ONE

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-22405

June 30, 1971

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.

PHILIPPINE EDUCATION CO., INC., plaintiff-appellant,

vs.
MAURICIO A. SORIANO, ET AL., defendant-appellees.

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.

DIZON, J.:

On January 8, 1962 appellant filed an action against appellees in the

Municipal Court of Manila praying for judgment as follows:

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 coappellee, 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.

WHEREFORE, plaintiff prays that after hearing defendants be ordered:

(a)
To countermand the notice given to the Bank of America on
September 27, 1961, deducting from the said Bank's clearing account the
sum of P200.00 represented by postal money order No. 124688, or in the
alternative indemnify the plaintiff in the same amount with interest at 8-
% per annum from September 27, 1961, which is the rate of interest being
paid by plaintiff on its overdraft account;
(b)
To pay to the plaintiff out of their own personal funds, jointly and
severally, actual and moral damages in the amount of P1,000.00 or in such
amount as will be proved and/or determined by this Honorable Court:
exemplary damages in the amount of P1,000.00, attorney's fees of
P1,000.00, and the costs of action.
Plaintiff also prays for such other and further relief as may be deemed just
and equitable.
On November 17, 1962, after the parties had submitted the stipulation of
facts reproduced at pages 12 to 15 of the Record on Appeal, the abovenamed 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-% per annum from September 27, 1961
until fully paid; without any pronouncement as to cost and attorney's fees.
The case was appealed to the Court of First Instance of Manila where, after
the parties had resubmitted the same stipulation of facts, the appealed
decision dismissing the complaint, with costs, was rendered.
The first, second and fifth assignments of error discussed in appellant's
brief are related to the other and will therefore be discussed jointly. They

raise this main issue: that the postal money order in question is a
negotiable instrument; that its nature as such is not in anyway affected by
the letter dated October 26, 1948 signed by the Director of Posts and
addressed to all banks with a clearing account with the Post Office, and
that money orders, once issued, create a contractual relationship of debtor
and creditor, respectively, between the government, on the one hand, and
the remitters payees or endorses, on the other.
It is not disputed that our postal statutes were patterned after statutes in
force in the United States. For this reason, ours are generally construed in
accordance with the construction given in the United States to their own
postal statutes, in the absence of any special reason justifying a departure
from this policy or practice. The weight of authority in the United States is
that postal money orders are not negotiable instruments (Bolognesi vs.
U.S. 189 Fed. 395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912), the
reason behind this rule being that, in establishing and operating a postal
money order system, the government is not engaging in commercial
transactions but merely exercises a governmental power for the public
benefit.
It is to be noted in this connection that some of the restrictions imposed
upon money orders by postal laws and regulations are inconsistent with
the character of negotiable instruments. For instance, such laws and
regulations usually provide for not more than one endorsement; payment
of money orders may be withheld under a variety of circumstances (49 C.J.
1153).
Of particular application to the postal money order in question are the
conditions laid down in the letter of the Director of Posts of October 26,
1948 (Exhibit 3) to the Bank of America for the redemption of postal
money orders received by it from its depositors. Among others, the
condition is imposed that "in cases of adverse claim, the money order or
money orders involved will be returned to you (the bank) and the,
corresponding amount will have to be refunded to the Postmaster, Manila,
who reserves the right to deduct the value thereof from any amount due
you if such step is deemed necessary." The conditions thus imposed in
order to enable the bank to continue enjoying the facilities theretofore
enjoyed by its depositors, were accepted by the Bank of America. The
latter is therefore bound by them. That it is so is clearly referred from the
fact that, upon receiving advice that the amount represented by the
money order in question had been deducted from its clearing account with
the Manila Post Office, it did not file any protest against such action.
Moreover, not being a party to the understanding existing between the
postal officers, on the one hand, and the Bank of America, on the other,
appellant has no right to assail the terms and conditions thereof on the
ground that the letter setting forth the terms and conditions aforesaid is
void because it was not issued by a Department Head in accordance with
Sec. 79 (B) of the Revised Administrative Code. In reality, however, said
legal provision does not apply to the letter in question because it does not
provide for a department regulation but merely sets down certain

conditions upon the privilege granted to the Bank of 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.
TWO
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 97753 August 10, 1992
CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY,
respondents.
REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal of the
decision promulgated by respondent court on March 8, 1991 in CA-G.R. CV
No. 23615 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

22 Feb. 82
90101 to 90120
26 Feb. 82
74602 to 74691
2 Mar. 82
74701 to 74740
4 Mar. 82
90127 to 90146
5 Mar. 82
74797 to 94800
5 Mar. 82
89965 to 89986
5 Mar. 82
70147 to 90150
8 Mar. 82
90001 to 90020
9 Mar. 82
90023 to 90050
9 Mar. 82
89991 to 90000
9 Mar. 82
90251 to 90272

Total 280
P1,120,000
===== ========

Amount
20
90
40
20
4
22
4
20
28
10
22

P80,000
360,000
160,000
80,000
16,000
88,000
16,000
80,000
112,000
40,000
88,000

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).
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.

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.
(Sgd. Illegible)

(Sgd. Illegible)

Branch Manager way back in 1982, testified in open court that the
depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz.
xxx

xxx

xxx

Atty. Calida:
q
In other words Mr. Witness, you are saying that per books of the
bank, the depositor referred (sic) in these certificates states that it was
Angel dela Cruz?

witness:

AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are non-negotiable
instruments, nationalizing as follows:

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:

. . . 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

And no other person or entity or company, Mr. Witness?

witness:
a
xxx

None, your Honor. 7

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
xxx

Angel dela Cruz is the depositor. 8

xxx

xxx

On this score, the accepted rule is that the negotiability or nonnegotiability 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 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
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.
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:
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
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.
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
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.

THREE
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 88866

February 18, 1991

METROPOLITAN BANK & TRUST COMPANY, petitioner,

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

repeated inquiries and also as an accommodation for a "valued client," the

petitioner says it finally decided to allow Golden Savings to withdraw from
the proceeds of the
warrants. 3
The first withdrawal was made on July 9, 1979, in the amount of
P508,000.00, the second on July 13, 1979, in the amount of P310,000.00,
and the third on July 16, 1979, in the amount of P150,000.00. The total
withdrawal was P968.000.00. 4
In turn, Golden Savings subsequently allowed Gomez to make withdrawals
from his own account, eventually collecting the total amount of
P1,167,500.00 from the proceeds of the apparently cleared warrants. The
last withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the
warrants had been dishonored by the Bureau of Treasury on July 19, 1979,
and demanded the refund by Golden Savings of the amount it had
previously withdrawn, to make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the
Regional Trial Court of Mindoro. 5 After trial, judgment was rendered in
favor of Golden Savings, which, however, filed a motion for reconsideration
even as Metrobank filed its notice of appeal. On November 4, 1986, the
lower court modified its decision thus:

On appeal to the respondent court, 6 the decision was affirmed, prompting

Metrobank to file this petition for review on the following grounds:
1.
Respondent Court of Appeals erred in disregarding and failing to
apply the clear contractual terms and conditions on the deposit slips
allowing Metrobank to charge back any amount erroneously credited.
(a)
Metrobank's right to charge back is not limited to instances where
the checks or treasury warrants are forged or unauthorized.
(b)
Until such time as Metrobank is actually paid, its obligation is that of
a mere collecting agent which cannot be held liable for its failure to collect
on the warrants.
2.
Under the lower court's decision, affirmed by respondent Court of
Appeals, Metrobank is made to pay for warrants already dishonored,
thereby perpetuating the fraud committed by Eduardo Gomez.
3.
Respondent Court of Appeals erred in not finding that as between
Metrobank and Golden Savings, the latter should bear the loss.
4.
Respondent Court of Appeals erred in holding that the treasury
warrants involved in this case are not negotiable instruments.
The petition has no merit.

ACCORDINGLY, judgment is hereby rendered:

1.

Dismissing the complaint with costs against the plaintiff;

2.
Dissolving and lifting the writ of attachment of the properties of
defendant Golden Savings and Loan Association, Inc. and defendant
Spouses Magno Castillo and Lucia Castillo;
3.
Directing the plaintiff to reverse its action of debiting Savings
Account No. 2498 of the sum of P1,754,089.00 and to reinstate and credit
to such account such amount existing before the debit was made including
the amount of P812,033.37 in favor of defendant Golden Savings and Loan
Association, Inc. and thereafter, to allow defendant Golden Savings and
Loan Association, Inc. to withdraw the amount outstanding thereon before
the debit;
4.
Ordering the plaintiff to pay the defendant Golden Savings and Loan
Association, Inc. attorney's fees and expenses of litigation in the amount of
P200,000.00.
5.
Ordering the plaintiff to pay the defendant Spouses Magno Castillo
and Lucia Castillo attorney's fees and expenses of litigation in the amount
of P100,000.00.
SO ORDERED.

From the above undisputed facts, it would appear to the Court that
Metrobank was indeed negligent in giving Golden Savings the impression
that the treasury warrants had been cleared and that, consequently, it was
safe to allow Gomez to withdraw the proceeds thereof from his account
with it. Without such assurance, Golden Savings would not have allowed
the withdrawals; with such assurance, there was no reason not to allow the
withdrawal. Indeed, Golden Savings might even have incurred liability for
its refusal to return the money that to all appearances belonged to the
depositor, who could therefore withdraw it any time and for any reason he
saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden
Savings deposited them to its account with Metrobank. Golden Savings had
no clearing facilities of its own. It relied on Metrobank to determine the
validity of the warrants through its own services. The proceeds of the
warrants were withheld from Gomez until Metrobank allowed Golden
Savings itself to withdraw them from its own deposit. 7 It was only when
Metrobank gave the go-signal that Gomez was finally allowed by Golden
Savings to withdraw them from his own account.
The argument of Metrobank that Golden Savings should have exercised
more care in checking the personal circumstances of Gomez before
accepting his deposit does not hold water. It was Gomez who was
entrusting the warrants, not Golden Savings that was extending him a

loan; and moreover, the treasury warrants were subject to clearing,

pending which the depositor could not withdraw its proceeds. There was no
question of Gomez's identity or of the genuineness of his signature as
checked by Golden Savings. In fact, the treasury warrants were dishonored
allegedly because of the forgery of the signatures of the drawers, not of
Gomez as payee or indorser. Under the circumstances, it is clear that
Golden Savings acted with due care and diligence and cannot be faulted
for the withdrawals it allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary carelessness. The amount
involved was not trifling more than one and a half million pesos (and this
was 1979). There was no reason why it should not have waited until the
treasury warrants had been cleared; it would not have lost a single centavo
by waiting. Yet, despite the lack of such clearance and notwithstanding
that it had not received a single centavo from the proceeds of the treasury
warrants, as it now repeatedly stresses it allowed Golden Savings to
withdraw not once, not twice, but thrice from the uncleared treasury
warrants in the total amount of P968,000.00
Its reason? It was "exasperated" over the persistent inquiries of Gloria
Castillo about the clearance and it also wanted to "accommodate" a valued
client. It "presumed" that the warrants had been cleared simply because of
"the lapse of one week." 8 For a bank with its long experience, this
explanation is unbelievably naive.
And now, to gloss over its carelessness, Metrobank would invoke the
conditions printed on the dorsal side of the deposit slips through which the
treasury warrants were deposited by Golden Savings with its Calapan
branch. The conditions read as follows:
Kindly note that in receiving items on deposit, the bank obligates itself only
as the depositor's collecting agent, assuming no responsibility beyond care
in selecting correspondents, and until such time as actual payment shall
have come into possession of this bank, the right is reserved to charge
back to the depositor's account any amount previously credited, whether
or not such item is returned. This also applies to checks drawn on local
banks and bankers and their branches as well as on this bank, which are
unpaid due to insufficiency of funds, forgery, unauthorized overdraft or any
other reason. (Emphasis supplied.)
According to Metrobank, the said conditions clearly show that it was acting
only as a collecting agent for Golden Savings and give it the right to
"charge back to the depositor's account any amount previously credited,
whether or not such item is returned. This also applies to checks ". . . which
are unpaid due to insufficiency of funds, forgery, unauthorized overdraft of
any other reason." It is claimed that the said conditions are in the nature of
contractual stipulations and became binding on Golden Savings when
Gloria Castillo, as its Cashier, signed the deposit slips.
Doubt may be expressed about the binding force of the conditions,
considering that they have apparently been imposed by the bank

unilaterally, without the consent of the depositor. Indeed, it could be

argued that the depositor, in signing the deposit slip, does so only to
identify himself and not to agree to the conditions set forth in the given
permit at the back of the deposit slip. We do not have to rule on this
matter at this time. At any rate, the Court feels that even if the deposit slip
were considered a contract, the petitioner could still not validly disclaim
responsibility thereunder in the light of the circumstances of this case.
In stressing that it was acting only as a collecting agent for Golden
Savings, Metrobank seems to be suggesting that as a mere agent it cannot
be liable to the principal. This is not exactly true. On the contrary, Article
1909 of the Civil Code clearly provides that
Art. 1909. The agent is responsible not only for fraud, but also for
negligence, which shall be judged 'with more or less rigor by the courts,
according to whether the agency was or was not for a compensation.
The negligence of Metrobank has been sufficiently established. To repeat
for emphasis, it was the clearance given by it that assured Golden Savings
it was already safe to allow Gomez to withdraw the proceeds of the
treasury warrants he had deposited Metrobank misled Golden Savings.
There may have been no express clearance, as Metrobank insists (although
this is refuted by Golden Savings) but in any case that clearance could be
implied from its allowing Golden Savings to withdraw from its account not
only once or even twice but three times. The total withdrawal was in
excess of its original balance before the treasury warrants were deposited,
which only added to its belief that the treasury warrants had indeed been
cleared.
Metrobank's argument that it may recover the disputed amount if the
warrants are not paid for any reason is not acceptable. Any reason does
not mean no reason at all. Otherwise, there would have been no need at all
for Golden Savings to deposit the treasury warrants with it for clearance.
There would have been no need for it to wait until the warrants had been
cleared before paying the proceeds thereof to Gomez. Such a condition, if
interpreted in the way the petitioner suggests, is not binding for being
arbitrary and unconscionable. And it becomes more so in the case at bar
when it is considered that the supposed dishonor of the warrants was not
communicated to Golden Savings before it made its own payment to
Gomez.
The belated notification aggravated the petitioner's earlier negligence in
giving express or at least implied clearance to the treasury warrants and
allowing payments therefrom to Golden Savings. But that is not all. On top
of this, the supposed reason for the dishonor, to wit, the forgery of the
signatures of the general manager and the auditor of the drawer
corporation, has not been established. 9 This was the finding of the lower
courts which we see no reason to disturb. And as we said in MWSS v. Court
of Appeals: 10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It

must be established by clear, positive and convincing evidence. This was

not done in the present case.
A no less important consideration is the circumstance that the treasury
warrants in question are not negotiable instruments. Clearly stamped on
their face is the word "non-negotiable." Moreover, and this is of equal
significance, it is indicated that they are payable from a particular fund, to
wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the
underscored parts, are pertinent:
Sec. 1. Form of negotiable instruments. An instrument to be
negotiable must conform to the following requirements:
(a)

It must be in writing and signed by the maker or drawer;

(b)
Must contain an unconditional promise or order to pay a sum certain
in money;
(c)
Must be payable on demand, or at a fixed or determinable future
time;
(d)

Must be payable to order or to bearer; and

(e)
Where the instrument is addressed to a drawee, he must be named
or otherwise indicated therein with reasonable certainty.
xxx

xxx

xxx

Sec. 3. When promise is unconditional. An unqualified order or promise

to pay is unconditional within the meaning of this Act though coupled with

(a)
An indication of a particular fund out of which reimbursement is to be
made or a particular account to be debited with the amount; or
(b)
A statement of the transaction which gives rise to the instrument
judgment.
But an order or promise to pay out of a particular fund is not unconditional.
The indication of Fund 501 as the source of the payment to be made on the
treasury warrants makes the order or promise to pay "not unconditional"
and the warrants themselves non-negotiable. There should be no question
that the exception on Section 3 of the Negotiable Instruments Law is
applicable in the case at bar. This conclusion conforms to Abubakar vs.
Auditor General 11 where the Court held:
The petitioner argues that he is a holder in good faith and for value of a
negotiable instrument and is entitled to the rights and privileges of a

holder in due course, free from defenses. But this treasury warrant is not
within the scope of the negotiable instrument law. For one thing, the
document bearing on its face the words "payable from the appropriation
for food administration, is actually an Order for payment out of "a
particular fund," and is not unconditional and does not fulfill one of the
essential requirements of a negotiable instrument (Sec. 3 last sentence
and section [1(b)] of the Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general,
Golden Savings assumed that they were "genuine and in all respects what
they purport to be," in accordance with Section 66 of the Negotiable
Instruments Law. The simple reason is that this law is not applicable to the
non-negotiable treasury warrants. The indorsement was made by Gloria
Castillo not for the purpose of guaranteeing the genuineness of the
warrants but merely to deposit them with Metrobank for clearing. It was in
fact Metrobank that made the guarantee when it stamped on the back of
the warrants: "All prior indorsement and/or lack of endorsements
guaranteed, Metropolitan Bank & Trust Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the
Philippine Islands, 12 but we feel this case is inapplicable to the present
controversy.1wphi1 That case involved checks whereas this case involves
treasury warrants. Golden Savings never represented that the warrants
were negotiable but signed them only for the purpose of depositing them
for clearance. Also, the fact of forgery was proved in that case but not in
the case before us. Finally, the Court found the Jai Alai Corporation
negligent in accepting the checks without question from one Antonio
Ramirez notwithstanding that the payee was the Inter-Island Gas Services,
Inc. and it did not appear that he was authorized to indorse it. No similar
negligence can be imputed to Golden Savings.
We find the challenged decision to be basically correct. However, we will
have to amend it insofar as it directs the petitioner to credit Golden
Savings with the full amount of the treasury checks deposited to its
account.
The total value of the 32 treasury warrants dishonored was P1,754,089.00,
from which Gomez was allowed to withdraw P1,167,500.00 before Golden
Savings was notified of the dishonor. The amount he has withdrawn must
be charged not to Golden Savings but to Metrobank, which must bear the
consequences of its own negligence. But the balance of P586,589.00
should be debited to Golden Savings, as obviously Gomez can no longer be
permitted to withdraw this amount from his deposit because of the
dishonor of the warrants. Gomez has in fact disappeared. To also credit the
balance to Golden Savings would unduly enrich it at the expense of
Metrobank, let alone the fact that it has already been informed of the
dishonor of the treasury warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the modification
that Paragraph 3 of the dispositive portion of the judgment of the lower
court shall be reworded as follows:

3.
Debiting Savings Account No. 2498 in the sum of P586,589.00 only
and thereafter allowing defendant Golden Savings & Loan Association, Inc.
to withdraw the amount outstanding thereon, if any, after the debit.
SO ORDERED.
Narvasa, Gancayco, Grio-Aquino and Medialdea, JJ., concur.
FOUR
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

(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:

G.R. No. 89252 May 24, 1993

RAUL SESBREO, petitioner,
vs.
HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND
PILIPINAS BANK, respondents.

PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro ManilaFebruary 9, 1981

VALUE DATE

Salva, Villanueva & Associates for Delta Motors Corporation.

TO Raul Sesbreo
Reyes, Salazar & Associates for Pilipinas Bank.
Aril 6, 1981

MATURITY DATE
FELICIANO, J.:
NO. 10805
On 9 February 1981, petitioner Raul Sesbreo 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;

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.
PILIINAS 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.
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 1981 3 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. 5 The 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 plaintiffappellant, 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 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-visDelta; 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.

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 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 Note 10 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

I.
We consider Delta's arguments seriatim.
We consider first the relationship between petitioner and Delta.
The Court of appeals in effect held that petitioner acquired no rights vis-avis 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:

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

instrument must be distinguished from theassignment 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)
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
SVPTreasurer
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 President 13
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,
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 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. 143A 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
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.

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

The record shows, however, that petitioner notified Delta of the fact of the
assignment to him only on 14 July 1981, 19that 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:

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
assignee of Philfinance, is similarly disabled from collecting from Delta the
portion of the Note assigned to him.

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

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 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 Sesbreo.
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 Sesbreo 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
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.

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 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 Sesbreo. 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 Sesbreo 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.

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.

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
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 havevis-a-vis Philfinance.
III.

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.

FIVE
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 113236

March 5, 2001

FIRESTONE TIRE & RUBBER COMPANY OF THE PHILIPPINES,

petitioner,
vs.
COURT OF APPEALS and LUZON DEVELOPMENT BANK,
respondents.

42127
P1,198,092.80

QUISUMBING, J.:

July 15, 1978

This petition assails the decision 1 dated December 29, 1993 of the Court
of Appeals in CA-G.R. CV No. 29546, which affirmed the judgment 2 of the
Regional Trial Court of Pasay City, Branch 113 in Civil Case No. PQ-7854-P,
dismissing Firestone's complaint for damages.

42128
940,190.00
Aug. 15, 1978

The facts of this case, adopted by the CA and based on findings by the trial
court, are as follows:
. . . [D]efendant is a banking corporation. It operates under a certificate of
authority issued by the Central Bank of the Philippines, and among its
activities, accepts savings and time deposits. Said defendant had as one of
its client-depositors the Fojas-Arca Enterprises Company ("Fojas-Arca" for
brevity). Fojas-Arca maintaining a special savings account with the
defendant, the latter authorized and allowed withdrawals of funds
therefrom through the medium of special withdrawal slips. These are
supplied by the defendant to Fojas-Arca.
In January 1978, plaintiff and Fojas-Arca entered into a "Franchised
Dealership Agreement" (Exh. B) whereby Fojas-Arca has the privilege to
purchase on credit and sell plaintiff's products.
On January 14, 1978 up to May 15, 1978. Pursuant to the aforesaid
Agreement, Fojas-Arca purchased on credit Firestone products from plaintiff
with a total amount of P4,896,000.00. In payment of these purchases,
Fojas-Arca delivered to plaintiff six (6) special withdrawal slips drawn upon
the defendant. In turn, these were deposited by the plaintiff with its current
account with the Citibank. All of them were honored and paid by the
defendant. This singular circumstance made plaintiff believe [sic] and
relied [sic] on the fact that the succeeding special withdrawal slips drawn
upon the defendant would be equally sufficiently funded. Relying on such
confidence and belief and as a direct consequence thereof, plaintiff
extended to Fojas-Arca other purchases on credit of its products.
On the following dates Fojas-Arca purchased Firestone products on credit
(Exh. M, I, J, K) and delivered to plaintiff the corresponding special
withdrawal slips in payment thereof drawn upon the defendant, to wit:
DATE

42129
880,000.00
Sep. 15, 1978
42130
981,500.00
These were likewise deposited by plaintiff in its current account with
Citibank and in turn the Citibank forwarded it [sic] to the defendant for
payment and collection, as it had done in respect of the previous special
withdrawal slips. Out of these four (4) withdrawal slips only withdrawal slip
No. 42130 in the amount of P981,500.00 was honored and paid by the
defendant in October 1978. Because of the absence for a long period
coupled with the fact that defendant honored and paid withdrawal slips No.
42128 dated July 15, 1978, in the amount of P981,500.00 plaintiff's belief
was all the more strengthened that the other withdrawal slips were likewise
sufficiently funded, and that it had received full value and payment of
Fojas-Arca's credit purchased then outstanding at the time. On this basis,
plaintiff was induced to continue extending to Fojas-Arca further purchase
on credit of its products as per agreement (Exh. "B").
However, on December 14, 1978, plaintiff was informed by Citibank that
special withdrawal slips No. 42127 dated June 15, 1978 for P1,198,092.80
and No. 42129 dated August 15, 1978 for P880,000.00 were dishonored
and not paid for the reason 'NO ARRANGEMENT.' As a consequence, the
Citibank debited plaintiff's account for the total sum of P2,078,092.80
representing the aggregate amount of the above-two special withdrawal
slips. Under such situation, plaintiff averred that the pecuniary losses it
suffered is caused by and directly attributable to defendant's gross
negligence.

WITHDRAWAL SLIP NO.

AMOUNT
June 15, 1978

On September 25, 1979, counsel of plaintiff served a written demand upon

the defendant for the satisfaction of the damages suffered by it. And due
to defendant's refusal to pay plaintiff's claim, plaintiff has been constrained
to file this complaint, thereby compelling plaintiff to incur litigation

expenses and attorney's fees which amount are recoverable from the
defendant.
Controverting the foregoing asseverations of plaintiff, defendant asserted,
inter alia that the transactions mentioned by plaintiff are that of plaintiff
and Fojas-Arca only, [in] which defendant is not involved; Vehemently, it
was denied by defendant that the special withdrawal slips were honored
and treated as if it were checks, the truth being that when the special
withdrawal slips were received by defendant, it only verified whether or not
the signatures therein were authentic, and whether or not the deposit level
in the passbook concurred with the savings ledger, and whether or not the
deposit is sufficient to cover the withdrawal; if plaintiff treated the special
withdrawal slips paid by Fojas-Arca as checks then plaintiff has to blame
itself for being grossly negligent in treating the withdrawal slips as check
when it is clearly stated therein that the withdrawal slips are nonnegotiable; that defendant is not a privy to any of the transactions
between Fojas-Arca and plaintiff for which reason defendant is not duty
bound to notify nor give notice of anything to plaintiff. If at first defendant
had given notice to plaintiff it is merely an extension of usual bank
courtesy to a prospective client; that defendant is only dealing with its
depositor Fojas-Arca and not the plaintiff. In summation, defendant
categorically stated that plaintiff has no cause of action against it (pp. 1-3,
Dec.; pp. 368-370, id).3
Petitioner's complaint4 for a sum of money and damages with the Regional
Trial Court of Pasay City, Branch 113, docketed as Civil Case No. 29546,
was dismissed together with the counterclaim of defendant.
Petitioner appealed the decision to the Court of Appeals. It averred that
respondent Luzon Development Bank was liable for damages under Article
21765 in relation to Articles 196 and 207 of the Civil Code. As noted by the
CA, petitioner alleged the following tortious acts on the part of private
respondent: 1) the acceptance and payment of the special withdrawal slips
without the presentation of the depositor's passbook thereby giving the
impression that the withdrawal slips are instruments payable upon
presentment; 2) giving the special withdrawal slips the general appearance
of checks; and 3) the failure of respondent bank to seasonably warn
petitioner that it would not honor two of the four special withdrawal slips.
On December 29, 1993, the Court of Appeals promulgated its assailed
decision. It denied the appeal and affirmed the judgment of the trial court.
According to the appellate court, respondent bank notified the depositor to
present the passbook whenever it received a collection note from another
bank, belying petitioner's claim that respondent bank was negligent in not
requiring a passbook under the subject transaction. The appellate court
also found that the special withdrawal slips in question were not purposely
given the appearance of checks, contrary to petitioner's assertions, and
thus should not have been mistaken for checks. Lastly, the appellate court
ruled that the respondent bank was under no obligation to inform
petitioner of the dishonor of the special withdrawal slips, for to do so would
have been a violation of the law on the secrecy of bank deposits.

