions drawn from these
facts are correct is a question of law. However, if the question posed
requires a re-evaluation of the credibility of witnesses, or the existence or
relevance of surrounding circumstances and their relationship to each
other, the issue is factual."[31]

Chua raises two issues in this petition, to wit: (1) whether the MeTC, RTC
and the CA correctly applied the legal presumption that Chua has
knowledge of the insufficiency of funds at the time he issued the check
based on his alleged receipt of the demand letter dated November 30,
1993 and his failure to make good the checks five days from such receipt;
and (2) whether the said courts correctly considered the demand letter

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dated November 30, 1993 as newly discovered evidence. As to the first
issue, it is not disputed that the subject demand letter, while bearing the
signature of Chua, does not indicate any date as to his receipt thereof.
There being no disagreement as to this fact, the propriety of the conclusion
drawn from the same by the courts below, that is, the date of the said letter
is considered as the date when Chua received the same for the purpose of
reckoning trie five-day period to make good the checks, clearly refers to a
question of law. Similarly, the second issue is one concerning a question of
law because it requires the application of the provision of the Rules of
Court concerning a newly discovered evidence.[32]

Nevertheless, assuming that the questions posed before this Court are
indeed factual, the rule that factual findings of the lower courts are not
proper subject of certiorari petition admits of exceptions. One of these
exceptions is when the lower courts failed to appreciate certain facts and
circumstances which, if taken into account, would materially affect the
result of the case. The Court finds the said exception applicable in the
instant case. Clearly, the petition deserves the consideration of this Court.

The prosecution failed to prove all the elements of the offenses charged.

In order to successfully hold an accused liable for violation of BP 22, the

following essential elements must be present: "(1) the making, drawing,
and issuance of any check to apply for account or for value; (2) the
knowledge of the maker, drawer, or issuer that at the time of issue he does
not have sufficient funds in br credit with the drawee bank for the payment
of the check in full upon its presentment; and (3) the 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, witjhout any valid cause,
ordered the bank to stop payment."[33] "Of the three (3) elefrients, the
second element is the hardest to prove as it involves a state of mind. Thus,
Section 2 of BP 22 creates a presumption of knowledge of insufficiency of
funds, which, however, arises only after it is proved that the issuer had
received a written notice of dishonor and that within five days from receipt
thereof, he failed to pay the amount of the check or to make arrangements
for its payment.[34]

In the instant case, what is in dispute is the existence of the second

element. Chua asserts that the absence of the date of his actual receipt on
the face of the demand letter dated November 30, 1993 prevented the legal
presumption of knowledge of insufficiency of funds from arising. On the
other hand, the MeTC opined that while the date of Chua's actual receipt of

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the subject demand letter is not affixed thereon, it is presumed that he
received the same on the date of the demand letter (November 30, 1993).
Moreover, the lower courts banked on the stimulation entered into by
Chua's counsel as to the existence of the demand letter anki of Chua's
signature thereon. By reason of such stipulation, they all held that Cljiua
could no longer impugn the said demand letter.

In Danao v. Court of Appeals,[35] the Court discussed the importance of

proving the date of actual receipt of the notice of dishonor, viz.:

In King vs. People, this Court, through Justice Artemio V. Panganiban,

held: "To hold a person liable under B.P. Blg. 22, it is not enough to
establish that a check issued was subsequently dishonored. It must be
shown further that the person who issued the check knew 'at the time of
issue that he does not have sufficient funds in or credit with the drawee
bank for the payment of such check in full upon its presentment.' Because
this element involves a state of mind which is difficult to establish, Section 2
of the law creates a prima facie presumption of such knowledge, as follows:

'SEC 2. Evidence of knowledge of insufficient funds - The making, drawing

and issuance of a check payment of which is refused by the drawee
because of insufficient funds in or credit with such bank, when presented
within ninety (90) days from the date of the check, shall be prima facie
evidence of knowledge of such insufficiency of funds or credit unless such
maker or drawer pays the holder thereof the amount due thereon, or makes
arrangements for payment in full by the drawee of such check within five
(5) banking days after receiving notice that such check has not been paid
by the drawee.

Thus, this Court further ruled in King, "in order to create the prima facie
presumption that the issuer knew of the insufficiency of funds, it must be
shown that he or she received a notice of dishonor and, within five banking
days thereafter, failed to satisfy the amount of the check or make
arrangement for its payment."

Indeed, the prima facie presumption in Section 2 of B.P. Blg. 22 "gives the
accused an opportunity to satisfy the amount indicated in the check and
thus avert prosecution. This opportunity, as this Court stated in Lozano vs.
Martinez, serves to mitigate the harshness of the law in its application.