Hence, the instant petition, alleging the following assignment of error:

25.
The CA grievously erred in holding that the [Luzon Development]
Bank was free from any fault or negligence regarding the dishonor, or in
failing to give fair and timely advice of the dishonor, of the two
intermediate LDB Slips and in failing to award damages to Firestone
pursuant to Article 2176 of the New Civil Code.8
The issue for our consideration is whether or not respondent bank should
be held liable for damages suffered by petitioner, due to its allegedly
belated notice of non-payment of the subject withdrawal slips.
The initial transaction in this case was between petitioner and Fojas-Arca,
whereby the latter purchased tires from the former with special withdrawal
slips drawn upon Fojas-Arca's special savings account with respondent
bank. Petitioner in turn deposited these withdrawal slips with Citibank. The
latter credited the same to petitioner's current account, then presented the
slips for payment to respondent bank. It was at this point that the bone of
contention arose.
On December 14, 1978, Citibank informed petitioner that special
withdrawal slips Nos. 42127 and 42129 dated June 15, 1978 and August
15, 1978, respectively, were refused payment by respondent bank due to
insufficiency of Fojas-Arca's funds on deposit. That information came about
six months from the time Fojas-Arca purchased tires from petitioner using
the subject withdrawal slips. Citibank then debited the amount of these
withdrawal slips from petitioner's account, causing the alleged pecuniary
damage subject of petitioner's cause of action.
At the outset, we note that petitioner admits that the withdrawal slips in
question were non-negotiable.9 Hence, the rules governing the giving of
immediate notice of dishonor of negotiable instruments do not apply in this
case.10 Petitioner itself concedes this point.11 Thus, respondent bank was
under no obligation to give immediate notice that it would not make
payment on the subject withdrawal slips. Citibank should have known that
withdrawal slips were not negotiable instruments. It could not expect these
slips to be treated as checks by other entities. Payment or notice of
dishonor from respondent bank could not be expected immediately, in
contrast to the situation involving checks.
In the case at bar, it appears that Citibank, with the knowledge that
respondent Luzon Development Bank, had honored and paid the previous
withdrawal slips, automatically credited petitioner's current account with
the amount of the subject withdrawal slips, then merely waited for the
same to be honored and paid by respondent bank. It presumed that the
withdrawal slips were "good."
It bears stressing that Citibank could not have missed the non-negotiable
nature of the withdrawal slips. The essence of negotiability which
characterizes a negotiable paper as a credit instrument lies in its freedom

to circulate freely as a substitute for money.12 The withdrawal slips in

question lacked this character.
A bank is under obligation to treat the accounts of its depositors with
meticulous care, whether such account consists only of a few hundred
pesos or of millions of pesos.13 The fact that the other withdrawal slips
were honored and paid by respondent bank was no license for Citibank to
presume that subsequent slips would be honored and paid immediately. By
doing so, it failed in its fiduciary duty to treat the accounts of its clients
with the highest degree of care.14
In the ordinary and usual course of banking operations, current account
deposits are accepted by the bank on the basis of deposit slips prepared
and signed by the depositor, or the latter's agent or representative, who
indicates therein the current account number to which the deposit is to be
credited, the name of the depositor or current account holder, the date of
the deposit, and the amount of the deposit either in cash or in check.15
The withdrawal slips deposited with petitioner's current account with
Citibank were not checks, as petitioner admits. Citibank was not bound to
accept the withdrawal slips as a valid mode of deposit. But having
erroneously accepted them as such, Citibank and petitioner as accountholder must bear the risks attendant to the acceptance of these
instruments. Petitioner and Citibank could not now shift the risk and hold
private respondent liable for their admitted mistake.
WHEREFORE, the petition is DENIED and the decision of the Court of
Appeals in CA-G.R. CV No. 29546 is AFFIRMED. Costs against petitioner.

SIX
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
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
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 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.
SEVEN
Republic of the Philippines
SUPREME COURT
Manila
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.
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 PLAINTIFFPETITIONER HAS NO CAUSE OF ACTION AGAINST DEFENDANTSRESPONDENTS 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.

against any or all of the defendants, in the alternative or otherwise.

A cause of action is defined as an act or omission of one party in violation
of the legal right or rights of another. The essential elements are: (1) legal
right of the plaintiff; (2) correlative obligation of the defendant; and (3) an
act or omission of the defendant in violation of said legal right. 2
The normal parties to a check are the drawer, the payee and the drawee
bank. Courts have long recognized the business custom of using printed
checks where blanks are provided for the date of issuance, the name of the
payee, the amount payable and the drawer's signature. All the drawer has
to do when he wishes to issue a check is to properly fill up the blanks and
sign it. However, the mere fact that he has done these does not give rise to
any liability on his part, until and unless the check is delivered to the payee
or his representative. A negotiable instrument, of which a check is, is not
only a written evidence of a contract right but is also a species of property.
Just as a deed to a piece of land must be delivered in order to convey title
to the grantee, so must a negotiable instrument be delivered to the payee
in order to evidence its existence as a binding contract. Section 16 of the
Negotiable Instruments Law, which governs checks, provides in part:
Every contract on a negotiable instrument is incomplete and revocable
until delivery of the instrument for the purpose of giving effect thereto. . . .

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

Thus, the payee of a negotiable instrument acquires no interest with

respect thereto until its delivery to him. 3 Delivery of an instrument means
transfer of possession, actual or constructive, from one person to another.
4 Without the initial delivery of the instrument from the drawer to the
payee, there can be no liability 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 wellsettled that a party cannot change his theory on appeal, as this would in
effect deprive the other party of his day in court. 5

Notwithstanding the above, it does not necessarily follow that the drawer
Sima Wei is freed from liability to petitioner Bank under the loan evidenced
by the promissory note agreed to by her. Her allegation that she has paid
the balance of her loan with the two checks payable to petitioner Bank has
no merit for, as We have earlier explained, these checks were never
delivered to petitioner Bank. And even granting, without admitting, that
there was delivery to petitioner Bank, the delivery of checks in payment of
an obligation does not constitute payment unless they are cashed or their
value is impaired through the fault of the creditor. 6 None of these
exceptions were alleged by respondent Sima Wei.
Therefore, unless respondent Sima Wei proves that she has been relieved
from liability on the promissory note by some other cause, petitioner Bank
has a right of action against her for the balance due thereon.
However, insofar as the other respondents are concerned, petitioner Bank
has no privity with them. Since petitioner Bank never received the checks
on which it based its action against said respondents, it never owned them
(the checks) nor did it acquire any interest therein. Thus, anything which
the respondents may have done with respect to said checks could not have
prejudiced petitioner Bank. It had no right or interest in the checks which
could have been violated by said respondents. Petitioner Bank has
therefore no cause of action against said respondents, in the alternative or
otherwise. If at all, it is Sima Wei, the drawer, who would have a cause of
action against her
co-respondents, if the allegations in the complaint are found to be true.
With respect to the second assignment of error raised by petitioner Bank
regarding the applicability of Section 13, Rule 3 of the Rules of Court, We
find it unnecessary to discuss the same in view of Our finding that the
petitioner Bank did not acquire any right or interest in the checks due to
lack of delivery. It therefore has no cause of action against the
respondents, in the alternative or otherwise.
In the light of the foregoing, the judgment of the Court of Appeals
dismissing the petitioner's complaint is AFFIRMED insofar as the second
cause of action is concerned. On the first cause of action, the case is
REMANDED to the trial court for a trial on the merits, consistent with this
decision, in order to determine whether respondent Sima Wei is liable to
the Development Bank of Rizal for any amount under the promissory note
allegedly signed by her.
SO ORDERED.
Narvasa, C.J., Padilla, Regalado and Nocon, JJ., concur.
EIGHT
Republic of the Philippines
SUPREME COURT
Manila
G.R. Nos. L-25836-37

January 31, 1981

THE PHILIPPINE BANK OF COMMERCE, plaintiff-appellee,

vs.
JOSE M. ARUEGO, defendant-appellant.

FERNANDEZ, J.:
The defendant, Jose M. Aruego, appealed to the Court of Appeals from the
order of the Court of First Instance of Manila, Branch XIII, in Civil Case No.
42066 denying his motion to set aside the order declaring him in default, 1
and from the order of said court in the same case denying his motion to set
aside the judgment rendered after he was declared in default. 2 These two
appeals of the defendant were docketed as CA-G.R. NO. 27734-R and CAG.R. NO. 27940-R, respectively.
Upon motion of the defendant on July 25, 1960, 3 he was allowed by the
Court of Appeals to file one consolidated record on appeal of CA-G.R. NO.
27734-R and CA-G.R. NO. 27940-R. 4
In a resolution promulgated on March 1, 1966, the Court of Appeals, First
Division, certified the consolidated appeal to the Supreme Court on the
ground that only questions of law are involved. 5
On December 1, 1959, the Philippine Bank of Commerce instituted against
Jose M. Aruego Civil Case No. 42066 for the recovery of the total sum of
about P35,000.00 with daily interest thereon from November 17, 1959 until
fully paid and commission equivalent to 3/8% for every thirty (30) days or
fraction thereof plus attorney's fees equivalent to 10% of the total amount
due and costs. 6 The complaint filed by the Philippine Bank of Commerce
contains twenty-two (22) causes of action referring to twenty-two (22)
transactions entered into by the said Bank and Aruego on different dates
covering the period from August 28, 1950 to March 14, 1951. 7 The sum
sought to be recovered represents the cost of the printing of "World
Current Events," a periodical published by the defendant. To facilitate the
payment of the printing the defendant obtained a credit accommodation
from the plaintiff. Thus, for every printing of the "World Current Events,"
the printer, Encal Press and Photo Engraving, collected the cost of printing
by drawing a draft against the plaintiff, said draft being sent later to the
defendant for acceptance. As an added security for the payment of the
amounts advanced to Encal Press and Photo-Engraving, the plaintiff bank
also required defendant Aruego to execute a trust receipt in favor of said
bank wherein said defendant undertook to hold in trust for plaintiff the
periodicals and to sell the same with the promise to turn over to the
plaintiff the proceeds of the sale of said publication to answer for the
payment of all obligations arising from the draft. 8
Aruego received a copy of the complaint together with the summons on
December 2, 1959. 9 On December 14, 1959 defendant filed an urgent
motion for extension of time to plead, and set the hearing on December

16, 1959. 10 At the hearing, the court denied defendant's motion for
extension. Whereupon, the defendant filed a motion to dismiss the
complaint on December 17, 1959 on the ground that the complaint states
no cause of action because:
a)
When the various bills of exchange were presented to the defendant
as drawee for acceptance, the amounts thereof had already been paid by
the plaintiff to the drawer (Encal Press and Photo Engraving), without
knowledge or consent of the defendant drawee.
b)
In the case of a bill of exchange, like those involved in the case at
bar, the defendant drawee is an accommodating party only for the drawer
(Encal Press and Photo-Engraving) and win be liable in the event that the
accommodating party (drawer) fails to pay its obligation to the plaintiff. 11
The complaint was dismissed in an order dated December 22, 1959, copy
of which was received by the defendant on December 24, 1959. 12
On January 13, 1960, the plaintiff filed a motion for reconsideration. 13 On
March 7, 1960, acting upon the motion for reconsideration filed by the
plaintiff, the trial court set aside its order dismissing the complaint and set
the case for hearing on March 15, 1960 at 8:00 in the morning. 14 A copy
of the order setting aside the order of dismissal was received by the
defendant on March 11, 1960 at 5:00 o'clock in the afternoon according to
the affidavit of the deputy sheriff of Manila, Mamerto de la Cruz. On the
following day, March 12, 1960, the defendant filed a motion to postpone
the trial of the case on the ground that there having been no answer as
yet, the issues had not yet been joined. 15 On the same date, the
defendant filed his answer to the complaint interposing the following
defenses: That he signed the document upon which the plaintiff sues in his
capacity as President of the Philippine Education Foundation; that his
liability is only secondary; and that he believed that he was signing only as
an accommodation party. 16
On March 15, 1960, the plaintiff filed an ex parte motion to declare the
defendant in default on the ground that the defendant should have filed his
answer on March 11, 1960. He contends that by filing his answer on March
12, 1960, defendant was one day late. 17 On March 19, 1960 the trial court
declared the defendant in default. 18 The defendant learned of the order
declaring him in default on March 21, 1960. On March 22, 1960 the
defendant filed a motion to set aside the order of default alleging that
although the order of the court dated March 7, 1960 was received on
March 11, 1960 at 5:00 in the afternoon, it could not have been reasonably
expected of the defendant to file his answer on the last day of the
reglementary period, March 11, 1960, within office hours, especially
because the order of the court dated March 7, 1960 was brought to the
attention of counsel only in the early hours of March 12, 1960. The
defendant also alleged that he has a good and substantial defense.
Attached to the motion are the affidavits of deputy sheriff Mamerto de la
Cruz that he served the order of the court dated March 7, 1960 on March
11, 1960, at 5:00 o'clock in the afternoon and the affidavit of the

defendant Aruego that he has a good and substantial defense. 19 The trial
court denied the defendant's motion on March 25, 1960. 20 On May 6,
1960, the trial court rendered judgment sentencing the defendant to pay
to the plaintiff the sum of P35,444.35 representing the total amount of his
obligation to the said plaintiff under the twenty-two (22) causes of action
alleged in the complaint as of November 15, 1957 and the sum of
P10,000.00 as attorney's fees. 21
On May 9, 1960 the defendant filed a notice of appeal from the order dated
March 25, 1961 denying his motion to set aside the order declaring him in
default, an appeal bond in the amount of P60.00, and his record on appeal.
The plaintiff filed his opposition to the approval of defendant's record on
appeal on May 13, 1960. The following day, May 14, 1960, the lower court
dismissed defendant's appeal from the order dated March 25, 1960
denying his motion to set aside the order of default. 22 On May 19, 1960,
the defendant filed a motion for reconsideration of the trial court's order
dismissing his appeal. 23 The plaintiff, on May 20, 1960, opposed the
defendant's motion for reconsideration of the order dismissing appeal. 24
On May 21, 1960, the trial court reconsidered its previous order dismissing
the appeal and approved the defendant's record on appeal. 25 On May 30,
1960, the defendant received a copy of a notice from the Clerk of Court
dated May 26, 1960, informing the defendant that the record on appeal
filed ed by the defendant was forwarded to the Clerk of Court of Appeals.
26
On June 1, 1960 Aruego filed a motion to set aside the judgment rendered
after he was declared in default reiterating the same ground previously
advanced by him in his motion for relief from the order of default. 27 Upon
opposition of the plaintiff filed on June 3, 1960, 28 the trial court denied the
defendant's motion to set aside the judgment by default in an order of June
11, 1960. 29 On June 20, 1960, the defendant filed his notice of appeal
from the order of the court denying his motion to set aside the judgment
by default, his appeal bond, and his record on appeal. The defendant's
record on appeal was approved by the trial court on June 25, 1960. 30
Thus, the defendant had two appeals with the Court of Appeals: (1) Appeal
from the order of the lower court denying his motion to set aside the order
of default docketed as CA-G.R. NO. 27734-R; (2) Appeal from the order
denying his motion to set aside the judgment by default docketed as CAG.R. NO. 27940-R.
In his brief, the defendant-appellant assigned the following errors:
I
THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT WAS IN
DEFAULT.
II
THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO DECLARE
DEFENDANT IN DEFAULT ALTHOUGH AT THE TIME THERE WAS ALREADY ON

FILE AN ANSWER BY HIM WITHOUT FIRST DISPOSING OF SAID ANSWER IN

AN APPROPRIATE ACTION.
III
THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION FOR
RELIEF OF ORDER OF DEFAULT AND FROM JUDGMENT BY DEFAULT AGAINST
DEFENDANT. 31
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 PhotoEngraving, drawer of the said bills of exchange in favor of the plaintiff
bank;
b)

The defendant signed these bills of exchange not as principal obligor,

but as accommodation or additional party obligor, to add to the security of

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

order in writting addressed by one person to another, signed by the person

giving it, requiring the person to whom it is addressed to pay on demand or
at a fixed or determinable future time a sum certain in money to order or
to bearer. 36 As long as a commercial paper conforms with the definition of
a bill of exchange, that paper is considered a bill of exchange. The nature
of acceptance is important only in the determination of the kind of
liabilities of the parties involved, but not in the determination of whether a
commercial paper is a bill of exchange or not.
It is evident then that the defendant's appeal can not prosper. To grant the
defendant's prayer will result in a new trial which will serve no purpose and
will just waste the time of the courts as well as of the parties because the
defense is nil or ineffective. 37
WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court
of First Instance of Manila denying the petition for relief from the judgment
rendered in said case is hereby affirmed, without pronouncement as to
costs.
SO ORDERED.
Teehankee (Chairman), Makasiar, Guerrero and Melencio-Herrera JJ.,
concur.
NINE
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 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.

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]

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 -

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 45day 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.

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.
With respect to the cross-claim of the defendant IBAA against its codefendant 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-

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
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. Wellentrenched is the rule that findings of trial courts which are factual in
nature, especially 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 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 attorneys 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 testitified 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]

A complaint was filed by petitioner with the Court of First Instance of

Manila. The same was dismissed by the said court after due trial, as well as
by the Court of Appeals, on appeal. Hence, this petition for review.

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.

The Supreme Court ruled that respondent acted within legal bounds when
it debited petitioners account; that the payments made by the drawee
banks to the respondent on account of the checks with forged
indorsements were ineffective; that on account thereof, no creditor-debtor
relationship was created between the parties; that petitioner was grossly
recreant in accepting the checks in question from Ramirez without making
any inquiry as to authority to exchange checks belonging to the payeecorporation; and that petitioner, in indorsing the said checks when it
deposited them with respondent, guaranteed the genuineness of all prior
indorsement thereon so that the respondent, which relied upon its
warranty, cannot be held liable for the resulting loss.

SO ORDERED.

Judgment affirmed

Melo, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur.

SYLLABUS

TEN
FIRST DIVISION
[G.R. No. L-29432. August 6, 1975.]
JAI-ALAI CORPORATION OF THE PHILIPPINES, Petitioner, v. BANK
OF THE PHILIPPINE ISLAND, Respondent.
SYNOPSIS
Petitioner deposited in its current account with respondent bank several
checks with a total face value of P8,030.58, all acquired from Antonio J.
Ramirez, a regular bettor at the jai-alai games and a sale agent of the
Inter-Island Gas Service, Inc., the payee of the checks. The deposits were
all temporarily credited to petitioners account in accordance with the
clause printed on the banks deposit slip. Subsequently, Ramirez resigned
and after the checks had been submitted to inter-bank clearing, the InterIsland Gas discovered that all the indorsement made on the cheeks
purportedly by its cashiers, as well as the rubber stamp impression thereon
reading "Inter-Island Gas Service, Inc.", were forgeries. It informed
petitioner, the respondent, the drawers and the drawee banks of the said
checks and forgeries and filed a criminal complaint against its former
employee. In view of these circumstances, the respondent Bank debited
the petitioners current account and forwarded to the latter the checks
containing the forged indorsements, which petitioner refused to accept.
Later, petitioner drew against its current account a check for P135,000.00.
This check was dishonored by respondent as its records showed that
petitioners balance after netting out the value of the checks with the
forged indorsement, was insufficient to cover the value of the check drawn.

1.
NEGOTIABLE INSTRUMENT; CHECKS; FORGED INDORSEMENTS
EFFECT. A forged signature in a negotiable instrument makes it 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.
2.
ID.; ID.; ID.; NO RELATION OF CREDITOR-DEBTOR BETWEEN THE
PARTIES CREATED EVEN IF DEPOSITARY OR COLLECTING BANK HAD
ALREADY COLLECTED THE PROCEEDS OF THE CHECKS WHEN IT DEBITED
PETITIONERS ACCOUNT; REASON. Where the indorsement made on the
checks were forged prior to their delivery to depositor, the payments made
by the drawee-banks to the collecting bank on account of the said checks
were ineffective. Such being the case, the relationship of creditor and
debtor between the depositor and the depository had not been validly
effected, the checks not having properly and legitimately converted into
cash.
3.
ID.; ID.; ID.; COLLECTING BANKS HAS DUTY TO REIMBURSE TO
DRAWEE-BANKS THE VALUE OF CHECKS CONTAINING FORGED
INDORSEMENT; RULING IN THE CASE OF GREAT EASTERN LIFE INSURANCE
CO. v. HONGKONG & SHANGHAI BANK. In Great Eastern Life Ins. Co. v.
Hongkong & Shanghai Bank, 43 Phil. 678 (1992), 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 to
anyone else upon a forged signature." "It was its duty to know," said the
Court, "that (the payees) endorsement was genuine before cashing the
check." The depositor must in turn shoulder the loss of the amounts which

the respondent, as its collecting agent, had no reimburse to the draweebanks.

respondent bank. The particulars of these checks are as

follows:chanrob1es virtual 1aw library

4.
ID.; ID.; ACCEPTANCE OF CHECKS INDORSED BY AN AGENT; RULING
IN THE CASE OF INSULAR DRUG CO. v. NATIONAL. In Insular Drug Co. v.
National, 58 Phil. 685 (1933), 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 by agents,
does so at his peril, and must abide by the consequences if the agent who
endorses the same is without authority."cralaw virtua1aw library

1.
Drawn by the Delta Engineering Service upon the Pacific Banking
Corporation and payable to the Inter-Island Gas Service Inc. or
order:chanrob1es virtual 1aw library

5.
ID.; ID.; LIABILITY OF AN INDORSER; NO LOSS TO BE SUFFERED BY A
BANK WHO RELIED ON INDORSERS WARRANTY. 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." Where the depositor indorsed the checks with forged
indorsement when it deposited them with the collecting bank, the former
as an endorser guaranteed the genuineness of all prior indorsement
thereon. The collecting bank which relied upon this warranty cannot be
held liable for the resulting loss.
6.
ID.; ID.; FORGED CHECKS; TRANSFER OF FUNDS FROM DRAWEE TO
COLLECTING BANK; APPLICATION OF ART. 2154 OF THE CIVIL CODE. The
transfer by the drawee-banks of funds to the collecting bank on account of
forged checks would be ineffectual when made under the mistaken and
valid assumption that the indorsement 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," By virtue thereof, there can be no valid
payment of money by drawee-banks to the collecting bank on account of
forged checks.

Date

Check

Deposited

Exhibit
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:chanrob1es virtual 1aw library
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:chanrob1es virtual 1aw library
5/18/59 VN430188

P940.8025cralaw:red

4.
Drawn by the Roxas Manufacturing, Inc. upon the Philippine National
Bank and payable to the Inter-Island Gas Service, Inc. order:chanrob1es
virtual 1aw library

DECISION
5/14/59 1860160 P 500.00

26

CASTRO, J.:

5/18/59 1860660 P 500.00

27

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).

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
petitioners account in accordance with the clause printed on the deposit
slips issued by the respondent and which reads:jgc:chanrobles.com.ph

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

"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."cralaw virtua1aw library
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 draweebanks 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 respondents cashier, Ramon Sarthou, upon receipt of the latter of
Inter-Island Gas dated August 31, 1959, called up the petitioners cashier,
Manuel Garcia, and advised the latter that in view of the circumstances he
would debit the value of the checks against the petitioners 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 petitioners 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.
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:chanrob1es virtual 1aw library
(a) Whether the respondent had the right to debit the petitioners 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 petitioners 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 petitioners 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 petitioners 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 petitioners 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 petitioners
account, so that following the rule in Gullas v. 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
petitioners 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."cralaw virtua1aw library
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 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. v. 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 payees] 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 InterIsland 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. v. 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 the same is without authority." (underscoring supplied)

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 payees 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 petitioners
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
petitioners cost.
Makasiar, Esguerra, Muoz Palma and Martin, JJ., concur.
ELEVEN

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 petitioners 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

Republic of the Philippines

SUPREME COURT
Manila
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 forgery 2 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 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:
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;

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.

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 "1Dominguez"; and

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 defendantappellant 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:

7. That the parties hereto reserve the right to present

evidence on any other fact not covered by the foregoing
stipulations,

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

it purports to be.

Manila, Philippines, June 6, 1969.

(b) That she has good title to it.

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:
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- YEARS AND THAT THE
APPELLANT DID NOT BENEFIT FROM ENCASHING SAID
CHECK.

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.
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
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 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.

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

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.

TWELVE
Republic of the Philippines
SUPREME COURT
Manila

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 predecessorin-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, twentythree (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:
(list deleted kay taas kayo)
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 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
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. 01050030-3, 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 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).
We have carefully reviewed the documents cited by the petitioner. There is
no express and categorical finding in these documents that the twentythree (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
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:
(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;

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.

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

xxx xxx xxx

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

20. Q: Where did you buy this Hammermill

Safety check paper?

(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

A: From Tan Chiong, a paper dealer with

store located at Juan Luna, Binondo,
Manila. (In front of the Metropolitan Bank).

(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

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?

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: I keep it under lock and key in my firing

cabinet.
xxx xxx xxx

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.

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?
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.

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 twentythree (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. 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
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?

hurt, I win do my best not to allow

unauthorized persons to enter my office.
xxx xxx xxx

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
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 coemployees 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

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". ThusWe 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. 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.

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.

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.

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.

THIRTEEN
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 74917 January 20, 1988

BANCO DE ORO SAVINGS AND MORTGAGE BANK, petitioner,

vs.
EQUITABLE BANKING CORPORATION, PHILIPPINE CLEARING HOUSE
CORPORATION, AND REGIONAL TRIAL COURT OF QUEZON CITY,
BRANCH XCII (92), respondents.

GANCAYCO, J.:
This is a petition for review on certiorari of a decision of the Regional Trial
Court of Quezon City promulgated on March 24, 1986 in Civil Case No. Q46517 entitled Banco de Oro Savings and Mortgage Bank versus Equitable
Banking Corporation and the Philippine Clearing House Corporation after a
review of the Decision of the Board of Directors of the Philippine Clearing
House Corporation (PCHC) in the case of Equitable Banking Corporation
(EBC) vs. Banco de Oro Savings and Mortgage (BCO), ARBICOM Case No.
84033.
The undisputed facts are as follows:
It appears that some time in March, April, May and August
1983, plaintiff through its Visa Card Department, drew six
crossed Manager's check (Exhibits "A" to "F", and herein
referred to as Checks) having an aggregate amount of
Forty Five Thousand Nine Hundred and Eighty Two &
23/100 (P45,982.23) Pesos and payable to certain member
establishments of Visa Card. Subsequently, the Checks
were deposited with the defendant to the credit of its
depositor, a certain Aida Trencio.
Following normal procedures, and after stamping at the
back of the Checks the usual endorsements. All prior
and/or lack of endorsement guaranteed the defendant sent
the checks for clearing through the Philippine Clearing
House Corporation (PCHC). Accordingly, plaintiff paid the
Checks; its clearing account was debited for the value of
the Checks and defendant's clearing account was credited
for the same amount,
Thereafter, plaintiff discovered that the endorsements
appearing at the back of the Checks and purporting to be

that of the payees were forged and/or unauthorized or

otherwise belong to persons other than the payees.
Pursuant to the PCHC Clearing Rules and Regulations,
plaintiff presented the Checks directly to the defendant for
the purpose of claiming reimbursement from the latter.
However, defendant refused to accept such direct
presentation and to reimburse the plaintiff for the value of
the Checks; hence, this case.
In its Complaint, plaintiff prays for judgment to require the
defendant to pay the plaintiff the sum of P45,982.23 with
interest at the rate of 12% per annum from the date of the
complaint plus attorney's fees in the amount of P10,000.00
as well as the cost of the suit.
In accordance with Section 38 of the Clearing House Rules
and Regulations, the dispute was presented for Arbitration;
and Atty. Ceasar Querubin was designated as the
Arbitrator.
After an exhaustive investigation and hearing the Arbiter
rendered a decision in favor of the plaintiff and against the
defendant ordering the PCHC to debit the clearing account
of the defendant, and to credit the clearing account of the
plaintiff of the amount of P45,982.23 with interest at the
rate of 12% per annum from date of the complaint and
Attorney's fee in the amount of P5,000.00. No
pronouncement as to cost was made. 1
In a motion for reconsideration filed by the petitioner, the Board of
Directors of the PCHC affirmed the decision of the said Arbiter in this wise:
In view of all the foregoing, the decision of the Arbiter is
confirmed; and the Philippine Clearing House Corporation is
hereby ordered to debit the clearing account of the
defendant and credit the clearing account of plaintiff the
amount of Forty Five Thousand Nine Hundred Eighty Two &
23/100 (P45,982.23) Pesos with interest at the rate of 12%
per annum from date of the complaint, and the Attorney's
fee in the amount of Five Thousand (P5,000.00) Pesos.

Thus, a petition for review was filed with the Regional Trial Court of Quezon
City, Branch XCII, wherein in due course a decision was rendered
affirming in toto the decision of the PCHC.
Hence this petition.
The petition is focused on the following issues:
1. Did the PCHC have any jurisdiction to give due course to and adjudicate
Arbicom Case No. 84033?
2. Were the subject checks non-negotiable and if not, does it fall under the
ambit of the power of the PCHC?
3. Is the Negotiable Instrument Law, Act No. 2031 applicable in deciding
controversies of this nature by the PCHC?
4. What law should govern in resolving controversies of this nature?
5. Was the petitioner bank negligent and thus responsible for any undue
payment?
Petitioner maintains that the PCHC is not clothed with jurisdiction because
the Clearing House Rules and Regulations of PCHC cover and apply only to
checks that are genuinely negotiable. Emphasis is laid on the primary
purpose of the PCHC in the Articles of Incorporation, which states:
To provide, maintain and render an effective, convenient,
efficient, economical and relevant exchange and facilitate
service limited to check processing and sorting by way of
assisting member banks, entities in clearing checks and
other clearing items as defined in existing and in future
Central Bank of the Philippines circulars, memoranda,
circular letters, rules and regulations and policies in
pursuance to the provisions of Section 107 of R.A. 265. ...
and Section 107 of R.A. 265 which provides:
xxx xxx xxx
The deposit reserves maintained by the banks in the
Central Bank, in accordance with the provisions of Section

1000 shall serve as a basis for the clearing of checks, and

the settlement of interbank balances ...
Petitioner argues that by law and common sense, the term check should be
interpreted as one that fits the articles of incorporation of the PCHC, the
Central Bank and the Clearing House Rules stating that it is a negotiable
instrument citing the definition of a "check" as basically a "bill of
exchange" under Section 185 of the NIL and that it should be payable to
"order" or to "bearer" under Section 126 of game law. Petitioner alleges
that with the cancellation of the printed words "or bearer from the face of
the check, it becomes non-negotiable so the PCHC has no jurisdiction over
the case.
The Regional Trial Court took exception to this stand and conclusion put
forth by the herein petitioner as it held:
Petitioner's theory cannot be maintained. As will be noted,
the PCHC makes no distinction as to the character or
nature of the checks subject of its jurisdiction. The
pertinent provisions quoted in petitioners memorandum
simply refer to check(s). Where the law does not
distinguish, we shall not distinguish.
In the case of Reyes vs. Chuanico (CA-G.R. No. 20813 R,
Feb. 5, 1962) the Appellate Court categorically stated that
there are four kinds of checks in this jurisdiction; the
regular check; the cashier's check; the traveller's check;
and the crossed check. The Court, further elucidated, that
while the Negotiable Instruments Law does not contain any
provision on crossed checks, it is coon practice in
commercial and banking operations to issue checks of this
character, obviously in accordance with Article 541 of the
Code of Commerce. Attention is likewise called to Section
185 of the Negotiable Instruments Law:
Sec. 185. Check defined. A check is a bill
of exchange drawn on a bank payable on
demand. Except as herein otherwise
provided, the provisions of this act
applicable to a bill of exchange payable on
demand apply to a check

and the provisions of Section 61 (supra) that the drawer

may insert in the instrument an express stipulation
negating or limiting his own liability to the holder.
Consequently, it appears that the use of the term "check"
in the Articles of Incorporation of PCHC is to be perceived
as not limited to negotiable checks only, but to checks as is
generally known in use in commercial or business
transactions.
Anent Petitioner's liability on said instruments, this court is
in full accord with the ruling of the PCHC Board of Directors
that:

In a previous case, this Court had occasion to rule: "Ubi lex non distinguish
nec nos distinguere debemos." 2 It was enunciated in Loc Cham v. Ocampo,
77 Phil. 636 (1946):
The rule, founded on logic is a corollary of the principle
that general words and phrases in a statute should
ordinarily be accorded their natural and general
significance. In other words, there should be no distinction
in the application of a statute where none is indicated.

In presenting the Checks for clearing and

for payment, the defendant made an
express guarantee on the validity of "all
prior endorsements." Thus, stamped at the
back of the checks are the defendant's
clear warranty; ALL PRIOR ENDORSEMENTS
AND/OR LACK OF ENDORSEMENTS
GUARANTEED. With. out such warranty,
plaintiff would not have paid on the checks.

There should be no distinction in the application of a statute where none is

indicated for courts are not authorized to distinguish where the law makes
no distinction. They should instead administer the law not as they think it
ought to be but as they find it and without regard to consequences. 3

No amount of legal jargon can reverse the

clear meaning of defendant's warranty. As
the warranty has proven to be false and
inaccurate, the defendant is liable for any
damage arising out of the falsity of its
representation.

Checks are used between banks and bankers and their customers, and are
designed to facilitate banking operations. It is of the essence to be payable
on demand, because the contract between the banker and the customer is
that the money is needed on demand. 4

The principle of estoppel, effectively

prevents the defendant from denying
liability for any damage sustained by the
plaintiff which, relying upon an action or
declaration of the defendant, paid on the
Checks. The same principle of estoppel
effectively prevents the defendant from
denying the existence of the Checks. (Pp.
1011 Decision; pp. 4344, Rollo)
We agree.

As provided in the aforecited articles of incorporation of PCHC its operation

extend to "clearing checks and other clearing items." No doubt
transactions on non-negotiable checks are within the ambit of its
jurisdiction.

The term check as used in the said Articles of Incorporation of PCHC can
only connote checks in general use in commercial and business activities.
It cannot be conceived to be limited to negotiable checks only.

The participation of the two banks, petitioner and private respondent, in

the clearing operations of PCHC is a manifestation of their submission to its
jurisdiction. Sec. 3 and 36.6 of the PCHC-CHRR clearing rules and
regulations provide:
SEC. 3. AGREEMENT TO THESE RULES. It is the general
agreement and understanding that any participant in the
Philippine Clearing House Corporation, MICR clearing
operations by the mere fact of their participation, thereby
manifests its agreement to these Rules and Regulations
and its subsequent amendments."
Sec 36.6. (ARBITRATION) The fact that a bank
participates in the clearing operations of the PCHC shall be

deemed its written and subscribed consent to the binding

effect of this arbitration agreement as if it had done so in
accordance with section 4 of the Republic Act No. 876,
otherwise known as the Arbitration Law.
Further Section 2 of the Arbitration Law mandates:
Two or more persons or parties may submit to the
arbitration of one or more arbitrators any controversy
existing between them at the time of the submission and
which may be the subject of an action, or the parties of any
contract may in such contract agree to settle by arbitration
a controversy thereafter arising between them. Such
submission or contract shall be valid and irrevocable, save
upon grounds as exist at law for the revocation of any
contract.
Such submission or contract may include question arising
out of valuations, appraisals or other controversies which
may be collateral, incidental, precedent or subsequent to
any issue between the parties. ...
Sec. 21 of the same rules, says:
Items which have been the subject of material alteration or
items bearing forged endorsement when such
endorsement is necessary for negotiation shall be returned
by direct presentation or demand to the Presenting
Bank and not through the regular clearing house facilities
within the period prescribed by law for the filing of a legal
action by the returning bank/branch, institution or entity
sending the same. (Emphasis supplied)
Viewing these provisions the conclusion is clear that the PCHC Rules and
Regulations should not be interpreted to be applicable only to checks
which are negotiable instruments but also to non-negotiable instruments
and that the PCHC has jurisdiction over this case even as the checks
subject of this litigation are admittedly non-negotiable.
Moreover, petitioner is estopped from raising the defense of nonnegotiability of the checks in question. It stamped its guarantee on the
back of the checks and subsequently presented these checks for clearing

and it was on the basis of these endorsements by the petitioner that the
proceeds were credited in its clearing account.
The petitioner by its own acts and representation can not now deny liability
because it assumed the liabilities of an endorser by stamping its guarantee
at the back of the checks.
The petitioner having stamped its guarantee of "all prior endorsements
and/or lack of endorsements" (Exh. A-2 to F-2) is now estopped from
claiming that the checks under consideration are not negotiable
instruments. The checks were accepted for deposit by the petitioner
stamping thereon its guarantee, in order that it can clear the said checks
with the respondent bank. By such deliberate and positive attitude of the
petitioner it has for all legal intents and purposes treated the said cheeks
as negotiable instruments and accordingly assumed the warranty of the
endorser when it stamped its guarantee of prior endorsements at the back
of the checks. It led the said respondent to believe that it was acting as
endorser of the checks and on the strength of this guarantee said
respondent cleared the checks in question and credited the account of the
petitioner. Petitioner is now barred from taking an opposite posture by
claiming that the disputed checks are not negotiable instrument.
This Court enunciated in Philippine National Bank vs. Court of Appeals 5 a
point relevant to the issue when it stated the doctrine of estoppel is based
upon the grounds of public policy, fair dealing, good faith and justice and
its purpose is to forbid one to speak against his own act, representations or
commitments to the injury of one to whom they were directed and who
reasonably relied thereon.
A commercial bank cannot escape the liability of an endorser of a check
and which may turn out to be a forged endorsement. Whenever any bank
treats the signature at the back of the checks as endorsements and thus
logically guarantees the same as such there can be no doubt said bank has
considered the checks as negotiable.
Apropos the matter of forgery in endorsements, this Court has succinctly
emphasized that the collecting bank or last endorser generally suffers the
loss because it has the duty to ascertain the genuineness of all prior
endorsements considering that the act of presenting the check for
payment to the drawee is an assertion that the party making the
presentment has done its duty to ascertain the genuineness of the
endorsements. This is laid down in the case of PNB vs. National City
Bank. 6 In another case, this court held that if the drawee-bank discovers
that the signature of the payee was forged after it has paid the amount of

the check to the holder thereof, it can recover the amount paid from the
collecting bank. 7
A truism stated by this Court is that "The doctrine of estoppel precludes
a party from repudiating an obligation voluntarily assumed after having
accepted benefits therefrom. To countenance such repudiation would be
contrary to equity and put premium on fraud or misrepresentation". 8
We made clear in Our decision in Philippine National Bank vs. The National
City Bank of NY & Motor Service Co. that:
Where a check is accepted or certified by the bank on
which it is drawn, the bank is estopped to deny the
genuineness of the drawers signature and his capacity to
issue the instrument.
If a drawee bank pays a forged check which was previously
accepted or certified by the said bank, it can not recover
from a holder who did not participate in the forgery and did
not have actual notice thereof.
The payment of a check does not include or imply its
acceptance in the sense that this word is used in Section
62 of the Negotiable Instruments Act. 9
The point that comes uppermost is whether the drawee bank was
negligent in failing to discover the alteration or the forgery. Very akin to the
case at bar is one which involves a suit filed by the drawer of checks
against the collecting bank and this came about in Farmers State
Bank 10 where it was held:
A cause of action against the (collecting bank) in favor of
the appellee (the drawer) accrued as a result of the bank
breaching its implied warranty of the genuineness of the
indorsements of the name of the payee by bringing about
the presentation of the checks (to the drawee bank) and
collecting the amounts thereof, the right to enforce that
cause of action was not destroyed by the circumstance
that another cause of action for the recovery of the
amounts paid on the checks would have accrued in favor of
the appellee against another or to others than the bank if
when the checks were paid they have been indorsed by the
payee. (United States vs. National Exchange Bank, 214 US,

302, 29 S CT665, 53 L. Ed 1006, 16 Am. Cas. 11 84;

Onondaga County Savings Bank vs. United States (E.C.A.)
64 F 703)
Section 66 of the Negotiable Instruments ordains that:
Every indorser who indorsee without qualification, warrants
to all subsequent holders in due course' (a) that the
instrument is genuine and in all respects what it purports
to be; (b) that he has good title to it; (c) that all prior
parties have capacity to contract; and (d) that the
instrument is at the time of his indorsement valid and
subsisting. 11
It has been enunciated in an American case particularly in American
Exchange National Bank vs. Yorkville Bank12 that: "the drawer owes no duty
of diligence to the collecting bank (one who had accepted an altered check
and had paid over the proceeds to the depositor) except of seasonably
discovering the alteration by a comparison of its returned checks and
check stubs or other equivalent record, and to inform the drawee thereof."
In this case it was further held that:
The real and underlying reasons why negligence of the
drawer constitutes no defense to the collecting bank are
that there is no privity between the drawer and the
collecting bank (Corn Exchange Bank vs. Nassau Bank, 204
N.Y.S. 80) and the drawer owe to that bank no duty of
vigilance (New York Produce Exchange Bank vs. Twelfth
Ward Bank, 204 N.Y.S. 54) and no act of the collecting bank
is induced by any act or representation or admission of the
drawer (Seaboard National Bank vs. Bank of America
(supra) and it follows that negligence on the part of the
drawer cannot create any liability from it to the collecting
bank, and the drawer thus is neither a necessary nor a
proper party to an action by the drawee bank against such
bank. It is quite true that depositors in banks are under the
obligation of examining their passbooks and returned
vouchers as a protection against the payment by the
depository bank against forged checks, and negligence in
the performance of that obligation may relieve that bank of
liability for the repayment of amounts paid out on forged
checks, which but for such negligence it would be bound to
repay. A leading case on that subject is Morgan vs. United

States Mortgage and Trust Col. 208 N.Y. 218, 101 N.E. 871
Amn. Cas. 1914D, 462, L.R.A. 1915D, 74.
Thus We hold that while the drawer generally owes no duty of diligence to
the collecting bank, the law imposes a duty of diligence on the collecting
bank to scrutinize checks deposited with it for the purpose of determining
their genuineness and regularity. The collecting bank being primarily
engaged in banking holds itself out to the public as the expert and the law
holds it to a high standard of conduct.
And although the subject checks are non-negotiable the responsibility of
petitioner as indorser thereof remains.
To countenance a repudiation by the petitioner of its obligation would be
contrary to equity and would deal a negative blow to the whole banking
system of this country.
The court reproduces with approval the following disquisition of the PCHC
in its decision
II. Payments To Persons Other
Than The Payees Are Not Valid
And Give Rise To An Obligation
To Return Amounts Received
Nothing is more clear than that neither the defendant's
depositor nor the defendant is entitled to receive payment
payable for the Checks. As the checks are not payable to
defendant's depositor, payments to persons other than
payees named therein, their successor-in-interest or any
person authorized to receive payment are not valid. Article
1240, New Civil Code of the Philippines unequivocably
provides that:
"Art. 1240. Payment shall be made to the
person in whose favor the obligation has
been constituted, or his successo-ininterest, or any person authorized to
receive it. "

Considering that neither the defendant's depositor nor the

defendant is entitled to receive payments for the Checks,
payments to any of them give rise to an obligation to
return the amounts received. Section 2154 of the New Civil
Code mandates that:
Article 2154. 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.
It is contended that plaintiff should be held responsible for
issuing the Checks notwithstanding that the underlying
transactions were fictitious This contention has no basis in
our jurisprudence.
The nullity of the underlying transactions does not
diminish, but in fact strengthens, plaintiffs right to recover
from the defendant. Such nullity clearly emphasizes the
obligation of the payees to return the proceeds of the
Checks. If a failure of consideration is sufficient to warrant
a finding that a payee is not entitled to payment or must
return payment already made, with more reason the
defendant, who is neither the payee nor the person
authorized by the payee, should be compelled to surrender
the proceeds of the Checks received by it. Defendant does
not have any title to the Checks; neither can it claim any
derivative title to them.
III. Having Violated Its Warranty
On Validity Of All Endorsements,
Collecting Bank Cannot Deny
liability To Those Who Relied
On Its Warranty
In presenting the Checks for clearing and for payment, the
defendant made an express guarantee on the validity of
"all prior endorsements." Thus, stamped at the bank of the
checks are the defendant's clear warranty: ALL PRIOR

ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS

GUARANTEED. Without such warranty, plaintiff would not
have paid on the checks.

the plaintiff has constrained the plaintiff to regular the

services of counsel in order to protect its interest
notwithstanding that plaintiffs claim is plainly valid just and
demandable. In addition, defendant's clear obligation is to
reimburse plaintiff upon direct presentation of the checks;
and it is undenied that up to this time the defendant has
failed to make such reimbursement.

No amount of legal jargon can reverse the clear meaning of

defendant's warranty. As the warranty has proven to be
false and inaccurate, the defendant is liable for any
damage arising out of the falsity of its representation.
The principle of estoppel effectively prevents the
defendant from denying liability for any damages sustained
by the plaintiff which, relying upon an action or declaration
of the defendant, paid on the Checks. The same principle
of estoppel effectively prevents the defendant from
denying the existence of the Checks.

WHEREFORE, the petition is DISMISSED for lack of merit without

pronouncement as to costs. The decision of the respondent court of 24
March 1986 and its order of 3 June 1986 are hereby declared to
be immediately executory.
SO ORDERED.

Whether the Checks have been issued for valuable

considerations or not is of no serious moment to this case.
These Checks have been made the subject of contracts of
endorsement wherein the defendant made expressed
warranties to induce payment by the drawer of the Checks;
and the defendant cannot now refuse liability for breach of
warranty as a consequence of such forged endorsements.
The defendant has falsely warranted in favor of plaintiff the
validity of all endorsements and the genuineness of the
cheeks in all respects what they purport to be.

FOURTEEN

The damage that will result if judgment is not rendered for

the plaintiff is irreparable. The collecting bank has privity
with the depositor who is the principal culprit in this case.
The defendant knows the depositor; her address and her
history, Depositor is defendant's client. It has taken a risk
on its depositor when it allowed her to collect on the
crossed-checks.

NATIVIDAD GEMPESAW, petitioner,

vs.
THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.

Having accepted the crossed checks from persons other

than the payees, the defendant is guilty of negligence; the
risk of wrongful payment has to be assumed by the
defendant.
On the matter of the award of the interest and attorney's
fees, the Board of Directors finds no reason to reverse the
decision of the Arbiter. The defendant's failure to reimburse

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 92244 February 9, 1993

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
I
THE RESPONDENT COURT OF APPEALS ERRED IN RULING
THAT THE NEGLIGENCE OF THE DRAWER IS THE PROXIMATE
CAUSE OF THE RESULTING INJURY TO THE DRAWEE BANK,
AND THE DRAWER IS PRECLUDED FROM SETTING UP THE
FORGERY OR WANT OF AUTHORITY.
II
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT
FINDING AND RULING THAT IT IS THE GROSS AND
INEXCUSABLE NEGLIGENCE AND FRAUDULENT ACTS OF
THE OFFICIALS AND EMPLOYEES OF THE RESPONDENT
BANK IN FORGING THE SIGNATURE OF THE PAYEES AND
THE WRONG AND/OR ILLEGAL PAYMENTS MADE TO
PERSONS, OTHER THAN TO THE INTENDED PAYEES
SPECIFIED IN THE CHECKS, IS THE DIRECT AND PROXIMATE
CAUSE OF THE DAMAGE TO PETITIONER WHOSE SAVING
(SIC) ACCOUNT WAS DEBITED.
III

THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT

ORDERING THE RESPONDENT BANK TO RESTORE OR RECREDIT 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 1300038-1 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 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. H2); (9) in Check No. 62033 dated May 23, 1984 in the
amount of P11,504.00 in favor of Monde Denmark Biscuit
(Exh. A-34), her obligation was only P504.00 (Exhs. I-1 and
I-2). 2
Practically, all the checks issued and honored by the respondent drawee
bank were crossed checks. 3 Aside from the daily notice given to the
petitioner by the respondent drawee Bank, the latter also furnished her
with a monthly statement of her transactions, attaching thereto all the
cancelled checks she had issued and which were debited against her
current account. It was only after the lapse of more two (2) years that
petitioner found out about the fraudulent manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were
brought to Ernest L. Boon, Chief Accountant of respondent drawee Bank at
the Buendia branch, who, without authority therefor, accepted them all for
deposit at the Buendia branch to the credit and/or in the accounts of
Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very close friend of
Alfredo Y. Romero. Sixty-three (63) out of the eighty-two (82) checks were
deposited in Savings Account No. 00844-5 of Alfredo Y. Romero at the
respondent drawee Bank's Buendia branch, and four (4) checks in his
Savings Account No. 32-81-9 at its Ongpin branch. The rest of the checks

were deposited in Account No. 0443-4, under the name of Benito Lam at
the Elcao branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on
the checks testified that they did not receive nor even see the subject
checks and that the indorsements appearing at the back of the checks
were not theirs.
The team of auditors from the main office of the respondent drawee Bank
which conducted periodic inspection of the branches' operations failed to
discover, check or stop the unauthorized acts of Ernest L. Boon. Under the
rules of the respondent drawee Bank, only a Branch Manager and no other
official of the respondent drawee bank, may accept a second indorsement
on a check for deposit. In the case at bar, all the deposit slips of the eightytwo (82) checks in question were initialed and/or approved for deposit by
Ernest L. Boon. The Branch Managers of the Ongpin and Elcao branches
accepted the deposits made in the Buendia branch and credited the
accounts of Alfredo Y. Romero and Benito Lam in their respective branches.
On November 7, 1984, petitioner made a written demand on respondent
drawee Bank to credit her account with the money value of the eighty-two
(82) checks totalling P1,208.606.89 for having been wrongfully charged
against her account. Respondent drawee Bank refused to grant petitioner's
demand. On January 23, 1985, petitioner filed the complaint with the
Regional Trial Court.
This is not a suit by the party whose signature was forged on a check
drawn against the drawee bank. The payees are not parties to the case.
Rather, it is the drawer, whose signature is genuine, who instituted this
action to recover from the drawee bank the money value of eighty-two (82)
checks paid out by the drawee bank to holders of those checks where the
indorsements of the payees were forged. How and by whom the forgeries
were committed are not established on the record, but the respective
payees admitted that they did not receive those checks and therefore
never indorsed the same. The applicable law is the Negotiable Instruments
Law 4(heretofore referred to as the NIL). Section 23 of the NIL provides:
When a signature is forged or made without the authority
of the person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to
give a discharge therefor, or to enforce payment thereof
against any party thereto, can be acquired through or
under such signature, unless the party against whom it is

sought to enforce such right is precluded from setting up

the forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute defense
by the party whose signature is forged. A party whose signature to
an instrument was forged was never a party and never gave his
consent to the contract which gave rise to the instrument. Since
his signature does not appear in the instrument, he cannot be held
liable thereon by anyone, not even by a holder in due course. Thus,
if a person's signature is forged as a maker of a promissory note,
he cannot be made to pay because he never made the promise to
pay. Or where a person's signature as a drawer of a check is
forged, the drawee bank cannot charge the amount thereof against
the drawer's account because he never gave the bank the order to
pay. And said section does not refer only to the forged signature of
the maker of a promissory note and of the drawer of a check. It
covers also a forged indorsement, i.e., the forged signature of the
payee or indorsee of a note or check. Since under said provision a
forged signature is "wholly inoperative", no one can gain title to
the instrument through such forged indorsement. Such an
indorsement prevents any subsequent party from acquiring any
right as against any party whose name appears prior to the
forgery. Although rights may exist between and among parties
subsequent to the forged indorsement, not one of them can
acquire rights against parties prior to the forgery. Such forged
indorsement cuts off the rights of all subsequent parties as against
parties prior to the forgery. However, the law makes an exception
to these rules where a party is precluded from setting up forgery as
a defense.
As a matter of practical significance, problems arising from forged
indorsements of checks may generally be broken into two types of cases:
(1) where forgery was accomplished by a person not associated with the
drawer for example a mail robbery; and (2) where the indorsement was
forged by an agent of the drawer. This difference in situations would
determine the effect of the drawer's negligence with respect to forged
indorsements. While there is no duty resting on the depositor to look for
forged indorsements on his cancelled checks in contrast to a duty imposed
upon him to look for forgeries of his own name, a depositor is under a duty
to set up an accounting system and a business procedure as are
reasonably calculated to prevent or render difficult the forgery of
indorsements, particularly by the depositor's own employees. And if the
drawer (depositor) learns that a check drawn by him has been paid under a
forged indorsement, the drawer is under duty promptly to report such fact

to the drawee bank. 5 For his negligence or failure either to discover or to

report promptly the fact of such forgery to the drawee, the drawer loses his
right against the drawee who has debited his account under a forged
indorsement. 6 In other words, he is precluded from using forgery as a basis
for his claim for re-crediting of his account.
In the case at bar, petitioner admitted that the checks were filled up and
completed by her trusted employee, Alicia Galang, and were given to her
for her signature. Her signing the checks made the negotiable instrument
complete. Prior to signing the checks, there was no valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable
until delivery of the instrument to the payee for the purpose of giving
effect thereto. 7 The first delivery of the instrument, complete in form, to
the payee who takes it as a holder, is called issuance of the
instrument. 8 Without the initial delivery of the instrument from the drawer
of the check to the payee, there can be no valid and binding contract and
no liability on the instrument.
Petitioner completed the checks by signing them as drawer and thereafter
authorized her employee Alicia Galang to deliver the eighty-two (82)
checks to their respective payees. Instead of issuing the checks to the
payees as named in the checks, Alicia Galang delivered them to the Chief
Accountant of the Buendia branch of the respondent drawee Bank, a
certain Ernest L. Boon. It was established that the signatures of the payees
as first indorsers were forged. The record fails to show the identity of the
party who made the forged signatures. The checks were then indorsed for
the second time with the names of Alfredo Y. Romero and Benito Lam, and
were deposited in the latter's accounts as earlier noted. The second
indorsements were all genuine signatures of the alleged holders. All the
eighty-two (82) checks bearing the forged indorsements of the payees and
the genuine second indorsements of Alfredo Y. Romero and Benito Lam
were accepted for deposit at the Buendia branch of respondent drawee
Bank to the credit of their respective savings accounts in the Buendia,
Ongpin and Elcao branches of the same bank. The total amount of
P1,208,606.89, represented by eighty-two (82) checks, were credited and
paid out by respondent drawee Bank to Alfredo Y. Romero and Benito Lam,
and debited against petitioner's checking account No. 13-00038-1,
Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement
has been forged cannot charge the drawer's account for the amount of
said check. An exception to this rule is where the drawer is guilty of such
negligence which causes the bank to honor such a check or checks. If a

check is stolen from the payee, it is quite obvious that the drawer cannot
possibly discover the forged indorsement by mere examination of his
cancelled check. This accounts for the rule that although a depositor owes
a duty to his drawee bank to examine his cancelled checks for forgery of
his own signature, he has no similar duty as to forged indorsements. A
different situation arises where the indorsement was forged by an
employee or agent of the drawer, or done with the active participation of
the latter. Most of the cases involving forgery by an agent or employee
deal with the payee's indorsement. The drawer and the payee often time
shave business relations of long standing. The continued occurrence of
business transactions of the same nature provides the opportunity for the
agent/employee to commit the fraud after having developed familiarity
with the signatures of the parties. However, sooner or later, some leak will
show on the drawer's books. It will then be just a question of time until the
fraud is discovered. This is specially true when the agent perpetrates a
series of forgeries as in the case at bar.
The negligence of a depositor which will prevent recovery of an
unauthorized payment is based on failure of the depositor to act as a
prudent businessman would under the circumstances. In the case at bar,
the petitioner relied implicitly upon the honesty and loyalty of her
bookkeeper, and did not even verify the accuracy of amounts of the checks
she signed against the invoices attached thereto. Furthermore, although
she regularly received her bank statements, she apparently did not
carefully examine the same nor the check stubs and the returned checks,
and did not compare them with the same invoices. Otherwise, she could
have easily discovered the discrepancies between the checks and the
documents serving as bases for the checks. With such discovery, the
subsequent forgeries would not have been accomplished. It was not until
two years after the bookkeeper commenced her fraudulent scheme that
petitioner discovered that eighty-two (82) checks were wrongfully charged
to her account, at which she notified the respondent drawee bank.
It is highly improbable that in a period of two years, not one of Petitioner's
suppliers complained of non-payment. Assuming that even one single
complaint had been made, petitioner would have been duty-bound, as far
as the respondent drawee Bank was concerned, to make an adequate
investigation on the matter. Had this been done, the discrepancies would
have been discovered, sooner or later. Petitioner's failure to make such
adequate inquiry constituted negligence which resulted in the bank's
honoring of the subsequent checks with forged indorsements. On the other
hand, since the record mentions nothing about such a complaint, the
possibility exists that the checks in question covered inexistent sales. But
even in such a case, considering the length of a period of two (2) years, it

is hard to believe that petitioner did not know or realize that she was
paying more than she should for the supplies she was actually getting. A
depositor may not sit idly by, after knowledge has come to her that her
funds seem to be disappearing or that there may be a leak in her business,
and refrain from taking the steps that a careful and prudent businessman
would take in such circumstances and if taken, would result in stopping the
continuance of the fraudulent scheme. If she fails to take steps, the facts
may establish her negligence, and in that event, she would be estopped
from recovering from the bank. 9
One thing is clear from the records that the petitioner failed to examine
her records with reasonable diligence whether before she signed the
checks or after receiving her bank statements. Had the petitioner
examined her records more carefully, particularly the invoice receipts,
cancelled checks, check book stubs, and had she compared the sums
written as amounts payable in the eighty-two (82) checks with the
pertinent sales invoices, she would have easily discovered that in some
checks, the amounts did not tally with those appearing in the sales
invoices. Had she noticed these discrepancies, she should not have signed
those checks, and should have conducted an inquiry as to the reason for
the irregular entries. Likewise had petitioner been more vigilant in going
over her current account by taking careful note of the daily reports made
by respondent drawee Bank in her issued checks, or at least made random
scrutiny of cancelled checks returned by respondent drawee Bank at the
close of each month, she could have easily discovered the fraud being
perpetrated by Alicia Galang, and could have reported the matter to the
respondent drawee Bank. The respondent drawee Bank then could have
taken immediate steps to prevent further commission of such fraud. Thus,
petitioner's negligence was the proximate cause of her loss. And since it
was her negligence which caused the respondent drawee Bank to honor
the forged checks or prevented it from recovering the amount it had
already paid on the checks, petitioner cannot now complain should the
bank refuse to recredit her account with the amount of such
checks. 10 Under Section 23 of the NIL, she is now precluded from using the
forgery to prevent the bank's debiting of her account.
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong
& Shanghai Bank 11 is not applicable to the case at bar because in said
case, the check was fraudulently taken and the signature of the payee was
forged not by an agent or employee of the drawer. The drawer was not
found to be negligent in the handling of its business affairs and the theft of
the check by a total stranger was not attributable to negligence of the
drawer; neither was the forging of the payee's indorsement due to the
drawer's negligence. Since the drawer was not negligent, the drawee was