In other words, if such notice of non-payment by the drawee bank is not

sent to the maker or drawer of the bum check, or if there is no proof as to
when such notice was received by the drawer, then the presumption
or prima facie evidence as provided in Section 2 of B.P. Blg. 22

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cannot arise, since there would simply be no way of reckoning the
crucial 5-day period."[36] (Italics in the original, emphasis supplied)

Similarly in the present case, there is no way to ascertain when the five-day
period under Section 22 of BP 22 would start and end since there is no
showing when Chua actually received the demand letter dated November
30, 1993. The MeTC cannot simply presume that the date of the demand
letter was likewise the date of Chua's receipt thereof. There is simply no
such presumption provided in our rules on evidence. In addition, from the
inception of this case Chua has consistently denied having received subject
demand letter. He maintains that the paper used for the purported demand
letter was still blank when presented to him for signature and that he signed
the same for another purpose. Given Chua's denial, it behooved upon the
prosecution to present proof of his actual receipt of the November 30, 1993
demand letter. However, all that the prosecution did was to present it
without, however, adducing any evidence as to the date of Chua's actual
receipt thereof. It must be stressed that [t]he prosecution must also prove
actual receipt of [the notice of dishonor] because the fact of service
provided for in the law is reckoned from receipt of such notice of dishonor
by the accused.[37] "The burden of proving notice rests upon the party
asserting its existence. Ordinarily, preponderance of evidence is sufficient
to prove notice. In criminal cases, however, the quantum of proof required
is proof beyond reasonable doubt. Hence, for B.P. Blg. 22 cases, there
should be clear proof of notice"[38] which the Court finds wanting in this
case.

Anent the stipulation entered into by Chua's counsel, the MeTC stated:

In the course of the said proceedings, the defense counsel manifested that
he is willing to stipulate as to the existence of the demand letter and the
signature of the accused as reflected on the face of the demand letter, x x x

x x x x

The prosecution had proved also that private complainant personally sent a
written notice of dishonor of the subject checks to the accused and that the
latter personally received the same. In fact, the defense stipulated in open
court the existence of the said demand letter and the signature of the
accused as reflected in the face of the demand letter, x x x. In view of that
stipulation, the defense is now estopped in denying its receipt thereof.[39]

As earlier mentioned, this ruling of the MeTC was affirmed by both the RTC
and the CA.

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The Court, however, disagrees with the lower courts. It is plain that the
stipulation only refers to the existence of the demand letter and of Chua's
signature thereon. In no way can an admission of Chua's receipt of the
demand letter be inferred therefrom. Hence, Chua cannot be considered
estopped from claiming non-receipt. Also, the Court observes that Chua's
admission with respect to his signature on the demand letter is consistent
with his claim that See made him sign blank papers where the contents of
the demand letter dated November 30, 1993 were later intercalated.

In view of the above discussion, the Court rules that the prosecution was
not able to sufficiently prove the existence of the second element of BP 22.

At any rate, the demand letter dated November 30, 1993 deserves no
weight and credence not only because it does not qualify as a newly
discovered evidence within the purview of the law but also because of its
doubtful character.

As may be recalled, the prosecution had already long rested its case when
it filed a Motion to Re-Open Presentation of Prosecution's Evidence and
Motion To Allow Prosecution To Submit Additional Formal Ofifer of
Evidence dated March 28, 2003. Intending to introduce the demand letter
dated November 30, 1993 as a newly discovered evidence, See attached
to the said motion an affidavit[40] of even date where he stated the
circumstances surrounding the fact of his location of the same, viz.:

2. When we initially presented our evidence in support of these criminal

complaints, I was already looking for a copy of the demand letter personally
served by the affiant (See) and duly received by [Chua];

3. That despite diligent efforts to locate the demand letter x x x dated

November 30, 1993, the same was not located until sometime in February
2002 when I was having our old house/office located at C-5 Christian
Street, Grace Village, Quezon City, cleaned and ready to be rented out;

4. x x x [upon] showing the same to the new handling public prosecutor, he

advised the affiant to have it presented in Court.[41]

In Ybiernas v. Tanco-Gabaldon,[42] the Court held that:

x x x The question of whether evidence is newly discovered has two

aspects: a temporal one, i.e., when was the evidence discovered, and a
predictive one, i.e., when should or could it have been discovered. It is to
the latter that the requirement of due diligence has relevance. We have
held that in order that a particular piece of evidence may be properly

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regarded as newly discovered to justify new trial, what is essential is not so
much the time when the evidence offered first sprang into existence nor the
time when it first came to the knowledge of the party now submitting it;
what is essential is that the offering party had exercised reasonable
diligence in seeking to locate such evidence before or during trial but had
nonetheless failed to secure it.