duty-bound to restore to the drawer's account the amount theretofore paid

under the check with a forged payee's indorsement because the drawee
did not pay as ordered by the drawer.
Petitioner argues that respondent drawee Bank should not have honored
the checks because they were crossed checks. Issuing a crossed check
imposes no legal obligation on the drawee not to honor such a check. It is
more of a warning to the holder that the check cannot be presented to the
drawee bank for payment in cash. Instead, the check can only be
deposited with the payee's bank which in turn must present it for payment
against the drawee bank in the course of normal banking transactions
between banks. The crossed check cannot be presented for payment but it
can only be deposited and the drawee bank may only pay to another bank
in the payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank
from having checks with more than one indorsement. The banking rule
banning acceptance of checks for deposit or cash payment with more than
one indorsement unless cleared by some bank officials does not invalidate
the instrument; neither does it invalidate the negotiation or transfer of the
said check. In effect, this rule destroys the negotiability of bills/checks by
limiting their negotiation by indorsement of only the payee. Under the NIL,
the only kind of indorsement which stops the further negotiation of an
instrument is a restrictive indorsement which prohibits the further
negotiation thereof.
Sec. 36. When indorsement restrictive. An indorsement
is restrictive which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or
negotiate must be written in express words at the back of the instrument,
so that any subsequent party may be forewarned that ceases to be
negotiable. However, the restrictive indorsee acquires the right to receive
payment and bring any action thereon as any indorser, but he can no
longer transfer his rights as such indorsee where the form of the
indorsement does not authorize him to do so. 12
Although the holder of a check cannot compel a drawee bank to honor it
because there is no privity between them, as far as the drawer-depositor is

concerned, such bank may not legally refuse to honor a negotiable bill of
exchange or a check drawn against it with more than one indorsement if
there is nothing irregular with the bill or check and the drawer has
sufficient funds. The drawee cannot be compelled to accept or pay the
check by the drawer or any holder because as a drawee, he incurs no
liability on the check unless he accepts it. But the drawee will make itself
liable to a suit for damages at the instance of the drawer for wrongful
dishonor of the bill or check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the
defense of forgery by reason of her gross negligence. But under Section
196 of the NIL, any case not provided for in the Act shall be governed by
the provisions of existing legislation. Under the laws of quasi-delict, she
cannot point to the negligence of the respondent drawee Bank in the
selection and supervision of its employees as being the cause of the loss
because negligence is the proximate cause thereof and under Article 2179
of the Civil Code, she may not be awarded damages. However, under
Article 1170 of the same Code the respondent drawee Bank may be held
liable for damages. The article provides
Those who in the performance of their obligations are
guilty of fraud, negligence or delay, and those who in any
manner contravene the tenor thereof, are liable for
damages.
There is no question that there is a contractual relation between petitioner
as depositor (obligee) and the respondent drawee bank as the obligor. In
the performance of its obligation, the drawee bank is bound by its internal
banking rules and regulations which form part of any contract it enters into
with any of its depositors. When it violated its internal rules that second
endorsements are not to be accepted without the approval of its branch
managers and it did accept the same upon the mere approval of Boon, a
chief accountant, it contravened the tenor of its obligation at the very
least, if it were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover
the irregularity with respect to the acceptance of checks with second
indorsement for deposit even without the approval of the branch manager
despite periodic inspection conducted by a team of auditors from the main
office constitutes negligence on the part of the bank in carrying out its
obligations to its depositors. Article 1173 provides
The fault or negligence of the obligor consists in the
omission of that diligence which is required by the nature

of the obligation and corresponds with the circumstance of

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

SO ORDERED.

FIFTEEN
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 123793 June 29, 1998

ASSOCIATED BANK, petitioner,
vs.
COURT OF APPEALS and LORENZO SARMIENTO JR., respondents.

PANGANIBAN, J.:
In a merger, does the surviving corporation have a right to enforce a
contract entered into by the absorbed company subsequent to the date of
the merger agreement, but prior to the issuance of a certificate of merger
by the Securities and Exchange Commission?
The Case
This is a petition for review under Rule 45 of the Rules of Court, seeking to
set aside the Decision 1 of the Court of Appeals 2 in CA-GR CV No. 26465
promulgated on January 30, 1996, which answered the above question in
the negative. The challenged Decision reversed and set aside the October
17, 1986 Decision 3 in Civil Case No. 85-32243, promulgated by the
Regional Trial Court of Manila, Branch 48, which disposed of the
controversy in favor of herein petitioner as follows: 4
WHEREFORE, judgment is hereby rendered in favor of the
plaintiff Associated Bank. The defendant Lorenzo
Sarmiento, Jr. is ordered to pay plaintiff:

1. The amount of P4,689,413.63 with interest thereon at

14% per annum until fully paid;
2. The amount of P200,000.00 as and for attorney's fees;
and
3. The costs of suit.
On the other hand, the Court of Appeals resolved the case in this wise:

WHEREFORE, premises considered, the decision appealed

from, dated October 17, 1986 is REVERSED and SET ASIDE
and another judgment rendered DISMISSING plaintiffappellee's complaint, docketed as Civil Case No. 85-32243.
There is no pronouncement as to costs.
The Facts
The undisputed factual antecedents, as narrated by the trial court and
adopted by public respondent, are as follows: 6
. . . [O]n or about September 16, 1975 Associated Banking
Corporation and Citizens Bank and Trust Company merged
to form just one banking corporation known as Associated
Citizens Bank, the surviving bank. On or about March 10,
1981, the Associated Citizens Bank changed its corporate
name to Associated Bank by virtue of the Amended Articles
of Incorporation. On September 7, 1977, the defendant
executed in favor of Associated Bank a promissory note
whereby the former undertook to pay the latter the sum of
P2,500,000.00 payable on or before March 6, 1978. As per
said promissory note, the defendant agreed to pay interest
at 14% per annum, 3% per annum in the form of liquidated
damages, compounded interests, and attorney's fees, in
case of litigation equivalent to 10% of the amount due. The
defendant, to date, still owes plaintiff bank the amount of
P2,250,000.00 exclusive of interest and other charges.
Despite repeated demands the defendant failed to pay the
amount due.
xxx xxx xxx

. . . [T]he defendant denied all the pertinent allegations in

the complaint and alleged as affirmative and[/]or special
defenses that the complaint states no valid cause of
action; that the plaintiff is not the proper party in interest
because the promissory note was executed in favor of
Citizens Bank and Trust Company; that the promissory note
does not accurately reflect the true intention and
agreement of the parties; that terms and conditions of the
promissory note are onerous and must be construed
against the creditor-payee bank; that several partial
payments made in the promissory note are not properly
applied; that the present action is premature; that as
compulsory counterclaim the defendant prays for
attorney's fees, moral damages and expenses of litigation.
On May 22, 1986, the defendant was declared as if in
default for failure to appear at the Pre-Trial Conference
despite due notice.
A Motion to Lift Order of Default and/or Reconsideration of
Order dated May 22, 1986 was filed by defendant's counsel
which was denied by the Court in [an] order dated
September 16, 1986 and the plaintiff was allowed to
present its evidence before the Court ex-parte on October
16, 1986.
At the hearing before the Court ex-parte, Esteban C.
Ocampo testified that . . . he is an accountant of the Loans
and Discount Department of the plaintiff bank; that as
such, he supervises the accounting section of the bank, he
counterchecks all the transactions that transpired during
the day and is responsible for all the accounts and records
and other things that may[ ]be assigned to the Loans and
Discount Department; that he knows the [D]efendant
Lorenzo Sarmiento, Jr. because he has an outstanding loan
with them as per their records; that Lorenzo Sarmiento, Jr.
executed a promissory note No. TL-2649-77 dated
September 7, 1977 in the amount of P2,500,000.00
(Exhibit A); that Associated Banking Corporation and the
Citizens Bank and Trust Company merged to form one
banking corporation known as the Associated Citizens Bank
and is now known as Associated Bank by virtue of its
Amended Articles of Incorporation; that there were partial
payments made but not full; that the defendant has not

paid his obligation as evidenced by the latest statement of

account (Exh. B); that as per statement of account the
outstanding obligation of the defendant is P5,689,413.63
less P1,000,000.00 or P4,689,413.63 (Exh. B, B-1); that a
demand letter dated June 6, 1985 was sent by the bank
thru its counsel (Exh. C) which was received by the
defendant on November 12, 1985 (Exh. C, C-1, C-2, C-3);
that the defendant paid only P1,000,000.00 which is
reflected in the Exhibit C.
Based on the evidence presented by petitioner, the trial court ordered
Respondent Sarmiento to pay the bank his remaining balance plus
interests and attorney's fees. In his appeal, Sarmiento assigned to the trial
court several errors, namely: 7
I The [trial court] erred in denying appellant's motion to
dismiss appellee bank's complaint on the ground of lack of
cause of action and for being barred by prescription and
laches.
II The same lower court erred in admitting plaintiff-appellee
bank's amended complaint while defendant-appellant's
motion to dismiss appelle bank's original complaint and
using/availing [itself of] the new additional allegations as
bases in denial of said appellant's motion and in the
interpretation and application of the agreement of merger
and Section 80 of BP Blg. 68, Corporation Code of the
Philippines.
III The [trial court] erred and gravely abuse[d] its discretion
in rendering the two as if in default orders dated May 22,
1986 and September 16, 1986 and in not reconsidering the
same upon technical grounds which in effect subvert the
best primordial interest of substantial justice and equity.

IV The court a quo erred in issuing the orders dated May

22, 1986 and September 16, 1986 declaring appellant as if
in default due to non-appearance of appellant's attending
counsel who had resigned from the law firm and while the
parties [were] negotiating for settlement of the case and
after a one million peso payment had in fact been paid to
appellee bank for appellant's account at the start of such
negotiation on February 18, 1986 as act of earnest desire
to settle the obligation in good faith by the interested
parties.
V The lower court erred in according credence to appellee
bank's Exhibit B statement of account which had been
merely requested by its counsel during the trial and
bearing date of September 30, 1986.
VI The lower court erred in accepting and giving credence
to appellee bank's 27-year-old witness Esteban C. Ocampo
as of the date he testified on October 16, 1986, and
therefore, he was merely an eighteen-year-old minor when
appellant supposedly incurred the foisted obligation under
the subject PN No. TL-2649-77 dated September 7, 1977,
Exhibit A of appellee bank.
VII The [trial court] erred in adopting appellee bank's
Exhibit B dated September 30, 1986 in its decision given in
open court on October 17, 1986 which exacted eighteen
percent (18%) per annum on the foisted principal amount
of P2.5 million when the subject PN, Exhibit A, stipulated
only fourteen percent (14%) per annum and which was
actually prayed for in appellee bank's original and
amended complaints.
VIII The appealed decision of the lower court erred in not
considering at all appellant's affirmative defenses that (1)
the subject PN No. TL-2649-77 for P2.5 million dated
September 7, 1977, is merely an accommodation pour
autrui of any actual consideration to appellant himself and
(2) the subject PN is a contract of adhesion, hence, [it]
needs [to] be strictly construed against appellee bank
assuming for granted that it has the right to enforce and
seek collection thereof.

IX The lower court should have at least allowed appellant

the opportunity to present countervailing evidence
considering the huge amounts claimed by appellee bank
(principal sum of P2.5 million which including accrued
interests, penalties and cost of litigation totaled
P4,689,413.63) and appellant's affirmative defenses
pursuant to substantial justice and equity.
The appellate court, however, found no need to tackle all the assigned
errors and limited itself to the question of "whether [herein petitioner had]
established or proven a cause of action against [herein private
respondent]." Accordingly, Respondent Court held that the Associated Bank
had no cause of action against Lorenzo Sarmiento Jr., since said bank was
not privy to the promissory note executed by Sarmiento in favor of Citizens
Bank and Trust Company (CBTC). The court ruled that the earlier merger
between the two banks could not have vested Associated Bank with any
interest arising from the promissory note executed in favor of
CBTC after such merger.
Thus, as earlier stated, Respondent Court set aside the decision of the trial
court and dismissed the complaint. Petitioner now comes to us for a
reversal of this ruling. 8
Issues
In its petition, petitioner cites the following "reasons":

I The Court of Appeals erred in reversing the decision of the

trial court and in declaring that petitioner has no cause of
action against respondent over the promissory note.
II The Court of Appeals also erred in declaring that, since
the promissory note was executed in favor of Citizens Bank
and Trust Company two years after the merger between
Associated Banking Corporation and Citizens Bank and
Trust Company, respondent is not liable to petitioner
because there is no privity of contract between respondent
and Associated Bank.
III The Court of Appeals erred when it ruled that petitioner,
despite the merger between petitioner and Citizens Bank
and Trust Company, is not a real party in interest insofar as
the promissory note executed in favor of the merger.

In a nutshell, the main issue is whether Associated Bank, the surviving

corporation, may enforce the promissory note made by private respondent
in favor of CBTC, the absorbed company, after the merger agreement had
been signed.
The Court's Ruling
The petition is impressed with merit.
The Main Issue:
Associated Bank Assumed
All Rights of CBTC
Ordinarily, in the merger of two or more existing corporations, one of the
combining corporations survives and continues the combined business,
while the rest are dissolved and all their rights, properties and liabilities are
acquired by the surviving corporation. 10 Although there is a dissolution of
the absorbed corporations, there is no winding up of their affairs or
liquidation of their assets, because the surviving corporation automatically
acquires all their rights, privileges and powers, as well as their liabilities. 11
The merger, however, does not become effective upon the mere
agreement of the constituent corporations. The procedure to be followed is
prescribed under the Corporation Code. 12 Section 79 of said Code requires
the approval by the Securities and Exchange Commission (SEC) of the
articles of merger which, in turn, must have been duly approved by a
majority of the respective stockholders of the constituent corporations. The
same provision further states that the merger shall be effective only upon
the issuance by the SEC of a certificate of merger. The effectivity date of
the merger is crucial for determining when the merged or absorbed
corporation ceases to exist; and when its rights, privileges, properties as
well as liabilities pass on to the surviving corporation.
Consistent with the aforementioned Section 79, the September 16, 1975
Agreement of Merger, 13 which Associated Banking Corporation (ABC) and
Citizens Bank and Trust Company (CBTC) entered into, provided that its
effectivity "shall, for all intents and purposes, be the date when the
necessary papers to carry out this [m]erger shall have been approved by
the Securities and Exchange Commission." 14 As to the transfer of the
properties of CBTC to ABC, the agreement provides:
10. Upon effective date of the Merger, all rights, privileges,
powers, immunities, franchises, assets and property of

[CBTC], whether real, personal or mixed, and including

[CBTC's] goodwill and tradename, and all debts due to
[CBTC] on whatever act, and all other things in action
belonging to [CBTC] as of the effective date of the [m]erger
shall be vested in [ABC], the SURVIVING BANK, without
need of further act or deed, unless by express
requirements of law or of a government agency, any
separate or specific deed of conveyance to legally effect
the transfer or assignment of any kind of property [or]
asset is required, in which case such document or deed
shall be executed accordingly; and all property, rights,
privileges, powers, immunities, franchises and all
appointments, designations and nominations, and all other
rights and interests of [CBTC] as trustee, executor,
administrator, registrar of stocks and bonds, guardian of
estates, assignee, receiver, trustee of estates of persons
mentally ill and in every other fiduciary capacity, and all
and every other interest of [CBTC] shall thereafter be
effectually the property of [ABC] as they were of [CBTC],
and title to any real estate, whether by deed or otherwise,
vested in [CBTC] shall not revert or be in any way impaired
by reason thereof; provided, however, that all rights of
creditors and all liens upon any property of [CBTC] shall be
preserved and unimpaired and all debts, liabilities,
obligations, duties and undertakings of [CBTC], whether
contractual or otherwise, expressed or implied, actual or
contingent, shall henceforth attach to [ABC] which shall be
responsible therefor and may be enforced against [ABC] to
the same extent as if the same debts liabilities, obligations,
duties and undertakings have been originally incurred or
contracted by [ABC], subject, however, to all rights,
privileges, defenses, set-offs and counterclaims which
[CBTC] has or might have and which shall pertain to
[ABC]. 15

The records do not show when the SEC approved the merger. Private
respondent's theory is that it took effect on the date of the execution of the
agreement itself, which was September 16, 1975. Private respondent
contends that, since he issued the promissory note to CBTC on September
7, 1977 two years after the merger agreement had been executed
CBTC could not have conveyed or transferred to petitioner its interest in
the said note, which was not yet in existence at the time of the merger.
Therefore, petitioner, the surviving bank, has no right to enforce the
promissory note on private respondent; such right properly pertains only to
CBTC.
Assuming that the effectivity date of the merger was the date of its
execution, we still cannot agree that petitioner no longer has any interest
in the promissory note. A closer perusal of the merger agreement leads to
a different conclusion. The provision quoted earlier has this other clause:
Upon the effective date of the [m]erger, all references to
[CBTC] in any deed, documents, or other papers of
whatever kind or nature and wherever found shall be
deemed for all intents and purposes, references to [ABC],
the SURVIVING BANK, as if such references were direct
references to [ABC]. . . . 6 (Emphasis supplied)
Thus, the fact that the promissory note was executed after the effectivity
date of the merger does not militate against petitioner. The agreement
itself clearly provides that all contracts irrespective of the date of
execution entered into in the name of CBTC shall be understood as
pertaining to the surviving bank, herein petitioner. Since, in contrast to the
earlier aforequoted provision, the latter clause no longer specifically refers
only to contracts existing at the time of the merger, no distinction should
be made. The clause must have been deliberately included in the
agreement in order to protect the interests of the combining banks;
specifically, to avoid giving the merger agreement a farcical interpretation
aimed at evading fulfillment of a due obligation.
Thus, although the subject promissory note names CBTC as the payee, the
reference to CBTC in the note shall be construed, under the very provisions
of the merger agreement, as a reference to petitioner bank, "as if such
reference [was a] direct reference to" the latter "for all intents and
purposes."
No other construction can be given to the unequivocal stipulation. Being
clear, plain and free of ambiguity, the provision must be given its literal

meaning 17 and applied without a convoluted interpretation. Verba lelegis

non est recedendum. 18
In light of the foregoing, the Court holds that petitioner has a valid cause of
action against private respondent. Clearly, the failure of private respondent
to honor his obligation under the promissory note constitutes a violation of
petitioner's right to collect the proceeds of the loan it extended to the
former.
Secondary Issues:
Prescription, Laches, Contract
Pour Autrui, Lack of Consideration
No Prescription
or Laches
Private respondent's claim that the action has prescribed, pursuant to
Article 1149 of the Civil Code, is legally untenable. Petitioner's suit for
collection of a sum of money was based on a written contract and
prescribes after ten years from the time its right of action
arose. 19 Sarmiento's obligation under the promissory note became due
and demandable on March 6, 1978. Petitioner's complaint was instituted on
August 22, 1985, before the lapse of the ten-year prescriptive period.
Definitely, petitioner still had every right to commence suit against the
payor/obligor, the private respondent herein.
Neither is petitioner's action barred by laches. The principle of laches is a
creation of equity, which is applied not to penalize neglect or failure to
assert a right within a reasonable time, but rather to avoid recognizing a
right when to do so would result in a clearly inequitable situation 20 or in an
injustice. 21 To require private respondent to pay the remaining balance of
his loan is certainly not inequitable or unjust. What would be manifestly
unjust and inequitable is his contention that CBTC is the proper party to
proceed against him despite the fact, which he himself asserts, that CBTC's
corporate personality has been dissolved by virtue of its merger with
petitioner. To hold that no payee/obligee exists and to let private
respondent enjoy the fruits of his loan without liability is surely most unfair
and unconscionable, amounting to unjust enrichment at the expense of
petitioner. Besides, this Court has held that the doctrine of laches is
inapplicable where the claim was filed within the prescriptive period set
forth under the law. 22

No Contract
Pour Autrui
Private respondent, while not denying that he executed the promissory
note in the amount of P2,500,000 in favor of CBTC, offers the alternative
defense that said note was a contract pour autrui.
A stipulation pour autrui is one in favor of a third person who may demand
its fulfillment, provided he communicated his acceptance to the obligor
before its revocation. An incidental benefit or interest, which another
person gains, is not sufficient. The contracting parties must have clearly
and deliberately conferred a favor upon a third person. 23
Florentino vs. Encarnacion Sr. 24 enumerates the requisites for such
contract: (1) the stipulation in favor of a third person must be a part of the
contract, and not the contract itself; (2) the favorable stipulation should
not be conditioned or compensated by any kind of obligation; and (3)
neither of the contracting parties bears the legal representation or
authorization of the third party. The "fairest test" in determining whether
the third person's interest in a contract is a stipulation pour autrui or
merely an incidental interest is to examine the intention of the parties as
disclosed by their contract. 25
We carefully and thoroughly perused the promissory note, but found no
stipulation at all that would even resemble a provision in consideration of a
third person. The instrument itself does not disclose the purpose of the
loan contract. It merely lays down the terms of payment and the penalties
incurred for failure to pay upon maturity. It is patently devoid of any
indication that a benefit or interest was thereby created in favor of a
person other than the contracting parties. In fact, in no part of the
instrument is there any mention of a third party at all. Except for his
barefaced statement, no evidence was proffered by private respondent to
support his argument. Accordingly, his contention cannot be sustained. At
any rate, if indeed the loan actually benefited a third person who
undertook to repay the bank, private respondent could have availed
himself of the legal remedy of a third-party complaint. 26That he made no
effort to implead such third person proves the hollowness of his arguments.
Consideration
Private respondent also claims that he received no consideration for the
promissory note and, in support thereof, cites petitioner's failure to submit
any proof of his loan application and of his actual receipt of the amount

loaned. These arguments deserve no merit. Res ipsa loquitur. The

instrument, bearing the signature of private respondent, speaks for itself.
Respondent Sarmiento has not questioned the genuineness and due
execution thereof. No further proof is necessary to show that he undertook
to pay P2,500,000, plus interest, to petitioner bank on or before March 6,
1978. This he failed to do, as testified to by petitioner's accountant. The
latter presented before the trial court private respondent's statement of
account 27 as of September 30, 1986, showing an outstanding balance of
P4,689,413.63 after deducting P1,000,000.00 paid seven months earlier.
Furthermore, such partial payment is equivalent to an express
acknowledgment of his obligation. Private respondent can no longer
backtrack and deny his liability to petitioner bank. "A person cannot accept
and reject the same instrument." 28
WHEREFORE, the petition is GRANTED. The assailed Decision is SET ASIDE
and the Decision of RTC-Manila, Branch 48, in Civil Case No. 26465 is
hereby REINSTATED.
SO ORDERED.

SIXTEEN
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-55079 November 19, 1982
METROPOLITAN BANK and TRUST COMPANY, petitioner,
vs.
THE FIRST NATIONAL CITY BANK and THE COURT OF
APPEALS, respondents.
Resales, Perez & Assoc. for petitioner.
Siguion, Reyna, Montecillo and Ongsiako for respondent PNCB.

MELENCIO-HERRERA, J.:

This is a Petition for Review on certiorari of the Decision of the Court of

Appeals in CA-G.R. No. 57129-R entitled, First National City Bank vs.
Metropolitan Bank and Trust Company, which affirmed in toto the Decision
of the Court of First Instance of Manila, Branch VIII, in Civil Case No. 61488,
ordering petitioner herein, Metropolitan Bank, to reimburse respondent
First National City Bank the amount of P50,000.00, with legal rate of
interest from June 25, 1965, and to pay attorney's fees of P5,000.00 and
costs.
The controversy arose from the following facts:
On August 25, 1964, Check No. 7166 dated July 8, 1964 for P50,000.00,
payable to CASH, drawn by Joaquin Cunanan & Company on First National
City Bank (FNCB for brevity) was deposited with Metropolitan Bank and
Trust Company (Metro Bank for short) by a certain Salvador Sales. Earlier
that day, Sales had opened a current account with Metro Bank depositing
P500.00 in cash. 1 Metro Bank immediately sent the cash check to the
Clearing House of the Central Bank with the following words stamped at
the back of the check:
Metropolitan Bank and Trust Company Cleared (illegible)
office All prior endorsements and/or Lack of endorsements
Guaranteed. 2
The check was cleared the same day. Private respondent paid petitioner
through clearing the amount of P50,000.00, and Sales was credited with
the said amount in his deposit with Metro Bank.
On August 26, 1964, Sales made his first withdrawal of P480.00 from his
current account. On August 28, 1964, he withdrew P32,100.00. Then on
August 31, 1964, he withdrew the balance of P17,920.00 and closed his
account with Metro Bank.
On September 3, 1964, or nine (9) days later, FNCB returned cancelled
Check No. 7166 to drawer Joaquin Cunanan & Company, together with the
monthly statement of the company's account with FNCB. That same day,
the company notified FNCB that the check had been altered. The actual
amount of P50.00 was raised to P50,000.00, and over the name of the
payee, Manila Polo Club, was superimposed the word CASH.
FNCB notified Metro Bank of the alteration by telephone, confirming it the
same day with a letter, which was received by Metro Bank on the following
day, September 4, 1964.

On September 10, 1964, FNCB wrote Metro Bank asking for reimbursement
of the amount of P50,000.00. The latter did not oblige, so that FNCB
reiterated its request on September 29, 1964. Metro Bank was adamant in
its refusal.

The Respondent Court of Appeals erred in disregarding and

in not applying the doctrines in the cases of Republic of the
Philippines vs. Equitable Banking Corporation (10 SCRA 8)
and Hongkong & Shanghai Banking Corporation vs.
People's Bank and Trust Company (35 SCRA 140) for the
same are controlling and apply four square to the present
case.

On June 29, 1965, FNCB filed in the Court of First Instance of Manila,
Branch VIII, Civil Case No. 61488 against Metro Bank for recovery of the
amount of P50,000.00.

IV
On January 27, 1975, the Trial Court rendered its Decision ordering Metro
Bank to reimburse FNCB the amount of P50,000.00 with legal rate of
interest from June 25, 1965 until fully paid, to pay attorney's fees of
P5,000.00, and costs.

The Respondent Court of Appeals erred in not finding the

private respondent guilty of operative negligence which is
the proximate cause of the loss.

Petitioner appealed said Decision to the Court of Appeals (CA-G.R. No.

57129-R). On August 29, 1980, respondent Appellate Court 3 affirmed in
toto the judgment of the Trial Court.

The material facts of the case are not disputed. The issue for resolution is,
which bank is liable for the payment of the altered check, the drawee bank
(FNCB) or the collecting bank (Metro Bank)?

Petitioner came to this instance on appeal by Certiorari, alleging:

The transaction occurred during the effectivity of Central Bank Circular No.
9 (February 17, 1949) as amended by Circular No. 138 (January 30, 1962),
and Circular No. 169 (March 30, 1964). Section 4 of said Circular, as
amended, states:

I
The Respondent Court of Appeals erred in completely
ignoring and disregarding the 24-hour clearing house rule
provided for under Central Bank Circular No. 9, as
amended, although:

Section 4. Clearing Procedures.

(c) Procedures for Returned Items

1. The 24-hour regulation of the Central Bank in clearing

house operations is valid and banks are subject to and are
bound by the same; and

Items which should be returned for any reason whatsoever

shall be delivered to and received through the clearing
Office in the special red envelopes and shall be considered
and accounted as debits to the banks to which the items
are returned. Nothing in this section shall prevent the
returned items from being settled by reinbursement to the
bank, institution or entity returning the items. All items
cleared on a particular clearing shall be returned not later
than 3:30 P.M. on the following business day.

2. The 24-hour clearing house rule applies to the present

case of the petitioner and the private respondent.
II
The Respondent Court of Appeals erred in relying heavily
on its decision in Gallaites, et al. vs. RCA, etc., promulgated
on October 23, 1950 for the same is not controlling and is
not applicable to the present case.
III

xxx xxx xxx

The facts of this case fall within said Circular. Under the procedure
prescribed, the drawee bank receiving the check for clearing from the
Central Bank Clearing House must return the check to the collecting bank
within the 24-hour period if the check is defective for any reason.

Metro Bank invokes this 24-hour regulation of the Central Bank as its
defense. FNCB on the other hand, relies on the guarantee of all previous
indorsements made by Metro Bank which guarantee had allegedly misled
FNCB into believing that the check in question was regular and the payee's
indorsements genuine; as well as on "the general rule of law founded on
equity and justice that a drawee or payor bank which in good faith pays
the amount of materially altered check to the holder thereof is entitled to
recover its payment from the said holder, even if he be an innocent
holder. 4
The validity of the 24-hour clearing house regulation has been upheld by
this Court in Republic vs. Equitable Banking Corporation, 10 SCRA 8 (1964).
As held therein, since both parties are part of our banking system, and
both are subject to the regulations of the Central Bank, they are bound by
the 24-hour clearing house rule of the Central Bank.
In this case, the check was not returned to Metro Bank in accordance with
the 24-hour clearing house period, but was cleared by FNCB. Failure of
FNCB, therefore, to call the attention of Metro Bank to the alteration of the
check in question until after the lapse of nine days, negates whatever right
it might have had against Metro Bank in the light of the said Central Bank
Circular. Its remedy lies not against Metro Bank, but against the party
responsible for the changing the name of the payee 5 and the amount on
the face of the check.
FNCB contends that the stamp reading,
Metropolitan Bank and Trust Company Cleared (illegible)
office All prior endorsements and/or Lack of endorsements
Guaranteed. 6
made by Metro Bank is an unqualified representation that the endorsement
on the check was that of the true payee, and that the amount thereon was
the correct amount. In that connection, this Court in the Hongkong &
Shanghai Bank case, supra, ruled:

.. But Plaintiff Bank insists that Defendant Bank is liable on

its indorsement during clearing house operations. The
indorsement, itself, is very clear when it begins with words
'For clearance, clearing office **** In other words, such an
indorsement must be read together with the 24-hour
regulation on clearing House Operations of the Central
Bank. Once that 24- hour period is over, the liability on
such an indorsement has ceased. This being so, Plaintiff
Bank has not made out a case for relief. 7
Consistent with this ruling, Metro Bank can not be held liable for the
payment of the altered check.
Moreover, FNCB did not deny the allegation of Metro Bank that before it
allowed the withdrawal of the balance of P17,920.00 by Salvador Sales,
Metro Bank withheld payment and first verified, through its Assistant
Cashier Federico Uy, the regularity and genuineness of the check deposit
from Marcelo Mirasol, Department Officer of FNCB, because its (Metro
Bank) attention was called by the fast movement of the account. Only
upon being assured that the same is not unusual' did Metro Bank allow the
withdrawal of the balance.
Reliance by respondent Court of Appeals, on its own ruling in Gallaites vs.
RCA, CA-G.R. No. 3805, October 23, 1950, by stating:
... The laxity of appellant in its dealing with customers,
particularly in cases where the Identity of the person is
new to them (as in the case at bar) and in the obvious
carelessness of the appellant in handling checks which can
easily be forged or altered boil down to one conclusionnegligence in the first order. This negligence enabled a
swindler to succeed in fraudulently encashing the chock in
question thereby defrauding drawee bank (appellee) in the
amount thereof.
is misplaced not only because the factual milieu is not four square with this
case but more so because it cannot prevail over the doctrine laid down by
this Court in the Hongkong & Shanghai Bank case which is more in point
and, hence, controlling:
WHEREFORE, the challenged Decision of respondent Court of Appeals of
August 29, 1980 is hereby set aside, and Civil Case No. 61488 is hereby
dismissed.

Costs against private respondent The First National City Bank.

SO ORDERED.

SEVENTEEN
FIRST DIVISION

of additional numerals in the amount appearing thereon, the remedy of the

drawee bank that negligently clears a forge and/or altered check for
payment is against the party responsible for the forgery or alteration
(Hongkong & Shanghai Banking Corp. v. Peoples Bank & Trust Co., 35
SCRA 140), otherwise, it bears the loss. It may not charge the amount so
paid to the account of the drawer, if the latter was free from blame, nor
recover it from the collecting bank if the latter made payment after proper
clearance from the drawee.

[G.R. No. 42725. April 22, 1991.]

DECISION

REPUBLIC BANK, Petitioner, v. COURT OF APPEALS and FIRST NATIONAL

CITY BANK, Respondents.

GRIO-AQUINO, J.:

Lourdes C. Dorado for Petitioner.

Siguion Reyna, Montecillo & Ongsiako for private respondent Citibank.
SYLLABUS
1.
COMMERCIAL LAW; BANKING LAWS; 24-HOUR CLEARING HOUSE
RULE APPLIES TO COMMERCIAL BANKS; FAILURE OF DRAWEE BANK TO
COMPLY WITH RULE ABSOLVES COLLECTING BANKS. The 24-hour
clearing house rule is a valid rule applicable to commercial banks (Republic
v. Equitable Banking Corporation, 10 SCRA 8 [1964]; Metropolitan Bank &
Trust Co. v. First National City Bank, 118 SCRA 537). It is true that when an
endorsement is forged, the collecting bank or last endorser, as a general
rule, bears the loss (Banco de Oro Savings & Mortgage Bank v. Equitable
Banking Corp., 157 SCRA 188). But the unqualified endorsement of the
collecting bank on the check should be read together with the 24-hour
regulation on clearing house operation (Metropolitan Bank & Trust Co. v.
First National City Bank, supra). Thus, when the drawee bank fails to return
a forged or altered check to the collecting bank within the 24-hour clearing
period, the collecting bank is absolved from liability. The following
decisions of this Court are also relevant and persuasive.
2.
ID.; ID.; ID.; ID.; REMEDY OF DRAWEE BANK IS AGAINST PARTY
RESPONSIBLE FOR FORGERY OR ALTERATION. Every bank that issues
checks for the use of its customers should know whether or not the
drawers signature thereon is genuine, whether there are sufficient funds in
the drawers account to cover checks issued, and it should be able to
detect alterations, erasures, superimpositions or intercalations thereon, for
these instruments are prepared, printed and issued by itself, it has control
of the drawers account, and it is supposed to be familiar with the drawers
signature. It should possess appropriate detecting devices for uncovering
forgeries and/or alterations on these instruments. Unless an alteration is
attributable to the fault or negligence of the drawer himself, such as when
he leaves spaces on the check which would allow the fraudulent insertion

On January 25, 1966, San Miguel Corporation (SMC for short), drew a
dividend Check No. 108854 for P240, Philippine currency, on its account in
the respondent First National City Bank ("FNCB" for brevity) in favor of J.
Roberto C. Delgado, a stockholder. After the check had been delivered to
Delgado, the amount on its face was fraudulently and without authority of
the drawer, SMC, altered by increasing it from P240 to P9,240. The check
was indorsed and deposited on March 14, 1966 by Delgado in his account
with the petitioner Republic Bank (hereafter "Republic").
Republic accepted the check for deposit without ascertaining its
genuineness and regularity. Later, Republic endorsed the check to FNCB by
stamping on the back of the check "all prior and/or lack of indorsement
guaranteed" and presented it to FNCB for payment through the Central
Bank Clearing House. Believing the check was genuine, and relying on the
guaranty and endorsement of Republic appearing on the back of the check,
FNCB paid P9,240 to Republic through the Central Bank Clearing House on
March 15, 1966.
On April 19, 1966, SMC notified FNCB of the material alteration in the
amount of the check in question. FNCB lost no time in recrediting P9,240 to
SMC. On May 19, 1966, FNCB informed Republic in writing of the alteration
and the forgery of the endorsement of J. Roberto C. Delgado. By then,
Delgado had already withdrawn his account from Republic.
On August 15, 1966, FNCB demanded that Republic refund the P9,240 on
the basis of the latters endorsement and guaranty. Republic refused,
claiming there was delay in giving it notice of the alteration; that it was not
guilty of negligence; that it was the drawers (SMCs) fault in drawing the
check in such a way as to permit the insertion of numerals increasing the
amount; that FNCB, as drawee, was absolved of any liability to the drawer
(SMC), thus, FNCB had no right of recourse against Republic.
On April 8, 1968, the trial court rendered judgment ordering Republic to
pay P9,240 to FNCB with 6% interest per annum from February 27, 1967
until fully paid, plus P2,000 for attorneys fees and costs of the suit. The

Court of Appeals affirmed that decision, but modified the award of

attorneys fees by reducing it to P1,000 without pronouncement as to costs
(CA-G.R. No. 41691-R, December 22, 1975).chanrobles virtual lawlibrary
In this petition for review, the lone issue is whether Republic, as the
collecting bank, is protected, by the 24-hour clearing house rule, found in
CB Circular No. 9, as amended, from liability to refund the amount paid by
FNCB, as drawee of the SMC dividend check.
The petition for review is meritorious and must be granted.
The 24-hour clearing house rule embodied in Section 4(c) of Central Bank
Circular No. 9, as amended, provides:jgc:chanrobles.com.ph
"Items which should be returned for any reason whatsoever shall be
returned directly to the bank, institution or entity from which the item was
received. For this purpose, the Receipt for Returned Checks (Cash Form No.
9) should be used. The original and duplicate copies of said Receipt shall
be given to the Bank, institution or entity which returned the items and the
triplicate copy should be retained by the bank, institution or entity whose
demand is being returned. At the following clearing, the original of the
Receipt for Returned Checks shall be presented through the Clearing Office
as a demand against the bank, institution or entity whose item has been
returned. Nothing in this section shall prevent the returned items from
being settled by direct reimbursement to the bank, institution or entity
returning the items. All items cleared at 11:00 oclock A.M. shall be
returned not later than 2:00 oclock P.M. on the same day and all items
cleared at 3:00 oclock P.M. shall be returned not later than 8:30 A.M. of the
following business day except for items cleared on Saturday which may be
returned not later than 8:30 A.M. of the following day."cralaw virtua1aw
library
The 24-hour clearing house rule is a valid rule applicable to commercial
banks (Republic v. Equitable Banking Corporation, 10 SCRA 8 [1964];
Metropolitan Bank & Trust Co. v. First National City Bank, 118 SCRA 537).
It is true that when an endorsement is forged, the collecting bank or last
endorser, as a general rule, bears the loss (Banco de Oro Savings &
Mortgage Bank v. Equitable Banking Corp., 167 SCRA 188). But the
unqualified endorsement of the collecting bank on the check should be
read together with the 24-hour regulation on clearing house operation
(Metropolitan Bank & Trust Co. v. First National City Bank, supra). Thus,
when the drawee bank fails to return a forged or altered check to the
collecting bank within the 24-hour clearing period, the collecting bank is
absolved from liability. The following decisions of this Court are also
relevant and persuasive:chanrob1es virtual 1aw library
In Hongkong & Shanghai Banking Corp. v. Peoples Bank & Trust Co. (35
SCRA 140), a check for P14,608.05 was drawn by the Philippine Long
Distance Telephone Company on the Hongkong & Shanghai Banking
Corporation payable to the same bank. It was mailed to the payee but fell

into the hands of a certain Florentino Changco who erased the name of the
payee, typed his own name, and thereafter deposited the altered check in
his account in the Peoples Bank & Trust Co. which presented it to the
drawee bank with the following indorsement:chanrobles law library
"For clearance, clearing office. All prior endorsements and or lack of
endorsements guaranteed. Peoples Bank and Trust Company."cralaw
virtua1aw library
The check was cleared by the drawee bank (Hongkong & Shanghai Bank),
whereupon the Peoples Bank credited Changco with the amount of the
check. Changco thereafter withdrew the contents of his bank account. A
month later, when the check was returned to PLDT, the alteration was
discovered. The Hongkong & Shanghai Bank sued to recover from the
Peoples Bank the sum of P14,608.05. The complaint was dismissed.
Affirming the decision of the trial court, this Court
held:jgc:chanrobles.com.ph
"The entire case of plaintiff is based on the indorsement that has been
heretofore copied namely, a guarantee of all prior indorsement, made
by Peoples Bank and since such an indorsement carries with it a
concomitant guarantee of genuineness, the Peoples Bank is liable to the
Hongkong Shanghai Bank for alteration made in the name of payee. On the
other hand, the Peoples Bank relies on the 24-hour regulation of the
Central Bank that requires after a clearing, that all cleared items must be
returned not later than 3:00 P.M. of the following business day. And since
the Hongkong Shanghai Bank only advised the Peoples Bank as to the
alteration on April 12, 1965 or 27 days after clearing, the Peoples Bank
claims that it is now too late to do so. This regulation of the Central Bank
as to 24 hours is challenged by Plaintiff Bank as being merely part of an
ingenious device to facilitate banking transactions. Be that what it may
as both Plaintiff as well as Defendant Banks are part of our banking system
and both are subject to regulations of the Central Bank they are both
bound by such regulations. . . . But Plaintiff Bank insists that Defendant
Bank is liable on its indorsement during clearing house operations. The
indorsement, itself, is very clear when it begins with the words `For
clearance, clearing office . . . In other words, such an indorsement must be
read together with the 24-hour regulation on clearing House Operations of
the Central Bank. Once that 24-hour period is over, the liability on such an
indorsement has ceased. This being so, Plaintiff Bank has not made out a
case for relief."cralaw virtua1aw library
"x

"Moreover, in one of the very cases relied upon by plaintiff, as appellant,

mention is made of a principle on which defendant Bank could have acted
without incurring the liability now sought to be imposed by plaintiff. Thus:
It is a settled rule that a person who presents for payment checks such as
are here involved guarantees the genuineness of the check, and the
drawee bank need concern itself with nothing but the genuineness of the
signature, and the state of the account with it of the drawee. (Interstate

Trust Co. v. United States National Bank, 185 Pac. 260 [1919]). If at all,
then, whatever remedy the plaintiff has would lie not against defendant
Bank but as against the party responsible for changing the name of the
payee. Its failure to call the attention of defendant Bank as to such
alteration until after the lapse of 27 days would, in the light of the above
Central Bank circular, negate whatever right it might have had against
defendant Bank. . . ." (35 SCRA 140, 142-143; 145-146.)

for the forgery or alteration (Hongkong & Shanghai Banking Corp. v.

Peoples Bank & Trust Co., 35 SCRA 140), otherwise, it bears the loss. It
may not charge the amount so paid to the account of the drawer, if the
latter was free from blame, nor recover it from the collecting bank if the
latter made payment after proper clearance from the drawee. As this Court
pointed out in Philippine National Bank v. Quimpo, Et Al., 158 SCRA 582,
584:jgc:chanrobles.com.ph

In Metropolitan Bank & Trust Co. v. First National City Bank, Et. Al. (118
SCRA 537, 542) a check for P50, drawn by Joaquin Cunanan and Company
on its account at FNCB and payable to Manila Polo Club, was altered by
changing the amount to P50,000 and the payee was changed to "Cash." It
was deposited by a certain Salvador Sales in his current account in the
Metropolitan Bank which sent it to the clearing house. The check was
cleared the same day by FNCB which paid the amount of P50,000 to Metro
Bank. Sales immediately withdrew the whole amount and closed his
account. Nine (9) days later, the alteration was discovered and FNCB
sought to recover from Metro Bank what it had paid. The trial court and the
Court of Appeals rendered judgment for FNCB but this Court reversed it.
We ruled:jgc:chanrobles.com.ph

"There is nothing inequitable in such a rule for if in the regular course of

business the check comes to the drawee bank which, having the
opportunity to ascertain its character, pronounces it to be valid and pays it,
it is not only a question of payment under mistake, but payment in neglect
of duty which the commercial law places upon it, and the result of its
negligence must rest upon it."cralaw virtua1aw library

"The validity of the 24-hour clearing house regulation has been upheld by
this Court in Republic v. Equitable Banking Corporation, 10 SCRA 8 (1964).
As held therein, since both parties are part of our banking system, and
both are subject to the regulations of the Central Bank, they are bound by
the 24-hour clearing house rule of the Central Bank.chanrobles.com.ph :
virtual law library
"In this case, the check was not returned to Metro Bank in accordance with
the 24-hour clearing house period, but was cleared by FNCB. Failure of
FNCB, therefore, to call the attention of Metro Bank to the alteration of the
check in question until after the lapse of nine days, negates whatever right
it might have had against Metro Bank in the light of the said Central Bank
Circular. Its remedy lies not against Metro Bank, but against the party
responsible for changing the name of the payee (Hongkong & Shanghai
Banking Corp. v. Peoples Bank & Trust Co., 35 SCRA 140) and the amount
on the face of the check." (p. 542.)
Every bank that issues checks for the use of its customers should know
whether or not the drawers signature thereon is genuine, whether there
are sufficient funds in the drawers account to cover checks issued, and it
should be able to detect alterations, erasures, superimpositions or
intercalations thereon, for these instruments are prepared, printed and
issued by itself, it has control of the drawers account, and it is supposed to
be familiar with the drawers signature. It should possess appropriate
detecting devices for uncovering forgeries and/or alterations on these
instruments. Unless an alteration is attributable to the fault or negligence
of the drawer himself, such as when he leaves spaces on the check which
would allow the fraudulent insertion of additional numerals in the amount
appearing thereon, the remedy of the drawee bank that negligently clears
a forged and/or altered check for payment is against the party responsible

The Court of Appeals erred in laying upon Republic, instead of on FNCB the
drawee bank, the burden of loss for the payment of the altered SMC check,
the fraudulent character of which FNCB failed to detect and warn Republic
about, within the 24-hour clearing house rule. The Court of Appeals
departed from the ruling of this Court in an earlier PNB case,
that:jgc:chanrobles.com.ph
"Where a loss, which must be borne by one of two parties alike innocent of
forgery, 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 succeeded. (Phil. National Bank v. National City Bank
of New York, 63 Phil. 711, 733.)"
WHEREFORE, the petition for review is granted. The decision of the Court
of Appeals is hereby reversed and set aside, and another is entered
absolving the petitioner Republic Bank from liability to refund to the First
National City Bank the sum of P9,240, which the latter paid on the check in
question. No costs.
SO ORDERED.
EIGHTEEN
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 121413

January 29, 2001

PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR

BANK OF ASIA AND AMERICA),petitioner,
vs.
COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK,
N.A., respondents.

The stipulated facts submitted by the parties as accepted by the Court of

Appeals are as follows:
G.R. No. 121479

January 29, 2001

FORD PHILIPPINES, INC., petitioner-plaintiff,

vs.
COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE
COMMERCIAL INTERNATIONAL BANK,respondents.

G.R. No. 128604

January 29, 2001

FORD PHILIPPINES, INC., petitioner,

vs.
CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK
and COURT OF APPEALS, respondents.
QUISUMBING, J.:
These consolidated petitions involve several fraudulently negotiated
checks.
The original actions a quo were instituted by Ford Philippines to recover
from the drawee bank, CITIBANK, N.A. (Citibank) and collecting bank,
Philippine Commercial International Bank (PCIBank) [formerly Insular Bank
of Asia and America], the value of several checks payable to the
Commissioner of Internal Revenue, which were embezzled allegedly by an
organized syndicate.1wphi1.nt
G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27,
1995 Decision1 of the Court of Appeals in CA-G.R. CV No. 25017, entitled
"Ford Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia and
America (now Philipppine Commercial International Bank), and the August
8, 1995 Resolution,2 ordering the collecting bank, Philippine Commercial
International Bank, to pay the amount of Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996
Decision3 of the Court of Appeals and its March 5, 1997 Resolution 4 in CAG.R. No. 28430 entitled "Ford Philippines, Inc. vs. Citibank, N.A. and
Philippine Commercial International Bank," affirming in toto the judgment
of the trial court holding the defendant drawee bank, Citibank, N.A., solely
liable to pay the amount of P12,163,298.10 as damages for the misapplied
proceeds of the plaintiff's Citibanl Check Numbers SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479

"On October 19, 1977, the plaintiff Ford drew and issued its
Citibank Check No. SN-04867 in the amount of P4,746,114.41, in
favor of the Commissioner of Internal Revenue as payment of
plaintiff;s percentage or manufacturer's sales taxes for the third
quarter of 1977.
The aforesaid check was deposited with the degendant IBAA (now
PCIBank) and was subsequently cleared at the Central Bank. Upon
presentment with the defendant Citibank, the proceeds of the
check was paid to IBAA as collecting or depository bank.
The proceeds of the same Citibank check of the plaintiff was never
paid to or received by the payee thereof, the Commissioner of
Internal Revenue.
As a consequence, upon demand of the Bureau and/or
Commissioner of Internal Revenue, the plaintiff was compelled to
make a second payment to the Bureau of Internal Revenue of its
percentage/manufacturers' sales taxes for the third quarter of 1977
and that said second payment of plaintiff in the amount of
P4,746,114.41 was duly received by the Bureau of Internal
Revenue.
It is further admitted by defendant Citibank that during the time of
the transactions in question, plaintiff had been maintaining a
checking account with defendant Citibank; that Citibank Check No.
SN-04867 which was drawn and issued by the plaintiff in favor of
the Commissioner of Internal Revenue was a crossed check in that,
on its face were two parallel lines and written in between said lines
was the phrase "Payee's Account Only"; and that defendant
Citibank paid the full face value of the check in the amount of
P4,746,114.41 to the defendant IBAA.
It has been duly established that for the payment of plaintiff's
percentage tax for the last quarter of 1977, the Bureau of Internal
Revenue issued Revenue Tax Receipt No. 18747002, dated October
20, 1977, designating therein in Muntinlupa, Metro Manila, as the
authorized agent bank of Metrobanl, Alabang branch to receive the
tax payment of the plaintiff.
On December 19, 1977, plaintiff's Citibank Check No. SN-04867,
together with the Revenue Tax Receipt No. 18747002, was
deposited with defendant IBAA, through its Ermita Branch. The
latter accepted the check and sent it to the Central Clearing House
for clearing on the samd day, with the indorsement at the back "all
prior indorsements and/or lack of indorsements guaranteed."

Thereafter, defendant IBAA presented the check for payment to

defendant Citibank on same date, December 19, 1977, and the
latter paid the face value of the check in the amount of
P4,746,114.41. Consequently, the amount of P4,746,114.41 was
debited in plaintiff's account with the defendant Citibank and the
check was returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check No.
SN-04867 in the amount of P4,746,114.41 was not paid to the
Commissioner of Internal Revenue. Hence, in separate letters
dated October 26, 1979, addressed to the defendants, the plaintiff
notified the latter that in case it will be re-assessed by the BIR for
the payment of the taxes covered by the said checks, then plaintiff
shall hold the defendants liable for reimbursement of the face
value of the same. Both defendants denied liability and refused to
pay.
In a letter dated February 28, 1980 by the Acting Commissioner of
Internal Revenue addressed to the plaintiff - supposed to be Exhibit
"D", the latter was officially informed, among others, that its check
in the amount of P4, 746,114.41 was not paid to the government or
its authorized agent and instead encashed by unauthorized
persons, hence, plaintiff has to pay the said amount within fifteen
days from receipt of the letter. Upon advice of the plaintiff's
lawyers, plaintiff on March 11, 1982, paid to the Bureau of Internal
Revenue, the amount of P4,746,114.41, representing payment of
plaintiff's percentage tax for the third quarter of 1977.
As a consequence of defendant's refusal to reimburse plaintiff of
the payment it had made for the second time to the BIR of its
percentage taxes, plaintiff filed on January 20, 1983 its original
complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the
Philippine Commercial International Bank (PCI Bank) with the latter
as the surviving entity.
Defendant Citibank maintains that; the payment it made of
plaintiff's Citibank Check No. SN-04867 in the amount of
P4,746,114.41 "was in due course"; it merely relied on the clearing
stamp of the depository/collecting bank, the defendant IBAA that
"all prior indorsements and/or lack of indorsements guaranteed";
and the proximate cause of plaintiff's injury is the gross negligence
of defendant IBAA in indorsing the plaintiff's Citibank check in
question.

It is admitted that on December 19, 1977 when the proceeds of

plaintiff's Citibank Check No. SN-048867 was paid to defendant
IBAA as collecting bank, plaintiff was maintaining a checking
account with defendant Citibank."5
Although it was not among the stipulated facts, an investigation by the
National Bureau of Investigation (NBI) revealed that Citibank Check No. SN04867 was recalled by Godofredo Rivera, the General Ledger Accountant of
Ford. He purportedly needed to hold back the check because there was an
error in the computation of the tax due to the Bureau of Internal Revenue
(BIR). With Rivera's instruction, PCIBank replaced the check with two of its
own Manager's Checks (MCs). Alleged members of a syndicate later
deposited the two MCs with the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the trial court
impleading Pacific Banking Corporation (PBC) and Godofredo Rivera, as
third party defendants. But the court dismissed the complaint against PBC
for lack of cause of action. The course likewise dismissed the third-party
complaint against Godofredo Rivera because he could not be served with
summons as the NBI declared him as a "fugitive from justice".
On June 15, 1989, the trial court rendered its decision, as follows:
"Premises considered, judgment is hereby rendered as follows:
"1. Ordering the defendants Citibank and IBAA (now PCI
Bank), jointly and severally, to pay the plaintiff the amount
of P4,746,114.41 representing the face value of plaintiff's
Citibank Check No. SN-04867, with interest thereon at the
legal rate starting January 20, 1983, the date when the
original complaint was filed until the amount is fully paid,
plus costs;
"2. On defendant Citibank's cross-claim: ordering the crossdefendant IBAA (now PCI Bank) to reimburse defendant
Citibank for whatever amount the latter has paid or may
pay to the plaintiff in accordance with next preceding
paragraph;
"3. The counterclaims asserted by the defendants against
the plaintiff, as well as that asserted by the crossdefendant against the cross-claimant are dismissed, for
lack of merits; and
"4. With costs against the defendants.
SO ORDERED."6

Not satisfied with the said decision, both defendants, Citibank and
PCIBank, elevated their respective petitions for review on certiorari to the
Courts of Appeals. On March 27, 1995, the appellate court issued its
judgment as follows:
"WHEREFORE, in view of the foregoing, the court AFFIRMS the
appealed decision with modifications.
The court hereby renderes judgment:
1. Dismissing the complaint in Civil Case No. 49287
insofar as defendant Citibank N.A. is concerned;
2. Ordering the defendant IBAA now PCI Bank to pay the
plaintiff the amount of P4,746,114.41 representing the face
value of plaintiff's Citibank Check No. SN-04867, with
interest thereon at the legal rate starting January 20, 1983,
the date when the original complaint was filed until the
amount is fully paid;
3. Dismissing the counterclaims asserted by the
defendants against the plaintiff as well as that asserted by
the cross-defendant against the cross-claimant, for lack of
merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED."7
PCI Bank moved to reconsider the above-quoted decision of the Court of
Appeals, while Ford filed a "Motion for Partial Reconsideration." Both
motions were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for review by
certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and
resolution of the Twelfth Division of the Court of Appeals contending that it
merely acted on the instruction of Ford and such casue of action had
already prescribed.
PCIBank sets forth the following issues for consideration:
I. Did the respondent court err when, after finding that the
petitioner acted on the check drawn by respondent Ford on the
said respondent's instructions, it nevertheless found the petitioner
liable to the said respondent for the full amount of the said check.