The Rules do not give an exact definition of due diligence, and whether the
movant has exercised due diligence depends upon the particular
circumstances of each case. Nonetheless, it has been observed that the
phrase is often equated with "reasonable promptness to avoid prejudice to
the defendant." In other words, the concept of due diligence has both a
time component and a good faith component. The movant for a new trial
must not only act in a timely fashion in gathering evidence in support of the
motion; he must act reasonably and in good faith as well. Due diligence
contemplates that the defendant acts reasonably and in good faith to obtain
the evidence, in light of the totality of the circumstances and the facts
known to him.[43]

"Under the Rules of Court, the requisites for newly discovered evidence
are: (a) the evidence was discovered after trial; (b) such evidence could not
have been discovered and produced at the trial with reasonable diligence;
and (c) it is material, not merely cumulative, corroborative or impeaching,
and is of such weight that, if admitted, will probably change the
judgment."[44]

In this case, the Court holds that the demand letter dated November 30,
1993 does not qualify as a newly discovered evidence within the purview of
the law. Per See's statements in his affidavit, the said evidence was
already known to him at the time he filed his complaint against Chua. It was
also apparently available considering that it was just kept in his house.
Undeniably, had See exercised reasonable diligence, he could have
promptly located the said demand letter and presented it during trial.
However, the circumstances suggest otherwise.

Curiously, while See claims that the demand letter dated November 30,
1993 was already existing at the time he filed the complaint, the same was
not mentioned therein. Only the demand letter dated December 10, 1993
was referred to in the complaint, which per See's own allegations, was also
not actually received by Chua. In addition, the prosecution failed to present
the original copy of the demand letter dated December 10, 1993 during
trial. Clearly on the basis of the demand letter dated December 10, 1993
alone, the prosecution cannot possibly establish the existence of the

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second element of the offense. Indeed, the surrounding circumstances and
the doubtful character of the demand letter dated November 30, 1993 make
it susceptible to the conclusion that its introduction was a mere afterthought
- a belated attempt to fill in a missing component necessary for the
existence of the second element of BP 22.

It may not be amiss to add at this point that out of the 54 cases for violation
of BP 22 filed against Chua, 22 involve checks issued on November 30,
1993 or thereafter. Hence, the lower courts grievously erred in convicting
Chua for those 22 cases on the basis of a purported demand letter written
and sent to Chua prior to the issuance of said 22 checks. Checks can only
be dishonored after they have been issued and presented for payment.
Before that, dishonor cannot take place. Thus, a demand letter that
precedes the issuance of checks cannot constitute as sufficient notice of
dishonor within the contemplation of BP 22. It is likewise significant to note
that aside from the absence of a date, the signature of Chua appearing on
the questioned November 30, 1993 demand letter is not accompanied by
any word or phrase indicating that he affixed his signature thereon to
signify his receipt thereof. Indeed, "conviction must rest upon the strength
of the evidence of the prosecution and not on the weakness of the
evidence for the defense."[45] In view of the foregoing, the Court cannot
accord the demand letter dated November 30, 1993 any weight and
credence. Consequently, it cannot be used to support Chua's guilt of the
offenses charged.

All told, the Court cannot convict Chua for violation of BP 22 with moral
certainty.

Chua's acquittal, however, does not entail the extinguishment of his civil
liability for the dishonored checks.[46] "An acquittal based on lack of proof
beyond reasonable doubt does not preclude the award of civil damages."[47]
For this reason, Chua must be directed to restitute See the total amount of
the face value of all the checks subject of the case with legal interest at the
rate of 12% per annum reckoned from the time the said checks became
due and demandable up to June 30, 2013 and 6% per annum from July 1,
2013 until fully paid.[48]

WHEREFORE, the Court GRANTS the Petition. The assailed Decision

dated November 11, 2010 of the Court of Appeals in CA-GR. CR No.
33079 which affirmed the Decisions of the Metropolitan Trial Court of
Quezon City, Branch 36 and the Regional Trial Court of Quezon City,
Branch 219 finding petitioner Robert Chua guilty beyond reasonable doubt

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of 54 counts of Violation of Batas Pambansa Blg. 22 is REVERSED and
SET ASIDE. Petitioner Robert Chua is hereby ACQUITTED on the ground
that his guilt has not been established beyond reasonable doubt and
ordered RELEASED immediately unless he is detained for some other
legal cause. He is ordered, however, to indemnify the private complainant
Philip See the total value of the 54 checks subject of this case plus legal
interest of 12% per annum from the time the said sum became due and
demandable until June 30, 2013 and 6% per annum from July 1, 2013 until
fully paid.

SO ORDERED.

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