II. Did the respondent court err when it did not find prescription in
favor of the petitioner.8
In a counter move, Ford filed its petition docketed as G.R. No. 121479,
questioning the same decision and resolution of the Court of Appeals, and
praying for the reinstatement in toto of the decision of the trial court which
found both PCIBank and Citibank jointly and severally liable for the loss.
In G.R. No. 121479, appellant Ford presents the following propositions for
consideration:
I. Respondent Citibank is liable to petitioner Ford considering that:
1. As drawee bank, respondent Citibank owes to petitioner
Ford, as the drawer of the subject check and a depositor of
respondent Citibank, an absolute and contractual duty to
pay the proceeds of the subject check only to the payee
thereof, the Commissioner of Internal Revenue.
2. Respondent Citibank failed to observe its duty as banker
with respect to the subject check, which was crossed and
payable to "Payee's Account Only."
3. Respondent Citibank raises an issue for the first time on
appeal; thus the same should not be considered by the
Honorable Court.
4. As correctly held by the trial court, there is no evidence
of gross negligence on the part of petitioner Ford.9
II. PCI Bank is liable to petitioner Ford considering that:
1. There were no instructions from petitioner Ford to
deliver the proceeds of the subject check to a person other
than the payee named therein, the Commissioner of the
Bureau of Internal Revenue; thus, PCIBank's only obligation
is to deliver the proceeds to the Commissioner of the
Bureau of Internal Revenue.10
2. PCIBank which affixed its indorsement on the subject
check ("All prior indorsement and/or lack of indorsement
guaranteed"), is liable as collecting bank.11
3. PCIBank is barred from raising issues of fact in the
instant proceedings.12
4. Petitioner Ford's cause of action had not prescribed. 13

II. G.R. No. 128604

The same sysndicate apparently embezzled the proceeds of checks
intended, this time, to settle Ford's percentage taxes appertaining to the
second quarter of 1978 and the first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of
P5,851,706.37 representing the percentage tax due for the second quarter
of 1978 payable to the Commissioner of Internal Revenue. A BIR Revenue
Tax Receipt No. 28645385 was issued for the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the
amount of P6,311,591.73, representing the payment of percentage tax for
the first quarter of 1979 and payable to the Commissioner of Internal
Revenue. Again a BIR Revenue Tax Receipt No. A-1697160 was issued for
the said purpose.
Both checks were "crossed checks" and contain two diagonal lines on its
upper corner between, which were written the words "payable to the
payee's account only."
The checks never reached the payee, CIR. Thus, in a letter dated February
28, 1980, the BIR, Region 4-B, demanded for the said tax payments the
corresponding periods above-mentioned.
As far as the BIR is concernced, the said two BIR Revenue Tax Receipts
were considered "fake and spurious". This anomaly was confirmed by the
NBI upon the initiative of the BIR. The findings forced Ford to pay the BIR a
new, while an action was filed against Citibank and PCIBank for the
recovery of the amount of Citibank Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the case, made
its findings on the modus operandi of the syndicate, as follows:
"A certain Mr. Godofredo Rivera was employed by the plaintiff
FORD as its General Ledger Accountant. As such, he prepared the
plaintiff's check marked Ex. 'A' [Citibank Check No. Sn-10597] for
payment to the BIR. Instead, however, fo delivering the same of
the payee, he passed on the check to a co-conspirator named
Remberto Castro who was a pro-manager of the San Andres Branch
of PCIB.* In connivance with one Winston Dulay, Castro himself
subsequently opened a Checking Account in the name of a
fictitious person denominated as 'Reynaldo reyes' in the Meralco
Branch of PCIBank where Dulay works as Assistant Manager.

After an initial deposit of P100.00 to validate the account, Castro

deposited a worthless Bank of America Check in exactly the same
amount as the first FORD check (Exh. "A", P5,851,706.37) while
this worthless check was coursed through PCIB's main office
enroute to the Central Bank for clearing, replaced this worthless
check with FORD's Exhibit 'A' and accordingly tampered the
accompanying documents to cover the replacement. As a result,
Exhibit 'A' was cleared by defendant CITIBANK, and the fictitious
deposit account of 'Reynaldo Reyes' was credited at the PCIB
Meralco Branch with the total amount of the FORD check Exhibit
'A'. The same method was again utilized by the syndicate in
profiting from Exh. 'B' [Citibank Check No. SN-16508] which was
subsequently pilfered by Alexis Marindo, Rivera's Assistant at
FORD.
From this 'Reynaldo Reyes' account, Castro drew various checks
distributing the sahres of the other participating conspirators
namely (1) CRISANTO BERNABE, the mastermind who formulated
the method for the embezzlement; (2) RODOLFO R. DE LEON a
customs broker who negotiated the initial contact between
Bernabe, FORD's Godofredo Rivera and PCIB's Remberto Castro; (3)
JUAN VASTILLO who assisted de Leon in the initial arrangements;
(4) GODOFREDO RIVERA, FORD's accountant who passed on the
first check (Exhibit "A") to Castro; (5) REMERTO CASTRO, PCIB's
pro-manager at San Andres who performed the switching of checks
in the clearing process and opened the fictitious Reynaldo Reyes
account at the PCIB Meralco Branch; (6) WINSTON DULAY, PCIB's
Assistant Manager at its Meralco Branch, who assisted Castro in
switching the checks in the clearing process and facilitated the
opening of the fictitious Reynaldo Reyes' bank account; (7) ALEXIS
MARINDO, Rivera's Assistant at FORD, who gave the second check
(Exh. "B") to Castro; (8) ELEUTERIO JIMENEZ, BIR Collection Agent
who provided the fake and spurious revenue tax receipts to make it
appear that the BIR had received FORD's tax payments.
Several other persons and entities were utilized by the syndicate
as conduits in the disbursements of the proceeds of the two
checks, but like the aforementioned participants in the conspiracy,
have not been impleaded in the present case. The manner by
which the said funds were distributed among them are traceable
from the record of checks drawn against the original "Reynaldo
Reyes" account and indubitably identify the parties who illegally
benefited therefrom and readily indicate in what amounts they did
so."14
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held
drawee-bank, Citibank, liable for the value of the two checks while
adsolving PCIBank from any liability, disposing as follows:

"WHEREFORE, judgment is hereby rendered sentencing defendant

CITIBANK to reimburse plaintiff FORD the total amount of
P12,163,298.10 prayed for in its complaint, with 6% interest
thereon from date of first written demand until full payment, plus
P300,000.00 attorney's fees and expenses litigation, and to pay
the defendant, PCIB (on its counterclaim to crossclaim) the sum of
P300,000.00 as attorney's fees and costs of litigation, and pay the
costs.

Note that in these cases, the checks were drawn against the drawee bank,
but the title of the person negotiating the same was allegedly defective
because the instrument was obtained by fraud and unlawful means, and
the proceeds of the checks were not remitted to the payee. It was
established that instead of paying the checks to the CIR, for the settlement
of the approprite quarterly percentage taxes of Ford, the checks were
diverted and encashed for the eventual distribution among the mmbers of
the syndicate. As to the unlawful negotiation of the check the applicable
law is Section 55 of the Negotiable Instruments Law (NIL), which provides:

SO ORDERED."15
Both Ford and Citibank appealed to the Court of Appeals which affirmed, in
toto, the decision of the trial court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting aside the portion
of the Court of Appeals decision and its resolution dated March 5, 1997,
with respect to the dismissal of the complaint against PCIBank and holding
Citibank solely responsible for the proceeds of Citibank Check Numbers SN10597 and 16508 for P5,851,706.73 and P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint
against defendant PCIBank considering that:
I. Defendant PCIBank was clearly negligent when it failed to
exercise the diligence required to be exercised by it as a banking
insitution.
II. Defendant PCIBank clearly failed to observe the diligence
required in the selection and supervision of its officers and
employees.
III. Defendant PCIBank was, due to its negligence, clearly liable for
the loss or damage resulting to the plaintiff Ford as a consequence
of the substitution of the check consistent with Section 5 of Central
Bank Circular No. 580 series of 1977.
IV. Assuming arguedo that defedant PCIBank did not accept,
endorse or negotiate in due course the subject checks, it is liable,
under Article 2154 of the Civil Code, to return the money which it
admits having received, and which was credited to it its Central
bank account.16
The main issue presented for our consideration by these petitions could be
simplified as follows: Has petitioner Ford the right to recover from the
collecting bank (PCIBank) and the drawee bank (Citibank) the value of the
checks intended as payment to the Commissioner of Internal Revenue? Or
has Ford's cause of action already prescribed?

"When title defective -- The title of a person who negotiates an

instrument is defective within the meaning of this Act when he
obtained the instrument, or any signature thereto, by fraud,
duress, or fore and fear, or other unlawful means, or for an illegal
consideration, or when he negotiates it in breach of faith or under
such circumstances as amount to a fraud."
Pursuant to this provision, it is vital to show that the negotiation is made
by the perpetator in breach of faith amounting to fraud. The person
negotiating the checks must have gone beyond the authority given by his
principal. If the principal could prove that there was no negligence in the
performance of his duties, he may set up the personal defense to escape
liability and recover from other parties who. Though their own negligence,
alowed the commission of the crime.
In this case, we note that the direct perpetrators of the offense, namely the
embezzlers belonging to a syndicate, are now fugitives from justice. They
have, even if temporarily, escaped liability for the embezzlement of
millions of pesos. We are thus left only with the task of determining who of
the present parties before us must bear the burden of loss of these
millions. It all boils down to thequestion of liability based on the degree of
negligence among the parties concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of the
"imputed contributory negligence" that would defeat its claim for
reimbursement, bearing ing mind that its employees, Godofredo Rivera
and Alexis Marindo, were among the members of the syndicate.
Citibank points out that Ford allowed its very own employee, Godofredo
Rivera, to negotiate the checks to his co-conspirators, instead of delivering
them to the designated authorized collecting bank (Metrobank-Alabang) of
the payee, CIR. Citibank bewails the fact that Ford was remiss in the
supervision and control of its own employees, inasmuch as it only
discovered the syndicate's activities through the information given by the
payee of the checks after an unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly authorized
Godofredo Rivera to divert the proceeds of Citibank Check No. SN-04867,
instead of using it to pay the BIR. As to the subsequent run-around of unds

of Citibank Check Nos. SN-10597 and 16508, PCIBank claims that the
proximate cause of the damge to Ford lies in its own officers and
employees who carried out the fradulent schemes and the transactions.
These circumstances were not checked by other officers of the company
including its comptroller or internal auditor. PCIBank contends that the
inaction of Ford despite the enormity of the amount involved was a sheer
negligence and stated that, as between two innocent persons, one of
whom must suffer the consequences of a breach of trust, the one who
made it possible, by his act of negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its duties. It
avers that there was no evidence presented before the trial court showing
lack of diligence on the part of Ford. And, citing the case of Gempesaw vs.
Court of Appeals,17 Ford argues that even if there was a finding therein that
the drawer was negligent, the drawee bank was still ordered to pay
damages.
Furthermore, Ford contends the Godofredo rivera was not authorized to
make any representation in its behalf, specifically, to divert the proceeds of
the checks. It adds that Citibank raised the issue of imputed negligence
against Ford for the first time on appeal. Thus, it should not be considered
by this Court.
On this point, jurisprudence regarding the imputed negligence of employer
in a master-servant relationship is instructive. Since a master may be held
for his servant's wrongful act, the law imputes to the master the act of the
servant, and if that act is negligent or wrongful and proximately results in
injury to a third person, the negligence or wrongful conduct is the
negligence or wrongful conduct of the master, for which he is liable. 18 The
general rule is that if the master is injured by the negligence of a third
person and by the concuring contributory negligence of his own servant or
agent, the latter's negligence is imputed to his superior and will defeat the
superior's action against the third person, asuming, of course that the
contributory negligence was the proximate cause of the injury of which
complaint is made.19
Accordingly, we need to determine whether or not the action of Godofredo
Rivera, Ford's General Ledger Accountant, and/or Alexis Marindo, his
assistant, was the proximate cause of the loss or damage. AS defined,
proximate cause is that which, in the natural and continuous sequence,
unbroken by any efficient, intervening cause produces the injury and
without the result would not have occurred.20
It appears that although the employees of Ford initiated the transactions
attributable to an organized syndicate, in our view, their actions were not
the proximate cause of encashing the checks payable to the CIR. The
degree of Ford's negligence, if any, could not be characterized as the
proximate cause of the injury to the parties.

The Board of Directors of Ford, we note, did not confirm the request of
Godofredo Rivera to recall Citibank Check No. SN-04867. Rivera's
instruction to replace the said check with PCIBank's Manager's Check was
not in theordinary course of business which could have prompted PCIBank
to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was
established that these checks were made payable to the CIR. Both were
crossed checks. These checks were apparently turned around by Ford's
emploees, who were acting on their own personal capacity.
Given these circumstances, the 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 perpertrating the fraud and imposing the
forged paper upon the bank, does notentitle the bank toshift the loss to the
drawer-payor, in the absence of some circumstance raising estoppel
against the drawer.21 This rule likewise applies to the checks fraudulently
negotiated or diverted by the confidential employees who hold them in
their possession.
With respect to the negligence of PCIBank in the payment of the three
checks involved, separately, the trial courts found variations between the
negotiation of Citibank Check No. SN-04867 and the misapplication of total
proceeds of Checks SN-10597 and 16508. Therefore, we have to scrutinize,
separately, PCIBank's share of negligence when the syndicate achieved its
ultimate agenda of stealing the proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita
Branch. It was coursed through the ordinary banking transaction, sent to
Central Clearing with the indorsement at the back "all prior indorsements
and/or lack of indorsements guaranteed," and was presented to Citibank
for payment. Thereafter PCIBank, instead of remitting the proceeds to the
CIR, prepared two of its Manager's checks and enabled the syndicate to
encash the same.
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate
the checks. The neglect of PCIBank employees to verify whether his letter
requesting for the replacement of the Citibank Check No. SN-04867 was
duly authorized, showed lack of care and prudence required in the
circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect the
payment of taxpayers in behalf of the BIR. As an agent of BIR, PCIBank is
duty bound to consult its principal regarding the unwarranted instructions
given by the payor or its agent. As aptly stated by the trial court, to wit:

"xxx. Since the questioned crossed check was deposited with IBAA
[now PCIBank], which claimed to be a depository/collecting bank of
BIR, it has the responsibility to make sure that the check in
question is deposited in Payee's account only.
xxx

xxx

xxx

As agent of the BIR (the payee of the check), defendant IBAA

should receive instructions only from its principal BIR and not from
any other person especially so when that person is not known to
the defendant. It is very imprudent on the part of the defendant
IBAA to just rely on the alleged telephone call of the one Godofredo
Rivera and in his signature considering that the plaintiff is not a
client of the defendant IBAA."
It is a well-settled rule that the relationship between the payee or holder of
commercial paper and the bank to which it is sent for collection is, in the
absence of an argreement to the contrary, that of principal and agent. 22 A
bank which receives such paper for collection is the agent of the payee or
holder.23
Even considering arguendo, that the diversion of the amount of a check
payable to the collecting bank in behalf of the designated payee may be
allowed, still such diversion must be properly authorized by the payor.
Otherwise stated, the diversion can be justified only by proof of authority
from the drawer, or that the drawer has clothed his agent with apparent
authority to receive the proceeds of such check.
Citibank further argues that PCI Bank's clearing stamp appearing at the
back of the questioned checks stating that ALL PRIOR INDORSEMENTS
AND/OR LACK OF INDORSEMENTS GURANTEED should render PCIBank
liable because it made it pass through the clearing house and therefore
Citibank had no other option but to pay it. Thus, Citibank had no other
option but to pay it. Thus, Citibank assets that the proximate cause of
Ford's injury is the gross negligence of PCIBank. Since the questione
dcrossed check was deposited with PCIBank, which claimed to be a
depository/collecting bank of the BIR, it had the responsibility to make sure
that the check in questions is deposited in Payee's account only.
Indeed, the crossing of the check with the phrase "Payee's Account Only,"
is a warning that the check should be deposited only in the account of the
CIR. Thus, it is the duty of the collecting bank PCIBank to ascertain that the
check be deposited in payee's account only. Therefore, it is the collecting
bank (PCIBank) which is bound to scruninize the check and to know its
depositors before it could make the clearing indorsement "all prior
indorsements and/or lack of indorsement guaranteed".
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking
Corporation,24 we ruled:

"Anent petitioner's liability on said instruments, this court is in full

accord with the ruling of the PCHC's Board of Directors that:
'In presenting the checks for clearing and for payment, the
defendant made an express guarantee on the validity of "all prior
endorsements." Thus, stamped at the back of the checks are the
defedant's clear warranty: ALL PRIOR ENDORSEMENTS AND/OR
LACK OF ENDORSEMENTS GUARANTEED. Without such warranty,
plaintiff would not have paid on the checks.'
No amount of legal jargon can reverse the clear meaning of
defendant's warranty. As the warranty has proven to be false and
inaccurate, the defendant is liable for any damage arising out of
the falsity of its representation."25
Lastly, banking business requires that the one who first cashes and
negotiates the check must take some percautions to learn whether or not it
is genuine. And if the one cashing the check through indifference or othe
circumstance assists the forger in committing the fraud, he should not be
permitted to retain the proceeds of the check from the drawee whose sole
fault was that it did not discover the forgery or the defect in the title of the
person negotiating the instrument before paying the check. For this
reason, a bank which cashes a check drawn upon another bank, without
requiring proof as to the identity of persons presenting it, or making
inquiries with regard to them, cannot hold the proceeds against the drawee
when the proceeds of the checks were afterwards diverted to the hands of
a third party. In such cases the drawee bank has a right to believe that the
cashing bank (or the collecting bank) had, by the usual proper
investigation, satisfied itself of the authenticity of the negotiation of the
checks. Thus, one who encashed a check which had been forged or
diverted and in turn received payment thereon from the drawee, is guilty
of negligence which proximately contributed to the success of the fraud
practiced on the drawee bank. The latter may recover from the holder the
money paid on the check.26
Having established that the collecting bank's negligence is the proximate
cause of the loss, we conclude that PCIBank is liable in the amount
corresponding to the proceeds of Citibank Check No. SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had no official
act in the ordinary course of business that would attribute to it the case of
the embezzlement of Citibank Check Numbers SN-10597 and 16508,
because PCIBank did not actually receive nor hold the two Ford checks at
all. The trial court held, thus:
"Neither is there any proof that defendant PCIBank contributed any
official or conscious participation in the process of the

embezzlement. This Court is convinced that the switching

operation (involving the checks while in transit for "clearing") were
the clandestine or hidden actuations performed by the members of
the syndicate in their own personl, covert and private capacity and
done without the knowledge of the defendant PCIBank" 27
In this case, there was no evidence presented confirming the conscious
particiapation of PCIBank in the embezzlement. As a general rule, however,
a banking corporation is liable for the wrongful or tortuous acts and
declarations of its officers or agents within the course and scope of their
employment.28 A bank will be held liable for the negligence of its officers or
agents when acting within the course and scope of their employment. It
may be liable for the tortuous acts of its officers even as regards that
species of tort of which malice is an essential element. In this case, we find
a situation where the PCIBank appears also to be the victim of the scheme
hatched by a syndicate in which its own management employees had
particiapted.
The pro-manager of San Andres Branch of PCIBank, Remberto Castro,
received Citibank Check Numbers SN-10597 and 16508. He passed the
checks to a co-conspirator, an Assistant Manager of PCIBank's Meralco
Branch, who helped Castro open a Checking account of a fictitious person
named "Reynaldo Reyes." Castro deposited a worthless Bank of America
Check in exactly the same amount of Ford checks. The syndicate tampered
with the checks and succeeded in replacing the worthless checks and the
eventual encashment of Citibank Check Nos. SN 10597 and 16508. The
PCIBank Ptro-manager, Castro, and his co-conspirator Assistant Manager
apparently performed their activities using facilities in their official capacity
or authority but for their personal and private gain or benefit.
A bank holding out its officers and agents as worthy of confidence will not
be permitted to profit by the frauds these officers or agents were enabled
to perpetrate in the apparent course of their employment; nor will t be
permitted to shirk its responsibility for such frauds, even though no benefit
may accrue to the bank therefrom. For the general rule is that a bank is
liable for the fraudulent acts or representations of an officer or agent
acting within the course and apparent scope of his employment or
authority.29 And if an officer or employee of a bank, in his official capacity,
receives money to satisfy an evidence of indebetedness lodged with his
bank for collection, the bank is liable for his misappropriation of such
sum.30
Moreover, as correctly pointed out by Ford, Section 531 of Central Bank
Circular No. 580, Series of 1977 provides that any theft affecting items in
transit for clearing, shall be for the account of sending bank, which in this
case is PCIBank.
But in this case, responsibility for negligence does not lie on PCIBank's
shoulders alone.

The evidence on record shows that Citibank as drawee bank was likewise
negligent in the performance of its duties. Citibank failed to establish that
its payment of Ford's checjs were made in due course and legally in order.
In its defense, Citibank claims the genuineness and due execution of said
checks, considering that Citibank (1) has no knowledge of any informity in
the issuance of the checks in question (2) coupled by the fact that said
checks were sufficiently funded and (3) the endorsement of the Payee or
lack thereof was guaranteed by PCI Bank (formerly IBAA), thus, it has the
obligation to honor and pay the same.
For its part, Ford contends that Citibank as the drawee bank owes to Ford
an absolute and contractual duty to pay the proceeds of the subject check
only to the payee thereof, the CIR. Citing Section 62 32 of the Negotiable
Instruments Law, Ford argues that by accepting the instrument, the
acceptro which is Citibank engages that it will pay according to the tenor of
its acceptance, and that it will pay only to the payee, (the CIR), considering
the fact that here the check was crossed with annotation "Payees Account
Only."
As ruled by the Court of Appeals, Citibank must likewise answer for the
damages incurred by Ford on Citibank Checks Numbers SN 10597 and
16508, because of the contractual relationship existing between the two.
Citibank, as the drawee bank breached its contractual obligation with Ford
and such degree of culpability contributed to the damage caused to the
latter. On this score, we agree with the respondent court's ruling.
Citibank should have scrutinized Citibank Check Numbers SN 10597 and
16508 before paying the amount of the proceeds thereof to the collecting
bank of the BIR. One thing is clear from the record: the clearing stamps at
the back of Citibank Check Nos. SN 10597 and 16508 do not bear any
initials. Citibank failed to notice and verify the absence of the clearing
stamps. Had this been duly examined, the switching of the worthless
checks to Citibank Check Nos. 10597 and 16508 would have been
discovered in time. For this reason, Citibank had indeed failed to perform
what was incumbent upon it, which is to ensure that the amount of the
checks should be paid only to its designated payee. The fact that the
drawee bank did not discover the irregularity seasonably, in our view,
consitutes negligence in carrying out the bank's duty to its depositors. The
point is that as a business affected with public interest and because of the
nature of its functions, the bank is under obligation to treat the accounts of
its depositors with meticulous care, always having in mind the fiduciary
nature of their relationship.33
Thus, invoking the doctrine of comparative negligence, we are of the view
that both PCIBank and Citibank failed in their respective obligations and
both were negligent in the selection and supervision of their employees
resulting in the encashment of Citibank Check Nos. SN 10597 AND 16508.
Thus, we are constrained to hold them equally liable for the loss of the
proceeds of said checks issued by Ford in favor of the CIR.

Time and again, we have stressed that banking business is so impressed

with public interest where the trust and confidence of the public in general
is of paramount umportance such that the appropriate standard of
diligence must be very high, if not the highest, degree of diligence. 34 A
bank's 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.35
Banks handle daily transactions involving millions of pesos. 36 By the very
nature of their work the degree of responsibility, care and trustworthiness
expected of their employees and officials is far greater than those of
ordinary clerks and employees.37 Banks are expected to exercise the
highest degree of diligence in the selection and supervision of their
employees.38
On the issue of prescription, PCIBank claims that the action of Ford had
prescribed because of its inability to seek judicial relief seasonably,
considering that the alleged negligent act took place prior to December 19,
1977 but the relief was sought only in 1983, or seven years thereafter.
The statute of limitations begins to run when the bank gives the depositor
notice of the payment, which is ordinarily when the check is returned to
the alleged drawer as a voucher with a statement of his account, 39 and an
action upon a check is ordinarily governed by the statutory period
applicable to instruments in writing.40
Our laws on the matter provide that the action upon a written contract
must be brought within ten year from the time the right of action
accrues.41 hence, the reckoning time for the prescriptive period begins
when the instrument was issued and the corresponding check was
returned by the bank to its depositor (normally a month thereafter).
Applying the same rule, the cause of action for the recovery of the
proceeds of Citibank Check No. SN 04867 would normally be a month after
December 19, 1977, when Citibank paid the face value of the check in the
amount of P4,746,114.41. Since the original complaint for the cause of
action was filed on January 20, 1984, barely six years had lapsed. Thus, we
conclude that Ford's cause of action to recover the amount of Citibank
Check No. SN 04867 was seasonably filed within the period provided by
law.
Finally, we also find thet Ford is not completely blameless in its failure to
detect the fraud. Failure on the part of the depositor to examine its
passbook, statements of account, and cancelled checks and to give notice
within a reasonable time (or as required by statute) of any discrepancy
which it may in the exercise of due care and diligence find therein, serves
to mitigate the banks' liability by reducing the award of interest from
twelve percent (12%) to six percent (6%) per annum. As provided in Article
1172 of the Civil Code of the Philippines, respondibility 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. In quasi-delicts, the contributory negligence of the
plaintiff shall reduce the damages that he may recover. 42
WHEREFORE, the assailed Decision and Resolution of the Court of
Appeals in CA-G.R. CV No. 25017 areAFFIRMED. PCIBank, know formerly
as Insular Bank of Asia and America, id declared solely responsible for the
loss of the proceeds of Citibank Check No SN 04867 in the amount
P4,746,114.41, which shall be paid together with six percent (6%) interest
thereon to Ford Philippines Inc. from the date when the original complaint
was filed until said amount is fully paid.
However, the Decision and Resolution of the Court of Appeals in CA-G.R.
No. 28430 are MODIFIED as follows: PCIBank and Citibank are adjudged
liable for and must share the loss, (concerning the proceeds of Citibank
Check Numbers SN 10597 and 16508 totalling P12,163,298.10) on a fiftyfifty ratio, and each bank is ORDEREDto pay Ford Philippines Inc.
P6,081,649.05, with six percent (6%) interest thereon, from the date the
complaint was filed until full payment of said amount.1wphi1.nt
Costs against Philippine Commercial International Bank and Citibank N.A.
SO ORDERED.
NINETEEN
Republic of the Philippines
SUPREME COURT
Manila
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.

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;

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. 0609037-0. 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 petitioners statement that his signatures
in the checks were forged.4 Mr. Razons affidavit states:
That I have examined and scrutinized the following checks in accordance
with prescribed verification procedures with utmost care and diligence by
comparing the signatures affixed thereat against the specimen signatures
of Mr. Ramon K. Ilusorio which we have on file at our said office on such
dates,
xxx
That the aforementioned checks were among those issued by Manilabank
in favor of its client MR. RAMON K. ILUSORIO,
That the same were personally encashed by KATHERINE E. ESTEBAN, an
executive secretary of MR. RAMON K. ILUSORIO in said Investment
Corporation;

That 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 banks
standard operating procedure that whenever a check is presented for
encashment or clearing, the signature on the check is first verified against
the specimen signature cards on file with the bank.
Manila Bank also sought the expertise of the National Bureau of
Investigation (NBI) in determining the genuineness of the signatures
appearing on the checks. However, in a letter dated March 25, 1987, the
NBI informed the trial court that they could not conduct the desired
examination for the reason that the standard specimens submitted were
not sufficient for purposes of rendering a definitive opinion. The NBI then
suggested that petitioner be asked to submit seven (7) or more additional
standard signatures executed before or about, and immediately after the
dates of the questioned checks. Petitioner, however, failed to comply with
this request.
After evaluating the evidence on both sides, the court a quo rendered
judgment on May 12, 1994 with the following dispositive portion:
WHEREFORE, finding no sufficient basis for plaintiff's cause herein against
defendant bank, in the light of the foregoing considerations and
established facts, this case would have to be, as it is hereby DISMISSED.
Defendants counterclaim is likewise DISMISSED for lack of sufficient basis.
SO ORDERED.7

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

petition for review but without success. The appellate court held that
petitioners own negligence was the proximate cause of his loss. The
appellate court disposed as follows:
WHEREFORE, the judgment appealed from is AFFIRMED. Costs against the
appellant.
SO ORDERED.8
Before us, petitioner ascribes the following errors to the Court of Appeals:
A. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
RESPONDENT BANK IS ESTOPPED FROM RAISING THE DEFENSE THAT
THERE WAS NO FORGERY OF THE SIGNATURES OF THE PETITIONER IN THE
CHECK BECAUSE THE RESPONDENT FILED A CRIMINAL COMPLAINT FOR
ESTAFA THRU FALSIFICATION OF COMMERCIAL DOCUMENTS AGAINST
KATHERINE EUGENIO USING THE AFFIDAVIT OF PETITIONER STATING THAT
HIS SIGNATURES WERE FORGED AS PART OF THE AFFIDAVIT-COMPLAINT. 9
B. THE COURT OF APPEALS ERRED IN NOT APPLYING SEC. 23, NEGOTIABLE
INSTRUMENTS LAW.10
C. THE COURT OF APPEALS ERRED IN NOT HOLDING THE BURDEN OF
PROOF IS WITH THE RESPONDENT BANK TO PROVE THE DUE DILIGENCE TO
PREVENT DAMAGE, TO THE PETITIONER, AND THAT IT WAS NOT NEGLIGENT
IN THE SELECTION AND SUPERVISION OF ITS EMPLOYEES. 11
D. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT
BANK SHOULD BEAR THE LOSS, AND SHOULD BE MADE TO PAY
PETITIONER, WITH RECOURSE AGAINST KATHERINE EUGENIO ESTEBAN. 12
Essentially the issues in this case are: (1) whether or not petitioner has a
cause of action against private respondent; and (2) whether or not private
respondent, in filing an estafa case against petitioners secretary, is barred
from raising the defense that the fact of forgery was not established.
Petitioner contends that Manila Bank is liable for damages for its
negligence in failing to detect the discrepant checks. He adds that as a
general rule a bank which has obtained possession of a check upon an
unauthorized or forged endorsement of the payees signature and which
collects the amount of the check from the drawee is liable for the proceeds
thereof to the payee. Petitioner invokes the doctrine of estoppel, saying

that having itself instituted a forgery case against Eugenio, Manila Bank is
now estopped from asserting that the fact of forgery was never proven.
For its part, Manila Bank contends that respondent appellate court did not
depart from the accepted and usual course of judicial proceedings, hence
there is no reason for the reversal of its ruling. Manila Bank additionally
points out that Section 2313 of the Negotiable Instruments Law is
inapplicable, considering that the fact of forgery was never proven. Lastly,
the bank negates petitioners claim of estoppel.14
On the first issue, we find that petitioner has no cause of action against
Manila Bank. To be entitled to damages, petitioner has the burden of
proving negligence on the part of the bank for failure to detect the
discrepancy in the signatures on the checks. It is incumbent upon
petitioner to establish the fact of forgery, i.e., by submitting his specimen
signatures and comparing them with those on the questioned checks.
Curiously though, petitioner failed to submit additional specimen
signatures as requested by the National Bureau of Investigation from which
to draw a conclusive finding regarding forgery. The Court of Appeals found
that petitioner, by his own inaction, was precluded from setting up forgery.
Said the appellate court:
We cannot fault the court a quo for such declaration, considering that the
plaintiffs evidence on the alleged forgery is not convincing enough. The
burden to prove forgery was upon the plaintiff, which burden he failed to
discharge. Aside from his own testimony, the appellant presented no other
evidence to prove the fact of forgery. He did not even submit his own
specimen signatures, taken on or about the date of the questioned checks,
for examination and comparison with those of the subject checks. On the
other hand, the appellee presented specimen signature cards of the
appellant, taken at various years, namely, in 1976, 1979 and 1981
(Exhibits "1", "2", "3" and "7"), showing variances in the appellants
unquestioned signatures. The evidence further shows that the appellee, as
soon as it was informed by the appellant about his questioned signatures,
sought to borrow the questioned checks from the appellant for purposes of
analysis and examination (Exhibit "9"), but the same was denied by the
appellant. It was also the former which sought the assistance of the NBI for
an expert analysis of the signatures on the questioned checks, but the
same was unsuccessful for lack of sufficient specimen signatures. 15
Moreover, petitioners contention that Manila Bank was remiss in the
exercise of its duty as drawee lacks factual basis. Consistently, the CA and
the RTC found that Manila Bank employees exercised due diligence in
cashing the checks. The banks employees in the present case did not have

a hint as to Eugenios modus operandi because she was a regular customer

of the bank, having been designated by petitioner himself to transact in his
behalf. According to the appellate court, the employees of the bank
exercised due diligence in the performance of their duties. Thus, it found
that:

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 evidence on both sides indicates that TMBCs employees exercised due
diligence before encashing the checks. Its verifiers first verified the
drawers signatures thereon as against his specimen signature cards, and
when in doubt, the verifier went further, such as by referring to a more
experienced verifier for further verification. In some instances the verifier
made a confirmation by calling the depositor by phone. It is only after
taking such precautionary measures that the subject checks were given to
the teller for payment.

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 courts assessment of facts anchored upon the
evidence on record.

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,

Petitioners failure to examine his bank statements appears as the

proximate cause of his own damage. Proximate cause is that cause, which,
in natural and continuous sequence, unbroken by any efficient intervening
cause, produces the injury, and without which the result would not have
occurred.21 In the instant case, the bank was not shown to be remiss in its
duty of sending monthly bank statements to petitioner so that any error or
discrepancy in the entries therein could be brought to the banks attention
at the earliest opportunity. But, petitioner failed to examine these bank
statements not because he was prevented by some cause in not doing so,
but because he did not pay sufficient attention to the matter. Had he done
so, he could have been alerted to any anomaly committed against him. In
other words, petitioner had sufficient opportunity to prevent or detect any
misappropriation by his secretary had he only reviewed the status of his
accounts based on the bank statements sent to him regularly. In view of
Article 2179 of the New Civil Code,22 when the plaintiffs own negligence
was the immediate and proximate cause of his injury, no recovery could be
had for damages.
Petitioner further contends that under Section 23 of the Negotiable
Instruments Law a forged check is inoperative, and that Manila Bank had
no authority to pay the forged checks. True, it is a rule that when a
signature is forged or made without the authority of the person whose
signature it purports to be, the check is wholly inoperative. No right to
retain the instrument, or to give a discharge therefor, or to enforce
payment thereof against any party, can be acquired through or under such
signature. However, the rule does provide for an exception, namely:
"unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority." In the instant
case, it is the exception that applies. In our view, petitioner is precluded
from setting up the forgery, assuming there is forgery, due to his own

negligence in entrusting to his secretary his credit cards and checkbook

including the verification of his statements of account.
TWENTY
Petitioners reliance on Associated Bank vs. Court of Appeals 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 Banks personnel diligently performed their duties, having
compared the signature in the checks from the specimen signatures on
record and satisfied themselves that it was petitioners.

Republic of the Philippines

SUPREME COURT
Manila

23

On the second issue, the fact that Manila Bank had filed a case for estafa
against Eugenio would not estop it from asserting the fact that forgery has
not been clearly established. Petitioner cannot hold private respondent in
estoppel for the latter is not the actual party to the criminal action. In a
criminal action, the State is the plaintiff, for the commission of a felony is
an offense against the State.25 Thus, under Section 2, Rule 110 of the Rules
of Court the complaint or information filed in court is required to be
brought in the name of the "People of the Philippines." 26
Further, as petitioner himself stated in his petition, respondent bank filed
the estafa case against Eugenio on the basis of petitioners own
affidavit,27 but without admitting that he had any personal knowledge of
the alleged forgery. It is, therefore, easy to understand that the filing of the
estafa case by respondent bank was a last ditch effort to salvage its ties
with the petitioner as a valuable client, by bolstering the estafa case which
he filed against his secretary.
All told, we find no reversible error that can be ascribed to the Court of
Appeals.
WHEREFORE, the instant petition is DENIED for lack of merit. The assailed
decision of the Court of Appeals dated January 28, 1999 in CA-G.R. CV No.
47942, is AFFIRMED.

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 Bian, Laguna, maintained a current account
with defendant Far East Bank and Trust Company1 ("FEBTC") at the latters
Bel-Air, Makati branch.2 The sole signatory to Samsung Constructions
account was Jong Kyu Lee ("Jong"), its Project Manager,3 while the checks
remained in the custody of the companys accountant, Kyu Yong Lee
("Kyu").4

Costs against petitioner.

SO ORDERED.

On 19 March 1992, a certain Roberto Gonzaga presented for payment

FEBTC Check No. 432100 to the banks branch in Bel-Air, Makati. The

check, payable to cash and drawn against Samsung Constructions current

account, was in the amount of Nine Hundred Ninety Nine Thousand Five
Hundred Pesos (P999,500.00). The bank teller, Cleofe Justiani, first checked
the balance of Samsung Constructions account. After ascertaining there
were enough funds to cover the check,5 she compared the signature
appearing on the check with the specimen signature of Jong as contained
in the specimen signature card with the bank. After comparing the two
signatures, Justiani was satisfied as to the authenticity of the signature
appearing on the check. She then asked Gonzaga to submit proof of his
identity, and the latter presented three (3) identification cards. 6
At the same time, Justiani forwarded the check to the branch Senior
Assistant Cashier Gemma Velez, as it was bank policy that two bank branch
officers approve checks exceeding One Hundred Thousand Pesos, for
payment or encashment. Velez likewise counterchecked the signature on
the check as against that on the signature card. He too concluded that the
check was indeed signed by Jong. Velez then forwarded the check and
signature card to Shirley Syfu, another bank officer, for approval. Syfu then
noticed that Jose Sempio III ("Sempio"), the assistant accountant of
Samsung Construction, was also in the bank. Sempio was well-known to
Syfu and the other bank officers, he being the assistant accountant of
Samsung Construction. Syfu showed the check to Sempio, who vouched for
the genuineness of Jongs signature. Confirming the identity of Gonzaga,
Sempio said that the check was for the purchase of equipment for
Samsung Construction. Satisfied with the genuineness of the signature of
Jong, Syfu authorized the banks encashment of the check to Gonzaga.
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 Jongs 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. 8Jong
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 aComplaint 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 attorneys 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 Jongs 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 Jongs 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 Jongs signature on the check was genuine. 15
Confronted with conflicting expert testimony, the RTC chose to believe the
findings of the NBI expert. In aDecision dated 25 April 1994, the RTC held
that Jongs signature on the check was forged and accordingly directed the
bank to pay or credit back to Samsung Constructions 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 filed, and
attorneys 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 RTCs 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 drawers account. The traditional
justification for the result is that the drawee is in a superior position to
detect a forgery because he has the makers signature and is expected to
know and compare it.22 The rule has a healthy cautionary effect on banks
by encouraging care in the comparison of the signatures against those on
the signature cards they have on file. Moreover, the very opportunity of the
drawee to insure and to distribute the cost among its customers who use
checks makes the drawee an ideal party to spread the risk to insurance. 23
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 banks 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
depositors order. When the bank pays a check, on which the

depositors 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 depositors.
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 depositors 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 plaintiffs credit and which the bank had paid out
on checks bearing forgeries of the plaintiffs 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
By no means is the principle rendered obsolete with the advent of modern
commercial transactions. Contemporary texts still affirm this wellentrenched 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 customers account by
specifying whose signature is necessary on checks that are
chargeable against the customers 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

customers 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 Jongs signature was indeed forged, FEBTC is liable for the loss since it
authorized the discharge of the forged check. Such liability attaches even if
the bank exerts due diligence and care in preventing such faulty discharge.
Forgeries often deceive the eye of the most cautious experts; and when a
bank has been so deceived, it is a harsh rule which compels it to suffer
although no one has suffered by its being deceived. 27 The forgery may be
so near like the genuine as to defy detection by the depositor himself, and
yet the bank is liable to the depositor if it pays the check. 28
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 opponents expert witness to stand uncontradicted, thus
the spectacle of competing expert witnesses is not unusual. The trier of
fact will 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
courts 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
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 (90) 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 (45) 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 experts. 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
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 examiners 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 Jongs 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 Jongs
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. Jongs 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
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 partys
negligence was the cause for the forgery. Employers do not possess the
preternatural gift of cognition as to the evil that may lurk within the hearts
and minds of their employees. The Courts pronouncement in PCI Bank v.
Court of Appeals53 applies in this case, to wit:
[T]he mere fact that the forgery was committed by a drawerpayors 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
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 Jongs
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 Constructions 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
only when negligence can be traced on the part of the drawer whose
signature was forged, and the need arises to weigh the comparative
negligence between the drawer and the drawee to determine who should
bear the burden of loss. The Court finds no basis to conclude that Samsung
Construction was negligent in the safekeeping of its checks. For one, the
settled rule is that the mere fact that the depositor leaves his check book
lying around does not constitute such negligence as will free the bank from
liability to him, where a clerk of the depositor or other persons, taking
advantage of the opportunity, abstract some of the check blanks, forges
the depositors signature and collect on the checks from the bank. 62 And
for another, in point of fact Samsung Construction was not negligent at all
since it reported the forgery almost immediately upon discovery. 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 drawers 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 drawers 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 drawers 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 banks
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
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.68 Moreover, 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 Gonzagas 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.
Banks are engaged in a business impressed with public interest,
and it is their duty to protect in return their many clients and
depositors who transact business with them. They have the
obligation to treat their clients account meticulously and with the

highest degree of care, considering the fiduciary nature of their

relationship. The diligence required of banks, therefore, is more
than that of a good father of a family.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.
TWENTY-ONE
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-43596

October 31, 1936

PHILIPPINE NATIONAL BANK, plaintiff-appellee,

vs.
THE NATIONAL CITY BANK OF NEW YORK, and MOTOR SERVICE
COMPANY, INC., defendants.
MOTOR SERVICE COMPANY, INC., appellant.
L. D. Lockwood for appellant.
Camus and Delgado for appellee.

RECTO, J.:
This case was submitted for decision to the court below on the following
stipulation of facts:
1. That plaintiff is a banking corporation organized and existing
under and by virtue of a special act of the Philippine Legislature,
with office as principal place of business at the Masonic Temple
Bldg., Escolta, Manila, P. I.; that the defendant National City Bank of
New York is a foreign banking corporation with a branch office duly
authorized and licensed to carry and engage in banking business in
the Philippine Islands, with branch office and place of business in
the National City Bank Bldg., City of Manila, P. I., and that the
defendant Motor Service Company, Inc., is a corporation organized
and existing under and by virtue of the general corporation law of
the Philippine Islands, with office and principal place of business at
408 Rizal Avenue, City of Manila, P. I., engaged in the purchase and
sale of automobile spare parts and accessories.
2. That on April 7 and 9, 1933, an unknown person or persons
negotiated with defendant Motor Service Company, Inc., the
checks marked as Exhibits A and A-1, respectively, which are made
parts of the stipulation, in payment for automobile tires purchased
from said defendant's stores, purporting to have been issued by
the "Pangasinan Transportation Co., Inc. by J. L. Klar, Manager and
Treasurer", against the Philippine National Bank and in favor of the
International Auto Repair Shop, for P144.50 and P215.75; and said
checks were indorsed by said unknown persons in the manner
indicated at the back thereof, the Motor Service Co., Inc., believing
at the time that the signature of J. L. Klar, Manager and Treasurer
of the Pangasinan Transportation Co., Inc., on both checks were
genuine.
3. The checks Exhibits A and A-1 were then indorsed for deposit by
the defendant Motor Service Company, Inc, at the National City
Bank of New York and the former was accordingly credited with the
amounts thereof, or P144.50 and P215.75.
4. On April 8 and 10, 1933, the said checks were cleared at the
clearing house and the Philippine National Bank credited the
National City Bank of New York for the amounts thereof, believing

at the time that the signatures of the drawer were genuine, that
the payee is an existing entity and the endorsement at the back
thereof regular and genuine.
5. The Philippine National Bank then found out that the purported
signatures of J. L. Klar, as Manager and Treasurer of the Pangasinan
Transportation Company, Inc., in said Exhibits A and A-1 were
forged when so informed by the said Company, and it accordingly
demanded from the defendants the reimbursement of the amounts
for which it credited the National City Bank of New York at the
clearing house and for which the latter credited the Motor Service
Co., but the defendants refused, and continue to refuse, to make
such reimbursements.
6. The Pangasinan Transportation Co., Inc., objected to have the
proceeds of said check deducted from their deposit.
7. Exhibits B, C, D, E, F, and G, which were introduced at the trial in
the municipal court of Manila and forming part of the record of the
present case, are admitted by the parties as genuine and are made
part of this stipulation as well as Exhibit H hereto attached and
made a part hereof.
Upon plaintiff's motion, the case was dismissed before trial as to the
defendant National City Bank of New York. a decision was thereafter
rendered giving plaintiff judgment for the total amount of P360.25, with
interest and costs. From this decision the instant appeal was taken.
Before us is the preliminary question of whether the original appeal taken
by the plaintiff from the decision of the municipal court of Manila where
this case originated, became perfected because of plaintiff's failure to
attach to the record within 15 days from receipt of notice of said decision,
the certificate of appeal bond required by section 76 of the Code of Civil
Procedure. It is not disputed that both the appeal docket fee and the
appeal cash bond were paid and deposited within the prescribed time. The
issue is whether the mere failure to file the official receipt showing that
such deposit was made within the said period is a sufficient ground to
dismiss plaintiff's appeal. This question was settled by our decision in the
case of Blanco vs. Bernabe and lawyers Cooperative Publishing Co. (page
124, ante), and no further consideration. No error was committed in
allowing said appeal.

We now pass on to consider and determine the main question presented by

this appeal, namely, whether the appellee has the right to recover from the
appellant, under the circumstances of this case, the value of the checks on
which the signatures of the drawer were forged. The appellant maintains
that the question should be answered in the negative and in support of its
contention appellant advanced various reasons presently to be examined
carefully.
I. It is contended, first of all, that the payment of the checks in question
made by the drawee bank constitutes an "acceptance", and, consequently,
the case should be governed by the provisions of section 62 of the
Negotiable Instruments Law, which says:
SEC. 62. Liability of acceptor. The acceptor by accepting the
instrument engages that he will pay it according to the tenor of his
acceptance; and admits:
(a) The existence of the drawer, the genuineness of his
signature, and his capacity and authority to draw the
instrument; and
(b) The existence of the payee and his then capacity to
indorse.
This contention is without merit. A check is a bill of exchange payable on
demand and only the rules governing bills of exchange payable on demand
are applicable to it, according to section 185 of the Negotiable Instruments
Law. In view of the fact that acceptance is a step unnecessary, in so far as
bills of exchange payable on demand are concerned (sec. 143), it follows
that the provisions relative to "acceptance" are without application to
checks. Acceptance implies, in effect, subsequent negotiation of the
instrument, which is not true in case of the payment of a check because
from the moment a check is paid it is withdrawn from circulation. The
warranty established by section 62, is in favor of holders of the instrument
after its acceptance. When the drawee bank cashes or pays a check, the
cycle of negotiation is terminated, and it is illogical thereafter to speak of
subsequent holders who can invoke the warranty provided in section 62
against the drawee. Moreover, according to section 191, "acceptance"
means "an acceptance completed by delivery or notification" and this
concept is entirely incompatible with payment, because when payment is
made the check is retained by the bank, and there is no such thing as
delivery or notification to the party receiving the payment. Checks are not
to be accepted, but presented at once for payment. (1 Bouvier's Law
Dictionary, 476.) There can be no such thing as "acceptance" in the

ordinary sense of the term. A check being payable immediately and on

demand, the bank can fulfill its duty to the depositor only by paying the
amount demanded. The holder has no right to demand from the bank
anything but payment of the check, and the bank has no right, as against
the drawer, to do anything but pay it. (5 R. C. L., p. 516, par. 38.) A check is
not an instrument which in the ordinary course of business calls for
acceptance. The holder can never claim acceptance as his legal right. He
can present for payment, and only for payment. (1 Morse on Banks and
Banking, 6th ed., pp. 898, 899.)
There is, however, nothing in the law or in, business practice against the
presentation of checks for acceptance, before they are paid, in which case
we have a "certification" equivalent to "acceptance" according to section
187, which provides that "where a check is certified by the bank on which
it is drawn, the certification is equivalent to an acceptance", and it is then
that the warranty under section 62 exists. This certification or acceptance
consists in the signification by the drawee of his assent to the order of the
drawer, which must not express that the drawee will perform his promise
by any other means than the payment of money. (Sec. 132.) When the
holder of a check procures it to be accepted or certified, the drawer and all
indorsers are discharged from liability thereon (sec. 188), and then the
check operates as an assignment of a part of the funds to the credit of the
drawer with the bank. (Sec. 189.) There is nothing in the nature of the
check which intrinsically precludes its acceptance, in like manner and with
like effect as a bill of exchange or draft may be accepted. The bank may
accept if it chooses; and it is frequently induced by convenience, by the
exigencies of business, or by the desire to oblige customers, voluntarily to
incur the obligation. The act by which the bank places itself under
obligation to pay to the holder the sum called for by a check must be the
expressed promise or undertaking of the bank signifying its intent to
assume the obligation, or some act from which the law will imperatively
imply such valid promise or undertaking. The most ordinary form which
such an act assumes is the acceptance by the bank of the check, or, as it is
perhaps more often called, the certifying of the check. (1 Morse on Banks
and Banking, pp. 898, 899; 5 R. C. L., p. 520.)
No doubt a bank may by an unequivocal promise in writing make itself
liable in any event to pay the check upon demand, but this is not an
"acceptance" of the check in the true sense of that term. Although a check
does not call for acceptance, and the holder can present it only for
payment, the certification of checks is a means in constant and extensive
use in the business of banking, and its effects and consequences are
regulated by the law merchant. Checks drawn upon banks or bankers, thus
marked and certified, enter largely into the commercial and financial

transactions of the country; they pass from hand to hand, in the payment
of debts, the purchase of property, and in the transfer of balances from one
house and one bank to another. In the great commercial centers, they
make up no inconsiderable portion of the circulation, and thus perform a
useful, valuable, and an almost indispensable office. The purpose of
procuring a check to be certified is to impart strength and credit to the
paper by obtaining an acknowledgment from the certifying bank that the
drawer has funds therein sufficient to cover the check and securing the
engagement of the bank that the check will be paid upon presentation. A
certified check has a distinctive character as a species of commercial
paper, and performs important functions in banking and commercial
business. When a check is certified, it ceases to possess the character, or
to perform the functions, of a check, and represents so much money on
deposit, payable to the holder on demand. The check becomes a basis of
credit an easy mode of passing money from hand to hand, and answers
the purposes of money. (5 R. C. L., pp. 516, 517.)lwphi1.nt
All the authorities, both English and American, hold that a check may be
accepted, though acceptance is not usual. By the law merchant, the
certificate of the bank that a check is good is equivalent to acceptance. It
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
undertaking that the check is good then, and shall continue good, and this
agreement is as binding on the bank as its notes of 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. The transferee takes it with the same
readiness and sense of security that he would take the notes of the bank. It
is available also to him for all the purposes of money. Thus it continues to
perform its important functions until in the course of business it goes back
to the bank for redemption, and is extinguished by payment. It cannot be
doubted that the certifying bank intended these consequences, and it is
liable accordingly. To hold otherwise would render these important
securities only a snare and a delusion. A bank incurs no greater risk in
certifying a check than in giving a certificate of deposit. In well-regulated
banks the practice is at once to charge the check to the account of the
drawer, to credit it in a certified check account, and, when the check is
paid, to debit that account with the amount. Nothing can be simpler or
safer than this process. (Merchants' Bank vs. States Bank, 10 Wall., 604, at
p. 647; 19 Law. ed., 1008, 1019.)
Ordinarily the acceptance or certification of a check is performed and
evidenced by some word or mark, usually the words "good", "certified" or

"accepted" written upon the check by the banker or bank officer. (1 Morse,
Banks and Banking, 915; 1 Bouvier's Law Dictionary, 476.) The bank
virtually says, that check is good; we have the money of the drawer here
ready to pay it. We will pay it now if you will receive it. The holder says, No,
I will not take the money; you may certify the check and retain the money
for me until this check is presented. The law will not permit a check, when
due, to be thus presented, and the money to be left with the bank for the
accommodation of the holder without discharging the drawer. The money
being due and the check presented, it is his own fault if the holder declines
to receive the pay, and for his own convenience has the money
appropriated to that check subject to its future presentment at any time
within the statute of limitations. (1 Morse on Banks and Banking, p. 920.)
The theory of the appellant and of the decisions on which it relies to
support its view is vitiated by the fact that they take the word
"acceptance" in its ordinary meaning and not in the technical sense in
which it is used in the Negotiable Instruments Law. Appellant says that
when payment is made, such payment amounts to an acceptance, because
he who pays accepts. This is true in common parlance but "acceptance" in
legal contemplation. The word "acceptance" has a peculiar meaning in the
Negotiable Instruments Law, and, as has been above stated, in the instant
case there was payment but no acceptatance, or what is equivalent to
acceptance, certification.
With few exceptions, the weight of authority is to the effect that "payment"
neither includes nor implies "acceptance".
In National Bank vs. First National Bank ([19101, 141 Mo. App., 719; 125 S.
W., 513), the court asks, if a mere promise to pay a check is binding on a
bank, why should not the absolute payment of the check have the same
effect? In response, it is submitted that the two things, that is
acceptance and payment, are entirely different. If the drawee accepts
the paper after seeing it, and then permits it to go into circulation as
genuine, on all the principles of estoppel, he ought to be prevented from
setting up forgery to defeat liability to one who has taken the paper on the
faith of the acceptance, or certification. On the other hand, mere payment
of the paper at the termination of its course does not act as an estoppel.
The attempt to state a general rule covering both acceptance and payment
is responsible for a large part of the conflicting arguments which have been
advanced by the courts with respect to the rule. (Annotation at 12 A. L. R.,
1090 1921].)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079,
1085), the court said:

We are of the opinion that "payment is not acceptance".

Acceptance, as defined by section 131, cannot be confounded with
payment. . . .
Acceptance, certification, or payment of a check, by the express
language of the statute, discharges the liability only of the persons
named in the statute, to wit, the drawer and all indorsers, and the
contract of indorsement by the negotiator if the check is
discharged by acceptance, certification, or payment. But clearly
the statute does not say that the contract of warranty of the
negotiator, created by section 65, is discharged by these acts.
The rule supported by the majority of the cases (14 A. L. R. 764), that
payment of a check on a forged or unauthorized indorsement of the
payee's name, and charging the same to the drawer's account, do not
amount to an acceptance so as to make the bank liable to the payee, is
supported by all of the recent cases in which the question is considered.
(Cases cited, Annotation at 69 A. L. R., 1076, 1077 [1930].)
Merely stamping a check "Paid" upon its payment on a forged or
unauthorized indorsement is not an acceptance thereof so as to render the
drawee bank liable to the true payee. (Anderson vs. Tacoma National Bank
[1928], 146 Wash., 520; 264 Pac., 8; Annotation at 69 A. L. R., 1077,
[1930].)
In State Bank of Chicago vs. Mid-City Trust & Savings Bank (12 A. L. R.,
989, 991, 992), the court said:
The defendant in error contends that the payment of the check shows
acceptance by the bank, urging that there can be no more definite act by
the bank upon which a check has been drawn, showing acceptance than
the payment of the check. Section 184 of the Negotiable Instruments Act
(sec. 202) provides that the provisions of the act applicable to bills of
exchange apply to a check, and section 131 (sec. 149), that the
acceptance of a bill must be in writing signed by the drawee. Payment is
the final act which extinguishes a bill. Acceptance is a promise to pay in
the future and continues the life of the bill. It was held in the First National
Bank vs. Whitman (94 U. S., 343; 24 L. ed., 229), that payment of a check
upon a forged indorsement did not operate as an acceptance in favor of
the true owner. The contrary was held in Pickle vs. Muse (Fickle vs. People's
Nat. Bank, 88 Tenn., 380; 7 L.R.A., 93; 17 Am. St. Rep., 900; 12 S. W., 919),
and Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751) at a
time when the Negotiable Instruments Act was not in force in those states.
The opinion of the Supreme Court of the United States seems more logical,

and the provision of the Negotiable Instruments Act now require an

acceptance to be in writing. Under this statute the payment of a check on
a forged indorsement, stamping it "paid," and charging it to the account of
the drawer, do not constitute an acceptance of the check or create a
liability of the bank to the true holder or the payee. (Elyria Sav. & Bkg.
Co. vs. Walker Bin Co., 92 Ohio St., 406; L. R. A., 1916D, 433; 111 N. E.,
147; Ann. Cas. 1917D, 1055; Baltimore & O. R. Co. vs. First National Bank,
102 Va., 753; 47 S. E., 837; State Bank of Chicago vs. Mid-City Trust &
Savings Bank 12 A. L. R., pp. 989, 991, 992.)
Before drawee's acceptance of check there is no privity of contract
between drawee and payee. Drawee's payment of check on unauthorized
indorsement does not constitute "acceptance" of check. (Sinclair Refining
Co.vs. Moultrie Banking Co., 165 S. E., 860 [1932].)
The great weight of authority is to the effect that the payment of a check
upon a forged or unauthorized indorsement and the stamping of it "paid"
does not constitute an acceptance. (Dakota Radio Apparatus Co. vs.First
Nat. Bank of Rapid City, 244 N. W., 351, 352 [1932].)
Payment of the check, cashing it on presentment is not acceptance. (South
Boston Trust Co. vs. Levin, 249 Mass., 45, 48, 49; 143 N. E., 816; Blocker,
Shepard Co. vs. Granite Trust Company, 187 Me., 53, 54 [1933].)
In Rauch vs. Bankers National Bank of Chicago (143 Ill. App., 625, 636, 637
[1908]), the language of the decision was as follows:
. . . The plaintiffs say that this acceptance was made by the very
unauthorized payments of which they complain. This suggestion
does not seem forceful to us. It is the contention which was made
before the Supreme Court of the United States in First National
Bank vs. Whitman (94 U. S., 343), and repudiated by that court.
The language of the opinion in that case is so apt in the present
case that we quote it:
"It is further contended that such an acceptance of a check as
creates a privity between the payee and the bank is established by
the payment of the amount of this check in the manner described.
This argument is based upon the erroneous assumption that the
bank has paid this check. If this were true, it would have
discharged all of its duty, and there would be an end to the claim
against it. The bank supposed that it had paid the check, but this
was an error. The money it paid was upon a pretended and not a

real indorsement of the name of the payee. . . . We cannot

recognize the argument that payment of the amount of the check
or sight draft under such circumstances amounts to an acceptance
creating a privity of contract with the real owner.
"It is difficult to construe a payment as an acceptance under any
circumstances. . . . A banker or individual may be ready to make
actual payment of a check or draft when presented, while unwilling
to make a promise to pay at a future time. Many, on the other
hand, are more ready to promise to pay than to meet the promise
when required. The difference between the transactions is
essential and inherent."
And in Wharf vs. Seattle National Bank (24 Pac. [2d]), 120, 123 [1933]):
It is the rule that payment of a check on unauthorized or forged
indorsement does not operate as an acceptance of the check so as
to authorize an action by the real owner to recover its amount from
the drawee bank. (Michie on Banks and Banking, vol. 5, sec. 278,
p. 521.) A full list of the authorities supporting the rule will be
found in a footnote to the foregoing citation. (See also, Federal
Land Bank vs. Collins, 156 Miss., 893; 127 So., 570; 69 A. L. R.,
1068.)
In a very recent case, Federal Land Bank vs. Collins (69 A. L. R., 1068,
1072-1074), this question was discussed at considerable length. The court
said:
In the light of the first of these statutes, counsel for appellant is forced to
stand upon the narrow ledge that the payment of the check by the two
banks will constitute an acceptance. The drawee bank simply marked it
"paid" and did not write anything else except the date. The bank first
paying the check, the Commercial National Bank and Trust Company,
simply wrote its name as indorser and passed the check on to the drawee
bank; does this constitute an acceptance? The precise question has not
been presented to this court for decision. Without reference to authorities
in other jurisdictions it would appear that the drawee bank had never
written its name across the paper and therefore, under the strict terms of
the statute, could not be bound as an acceptor; in the second place, it does
not appear to us to be illogical and unsound to say that the payment of a
check by the drawee, and the stamping of it "paid", is equivalent to the
same thing as the acceptance of a check; however, there is a variety of
opinions in the various jurisdictions on this question. Counsel correctly
states that the theory upon which the numerous courts hold that the

payment of a check creates privity between the holder of the check and
the drawee bank is tantamount to a pro tanto assignment of that part of
the funds. It is most easily understood how the payment of the check,
when not authorized to be done by the drawee bank, might under such
circumstances create liability on the part of the drawee to the drawer.
Counsel cites the case of Pickle vs.Muse (88 Tenn, 380; 12 S. W., 919; 7 L.
R. A., 93; 17 Am. St. Rep., 900), wherein Judge Lurton held that the
acceptance of a check was necessary in order to give the holder thereof a
right of action thereon against the bank, and further held in a case similar
to this, so far as this question is concerned, that the acceptance of a check
so as to give a right of action to the payee is inferred from the retention of
the check by the bank and its subsequent charge of the amount to the
drawer, although it was presented by, and payment made, an
unauthorized person. Judge Lurton cited the case of National Bank of the
Republic vs. Millard (10 Wall., 152; 19 L. ed., 897), wherein the Supreme
Court of the United States, not having such a case before it, threw out the
suggestion that, if it was shown that a bank had charged the check on its
books against the drawer and made settlement with the drawee that the
holder could recover on account of money had and received, invoking the
rule of justice and fairness, it might be said there was an implied promise
to the holder to pay it on demand. (SeeNational Bank of the
Republic vs. Millard, 10 Wall. [77 U. S.], 152; 19 L. ed., 899.) The Tennessee
court then argued that it would be inequitable and unconscionable for the
owner and payee of the check to be limited to an action against an
insolvent drawer and might thereby lose the debt. They recognized the
legal principle that there is no privity between the drawer bank and the
holder, or payee, of the check, and proceeded to hold that no particular
kind of writing was necessary to constitute an acceptance and that it
became a question of fact, and the bank became liable when it stamped it
"paid" and charged it to the account of the drawer, and cites, in support of
its opinion, Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep.,
751); Saylor vs. Bushong (100 Pa., 23; 45 Am. Rep., 353); and
Dodge vs. Bank (20 Ohio St., 234; 5 Am. Rep., 648).
This decision was in 1890, prior to the enactment of the Negotiable
Instruments Law by the State of Tennessee. However, in this case
Judge Snodgrass points out that the Millard case, supra, was dicta.
The Dodge case, from the Ohio court, held exactly as the
Tennessee court, but subsequently in the case of Elyria
Bank vs. Walker Bin Co. (92 Ohio St., 406; 111 N. E., 147; L. R. A.
1916D, 433; Ann. Cas. 1917D, 1055), the court held to the
contrary, called attention to the fact that the Dodge case was no
longer the law, and proceeded to announce that, whatever might
have been the law before the passage of the Negotiable

Instrument Act in that state, it was no longer the law; that the rule
announced in the Dodge case had been "discarded." The court, in
the latter case, expressed its doubts that the courts of Tennessee
and Pennsylvania would adhere to the rule announced in the Pickle
case, quoted supra, in the face of the Negotiable Instrument Law.
Subsequent to the Millard case, the Supreme Court of the United
States, in the case of First National Bank of
Washington vs. Whitman (94 U. S., 343, 347; 24 L. ed., 229), where
the bank, without any knowledge that the indorsement of the
payee was unauthorized, paid the check, and it was contended
that by the payment the privity of contract existing between the
drawer and drawee was imparted to the payee, said:
"It is further contended that such an acceptance of the check as
creates a privity between the payee and the bank is established by
the payment of the amount of this check in the manner described.
This argument is based upon the erroneous assumption that the
bank has paid this check. If this were true, it would have
discharged all of its duty, and there would be an end of the claim
against it. The bank supposed that it had paid the check; but this
was an error. The money it paid was upon a pretended and not a
real indorsement of the name of the payee. The real indorsement
of the payee was as necessary to a valid payment as the real
signature of the drawer; and in law the check remains unpaid. Its
pretended payment did not diminish the funds of the drawer in the
bank, or put money in the pocket of the person entitled to the
payment. The state of the account was the same after the
pretended payment as it was before.
"We cannot recognize the argument that a payment of the amount
of a check or sight draft under such circumstances amounts to an
acceptance, creating a privity of contract with the real owner. It is
difficult to construe a payment as an acceptance under any
circumstances. The two things are essentially different. One is a
promise to perform an act, the other an actual performance. A
banker or an individual may be ready to make actual payment of a
check or draft when presented, while unwilling to make a promise
to pay at a future time. Many, on the other hand, are more ready to
promise to pay than to meet the promise when required. The
difference between the transactions is essential and inherent."
Counsel for the appellant cite other cases holding that the
stamping of the check "paid" and the charging of the amount
thereof to the drawer constituted an acceptance, but we are of

opinion that none of these cases cited hold that it is in compliance

with the Negotiable Instruments Act; paying the check and
stamping same is not the equivalent of accepting the check in
writing signed by the drawee. The cases holding that payment as
indicated above constituted acceptance were rendered prior to the
adoption of the Negotiable Instruments Act in the particular state,
and these decisions are divided into two classes: the one holding
that the check delivered by the drawer to the holder and presented
to the bank or drawee constitutes an assignment pro tanto; the
other holding that the payment of the check and the charging of
same to the drawee although paid to an unauthorized person
creates privity of contract between the holder and the drawee
bank.
We have already seen that our own court has repudiated the
assignment pro tanto theory, and since the adoption of the
Negotiable Instrument Act by this state we are compelled to say
that payment of a check is not equivalent to accepting a check in
writing and signing the name of the acceptor thereon. Payment of
the check and the charging of same to the drawer does not
constitute an acceptance. Payment of the check is the end of the
voyage; acceptance of the check is to fuel the vessel and
strengthen it for continued operation on the commercial sea. What
we have said applies to the holder and not to the drawer of the
check. On this question we conclude that the general rule is that
an action cannot be maintained by a payee of the check against
the bank on which is draw unless the check has been certified or
accepted by the bank in compliance with the statute, even though
at the time the check is that an action cannot be maintained by a
payee of the drawer of the check out of which the check is legally
payable; and that the payment of the check by the bank on which
it is drawn, even though paid on the unauthorized indorsement of
the name of the holder (without notice of the defect by the bank),
does not constitute a certification thereof, neither is it an
acceptance thereof; and without acceptance or certification, as
provided by statute, there is no privity of contract between the
drawee bank and the payee, or holder of the check. Neither is
there an assignment pro tanto of the funds where the check is not
drawn on a particular fund, or does not show on its face that it is
an assignment of a particular fund. The above rule as stated seems
to have been the rule in the majority of the states even before the
passage of the uniform Negotiable Instruments Act in the several
states.

The decision in the case of First National Bank vs. Bank of Cottage Grove
(59 Or., 388), which appellant cites in its brief (pp. 12, 13 ) has been
expressly overruled by the Supreme Court of Massachusetts in South
Boston Trust Co. vs. Levin (143 N. E., 816, 817), in the following language:
In First National Bank vs. Bank of Cottage Grove (59 Or., 388; 117
Pac., 293, 296, at page 396), it was said: "The payment of a bill or
check by the drawee amounts to more than an acceptance. The
rule, holding that such a payment has all the efficacy of an
acceptance, is founded upon the principle that the greater includes
the less." We are unable to agree with this statement as there is no
similarity between acceptance and payment; payment discharges
the instrument, and no one else is expected to advance anything
on the faith of it; acceptance, contemplates further circulation,
induced by the fact of acceptance. The rule that the acceptor made
certain admissions which will inure to the benefit of subsequent
holders, has no applicability to payment of the instrument where
subsequent holders can never exist.
II. The old doctrine that a bank was bound to know its correspondent's
signature and that a drawee could not recover money paid upon a forgery
of the drawer's name, because it was said, the drawee was negligent not
to know the forgery and it must bear the consequence of its negligence, is
fast fading into the misty past, where it belongs. It was founded in
misconception of the fundamental principles of law and common sense. (2
Morse, Banks and Banking, p. 1031.)
Some of the cases carried the rule to its furthest limit and held that under
no circumstances (except, of course, where the purchaser of the bill has
participated in the fraud upon the drawee) would the drawee be allowed to
recover bank money paid under a mistake of fact upon a bill of exchange
to which the name of the drawer had been forged. This doctrine has been
freely criticized by the eminent authorities, as a rule too favorable to the
holder, not the most fair, nor best calculated to effectuate justice between
the drawee and the drawer. (5 R.C.L., p. 556.)
The old rule which was originally announced by Lord Mansfield in the
leading case of Price vs. Neal (3 Burr., 1354), elicited the following
comment from Justice Holmes, then Chief Justice of the Supreme Court of
Massachusetts, in the case of Dedham National Bank vs. Everett National
Bank (177 Mass., 392). "Probably the rule was adopted from an impression
of convenience rather than for any more academic reason; or perhaps we
may say that Lord Mansfield took the case out of the doctrine as to
payments under a mistake of fact by the assumption that a holder who

simply presents negotiable paper for payment makes no representation as

to the signature, and that the drawee pays at his peril."
Such was the reaction that followed Lord Mansfield's rule which Justice
Story of the United States Supreme adopted in the case of Bank of United
States vs. Georgia (10 Wheat., 333), that in B. B. Ford & Co. vs. People's
Bank of Orangeburg (74 S. C., 180), it was held that "an unrestricted
indorsement of a draft and presentation to the drawee is a representation
that the signature of the drawer is genuine", and in Lisbon First National
Bank vs.Wyndmere Bank (15 N. D., 299), it was also held that "the drawee
of a forged check who has paid the same without detecting the forgery,
may upon discovery of the forgery, recover the money paid from the party
who received the money, even though the latter was a good faith holder,
provided the latter has not been misled or prejudiced by the drawee's
failure to detect the forgery."
Daniel, in his treatise on Negotiable Instruments, has the following to say:
In all the cases which hold the drawee absolutely estoppel by acceptance
or payment from denying genuineness of the drawer's name, the loss is
thrown upon him on the ground of negligence on his part in accepting or
paying, until he has ascertained the bill to be genuine. But the holder has
preceded him in negligence, by himself not ascertaining the true character
of the paper before he received it, or presented it for acceptance or
payment. And although, as a general rule, the drawee is more likely to
know the drawer's handwriting than a stranger is, if he is in fact deceived
as to its genuineness, we do not perceive that he should suffer more
deeply by mistake than a stranger, who, without knowing the handwriting,
has taken the paper without previously ascertaining its genuineness. And
the mistake of the drawee should always be allowed to be corrected,
unless the holder, acting upon faith and confidence induced by his
honoring the draft, would be placed in a worse position by according such
privilege to him. This view has been applied in a well considered case, and
is intimidated in another; and is forcibly presented by Mr. Chitty, who says
it is going a great way to charge the acceptor with knowledge of his
correspondent's handwriting, "unless some bona fide holder has purchased
the paper on the faith of such an act." Negligence in making payment
under a mistake of fact is not now deemed a bar to recovery of it, and we
do not see why any exception should be made to the principle, which
would apply as well as to release an obligation not consummated by
payment. ( Vol. 2, 6th edition, pp. 1537-1539.)
III. But now the rule is perfectly well settled that in determining the relative
rights of a drawee who, under a mistake of fact, has paid, and a holder who

has received such payment, upon a check to which the name of the drawer
has been forged, it is only fair to consider the question of diligence or
negligence of the parties in respect thereto. (Woods and Malone vs. Colony
Bank [1902], 56 L. R. A., 929, 932.) The responsibility of the drawee who
pays a forged check, for the genuineness of the drawer's signature, is
absolute only in favor of one who has not, by his own fault or negligence,
contributed to the success of the fraud or to mislead the drawee. (National
Bank of America vs. Bangs, 106 Mass., 441; 8 Am. Rep., 349; Woods and
Malone vs. Colony Bank, supra; De Feriet vs.Bank of America, 23 La. Ann.,
310; B. B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 10 L.
R. A. [N. S.], 63.) If it appears that the one to whom payment was made
was not an innocent sufferer, but was guilty of negligence in not doing
something, which plain duty demanded, and which, if it had been done,
would have avoided entailing loss on any one, he is not entitled to retain
the moneys paid through a mistake on the part of the drawee bank. (First
Nat. Bank of Danvers vs. First Nat. Bank of Salem, 151 Mass., 280; 24 N. E.,
44; 21 A. S. R., 450; First Nat. Bank of Orleans vs. State Bank of Alma, 22
Neb., 769; 36 N. W., 289; 3 A. S. R., 294; American Exp. Co. vs. State Nat.
Bank, 27 Okla., 824; 113 Pac., 711; 33 L. R. A. [N. S.], 188; B. B. Ford &
Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 54 S. E., 204; 114 A. S.
R., 986; 7 Ann. Cas., 744; 10 L. R. A. [N. S.], 63; People's Bank vs. Franklin
Bank, 88 Tenn. 299; 12 S. W., 716; 17 A. S. R.) 884; 6 L. R. A., 724;
Canadian Bank of Commerce vs. Bingham, 30 Wash., 484; 71 Pac., 43; 60
L. R. A., 955.) In other words, to entitle the holder of a forged check to
retain the money obtained he must be able to show that the whole
responsibility of determining the validity of the signature was upon the
drawee, and that the negligence of such drawee was not lessened by any
failure of any precaution which, from his implied assertion in presenting the
check as a sufficient voucher, the drawee had the right to believe he had
taken. (Ellis vs. Ohio Life Insurance & Trust Co., 4 Ohio St., 628;
Rouvantvs. Bank, 63 Tex., 610; Bank vs. Ricker, 71 Ill., 429; First National
Bank of Danvers vs. First Nat. Bank of Salem, 24 N. E., 44, 45; B. B. Ford &
Co. vs. People's Bank of Orangeburg, supra.) The recovery is permitted in
such case, because, although the drawee was constructively negligent in
failing to detect the forgery, yet if the purchaser had performed his duty,
the forgery would in all probability have been detected and the fraud
defeated. (First National Bank of Lisbon vs. Bank of Wyndmere, 15 N. D.,
209; 10 L. R. A. [N. S.], 49.) In the absence of actual fault on the part of the
drawee, his constructive fault in not knowing the signature of the drawer
and detecting the forgery will not preclude his recovery from one who took
the check under circumstances of suspicion without proper precaution, or
whose conduct has been such as to mislead the drawee or induce him to
pay the check without the usual scrutiny or other precautions against
mistake or fraud. (National Bank of America vs.Bangs, supra; First National

Bank vs. Indiana National Bank, 30 N. E., 808-810; Woods and

Malone vs. Colony Bank, supra; First National Bank of Danvers vs. First Nat.
Bank of Salem, 151 Mass., 280.) Where a loss, which must be borne by one
of two parties alike innocent of forgery, can be traced to the neglect or
fault of either, it is unreasonable that it would be borne by him, even if
innocent of any intentional fraud, through whose means it has succeeded.
(Gloucester Bank vs. Salem Bank, 17 Mass., 33; First Nat. Bank of
Danvers vs. First National Bank of Salem, supra; B. B. Ford &
Co. vs. People's Bank of Orangeburg, supra.) Again if the indorser is guilty
of negligence in receiving and paying the check or draft, or has reason to
believe that the instrument is not genuine, but fails to inform the drawee of
his suspicions the indorser according to the reasoning of some courts will
be held liable to the drawee upon his implied warranty that the instrument
is genuine. (B. B. Ford & Co. vs. People's Bank of Orangeburg, supra;
Newberry Sav. Bank vs. Bank of Columbia, 93 S. C., 294; 38 L. R. A. [N. S],
1200.) Most of the courts now agree that 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, the
drawee, who has, without actual negligence on his part, paid the forged
demand, may recover the money paid from such negligent purchaser.
(Lisbon First National Bank vs.Wyndmere Bank, supra.) Of course, the
drawee must, in order to recover back the holder, show that he himself
was free from fault. (See also 5 R. C. L., pp. 556-558.)
So, if a collecting bank is alone culpable, and, on account of its negligence
only, the loss has occurred, the drawee may recover the amount it paid on
the forged draft or check. (Security Commercial & Sav. Bank vs.Southern
Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.)
But we are aware of no case in which the principle that the drawee is
bound to know the signature of the drawer of a bill or check which he
undertakes to pay has been held to be decisive in favor of a payee of a
forged bill or check to which he has himself given credit by his
indorsement. (Secalso, Mckleroy vs. Bank, 14 La. Ann., 458; Canal
Bank vs. Bank of Albany, 1 Hill, 287; Rouvant vs. Bank, supra, First Nat.
Bank vs. Indiana National Bank; 30 N. E., 808-810.)
In First Nat. Bank vs. United States National Bank ([1921], 100 Or., 264; 14
A. L. R., 479; 197 Pac., 547), the court declared: "A holder cannot profit by
a mistake which his negligent disregard of duty has contributed to induce
the drawee to commit. . . . The holder must refund, if by his negligence he
has contributed to the consummation of the mistake on the part of the
drawee by misleading him. . . . If the only fault attributable to the drawee

is the constructive fault which the law raises from the bald fact that he has
failed to detect the forgery, and if he is not chargeable with actual fault in
addition to such constructive fault, then he is not precluded from recovery
from a holder whose conduct has been such as to mislead the drawee or
induce him to pay the check or bill of exchange without the usual security
against fraud. The holder must refund to a drawee who is not guilty of
actual fault if the holder was negligent in not making due inquiry
concerning the validity of the check before he took it, and if the drawee
can be said to have been excused from making inquiry before taking the
check because of having had a right to, presume that the holder had made
such inquiry."
The rule that one who first negotiates forged paper without taking some
precaution to learn whether or not it is genuine should not be allowed to
retain the proceeds of the draft or check from the drawee, whose sole fault
was that he did not discover the forgery before he paid the draft or check,
has been followed by the later cases. (Security Commercial & Savings
Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945;
Hutcheson Hardware Co. vs. Planters State Bank [1921], 26 Ga. App., 321;
105 S. E., 854; [Annotation at 71 A. L. R., 337].)
Where a bank, without inquiry or identification of the person presenting a
forged check, purchases it, indorses it, generally, and presents it to the
drawee bank, which pays it, the latter may recover if its only negligence
was its mistake in having failed to detect the forgery, since its mistake, did
not mislead the purchaser or bring about a change in position. (Security
Commercial & Savings Bank vs. Southern Trust & C. Bank [1925], 74 Cal.
App., 734; 241 Pac., 945.)
Also, a drawee could recover from another bank the portion of the
proceeds of a forged check cashed by the latter and deposited by the
forger in the second bank and never withdrawn, upon the discovery of the
forgery three months later, after the drawee had paid the check and
returned the voucher to the purported drawer, where the purchasing bank
was negligent in taking the check, and was not injured by the drawee's
negligence in discovering and reporting the forgery as to the amount left
on deposit, since it was not a purchaser for value. (First State Bank & T.
Co. vs. First Nat. Bank [1924], 314 Ill., 269; 145 N. E., 382.)
Similarly, it has been held that the drawee of a check could recover the
amount paid on the check, after discovery of the forgery, from another
bank, which put the check into circulation by cashing it for the one who
had forged the signature of both drawer and payee without making any
inquiry as to who he was although he was a stranger, after which the check

reached, and was paid by, the drawee, after going through the hands of
several intermediate indorsees. (71 A. L. R., p. 340.)
In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079,
1085), the following statement was made:
We are clearly of opinion, therefore that the warranty of genuineness,
arising upon the act of the Brule National Bank in putting the check in
circulation, was not discharged by payment of the check by the drawee
(First National Bank), nor was the Brule National Bank deceived or misled
to its prejudice by such payment. The Brule National Bank by its
indorsement and delivery warranted its own identification of Kost and the
genuineness of his signature. The indorsement of the check by the Brule
National Bank was such as to assign the title to the check to its assignee,
the Whitbeck National Bank, and the amount was credited to the indorser.
The check bore no indication that it was deposited for collection, and was
not in any manner restricted so as to constitute the indorsee the agent of
the indorser, nor did it prohibit farther negotiation of the instrument, nor
did it appear to be in trust for, or to the use of, any other person, nor was it
conditional. Certainly the Pukwana Bank was justified in relying upon the
warrant of genuineness, which implied the full identification of Kost, and
his signature by the defendant bank. This view of the statute is in accord
with the decisions of many courts. (First National Bank vs.State Bank, 22
Neb., 769; 3 Am. St. Rep., 294; 36 N. W., 289; First National Bank vs. First
National Bank, 151 Mass., 280; 21 Am. St. Rep., 450; 24 N. E., 44; People's
Bank vs. Franklin Bank, 88 Tenn., 299; 6 L. R. A., 727; 17 Am. St. Rep., 884;
12 S. W., 716.)"
The appellant leans heavily on the case of Fidelity & Co. vs. Planenscheck
(71 A. L. R., 331), decided in 1929. We have carefully examined this
decision and we do not feel justified in accepting its conclusions. It is but a
restatement of the long abandoned rule of Neal vs. Price, and it predicated
on the wrong premise that the payment includes acceptance, and that a
bank drawee paying a check drawn on it becomes ipso facto an acceptor
within the meaning of section 62 of the Negotiable Instruments Act.
Moreover in a more recent decision, that of Louisa National
Bank vs. Kentucky National Bank (39 S. W. [2nd] 497, 501) decided in
1931, the Court of Appeals of Kentucky held the following:
The appellee, on presentation for payment of $600 check, failed to
discover it was a forgery. It was bound to know the signature of its
customer, Armstrong, and it was derelict in failing to give his
signature to the check sufficient attention and examination to
enable it to discover instantly the forgery. The appellant, when the

check was presented to it by Banfield, failed to make an inquiry of

or about him and did not cause or have him to be identified. Its act
in so paying to him the check is a degree of negligence on its part
equivalent to positive negligence. It indorsed the check, and, while
such indorsement may not be regarded within the meaning of the
Negotiable Instrument Law as amounting to a warranty to
appellant of that which it indorsed, it at least substantially served
as a representation to it that it had exercised ordinary care and
had complied with the rules and customs of prudent banking. Its
indorsement was calculated, if it did not in fact do so, to lull the
drawee bank into indifference as to the drawer's signature to it
when paying the check and charging it to its customer's account
and remitting its proceeds to appellant's correspondent.
If in such a transaction between the drawee and the holder of a
check both are without fault, no recovery may be had of the money
so paid. (Deposit Bank of Georgetown vs. Fayette National
Bank, supra, and cases cited.) Or the rule may be more accurately
stated that, where the drawee pays the money, he cannot recover
it back from a holder in good faith, for value and without fault.
If, on the other hand, the holder acts in bad faith, or is guilty of
culpable negligence, a recovery may be had by the drawee of such
holder. The negligence of the Bank of Louisa in failing to inquire of
and about Banfield, and to cause or to have him identified before it
parted with its money on the forged check, may be regarded as the
primary and proximate cause of the loss. Its negligence in this
respect reached in its effect the appellee, and induced incaution on
its part. In comparison of the degrees of the negligence of the two,
it is apparent that of the appellant excels in culpability. Both
appellant and appellee inadvertently made a mistake, doubtless
due to a hurry incident to business. The first and most grievous
one was made by the appellant , amounting to its disregard of the
duty, it owed itself as well as the duty it owed to the appellee, and
it cannot on account thereof retain as against the appellee the
money which it so received. It cannot shift the loss to the appellee,
for such disregard of its duty inevitably contributed to induce the
appellee to omit its duty critically to examine the signature of
Armstrong, even if it did not know it instantly at the time it paid the
check. (Farmers' Bank of Augusta vs. Farmer's Bank of
Maysville, supra, and cases cited.)
IV. The question now is to determine whether the appellant's negligence in
purchasing the checks in question is such as to give the appellee the right

to recover upon said checks, and on the other hand, whether the drawee
bank was not itself negligent, except for its constructive fault in not
knowing the signature of the drawer and detecting the forgery.
We quote with approval the following conclusions of the court a quo:
Check Exhibit A bears number 637023-D and is dated April 6,
1933, whereas check Exhibit A-1 bears number 637020-D and is
dated April 7, 1933. Therefore, the latter check, which is prior in
number to the former check, is however, issued on a later date.
This circumstance must have aroused at least the curiosity of the
Motor Service Co., Inc.
The Motor Service Co., Inc., accepted the two checks from
unknown persons. And not only this; check Exhibit A is indorsed by
a subagent of the agent of the payee, International Auto Repair
Shop. The Motor Service Co., Inc., made no inquiry whatsoever as
to the extent of the authority of these unknown persons. Our
Supreme Court said once that "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 the same is without authority" (Insular Drug
Co. vs. National Bank, 58, Phil., 684).
xxx

xxx

xxx

Check Exhibit A-1, aside from having been indorsed by a supposed

agent of the international Auto Repair Shop is crossed generally.
The existence of two parallel lines transversally drawn on the face
of this check was a warning that the check could only be collected
through a banking institution (Jacobs, Law of Bills of Exchange,
etc., pp., 179, 180; Bills of Exchange Act of England, secs. 76 and
79). Yet the Motor Service Co., Inc., accepted the check in payment
for merchandise.
. . . In Exhibit H attached to the stipulation of facts as an integral
part thereof, the Motor Service Co., Inc., stated the following:
"The Pangasinan Transportation Co. is a good customer of this firm
and we received checks from them every month in payment of
their account. The two checks in question seem to be exactly
similar to the checks which we received from the Pangasinan
Transportation Co. every month."

If the failure of the Motor Service Co., Inc., to detect the forgery of
the drawer's signature in the two checks, may be considered as an
omission in good faith because of the similarity stated in the letter,
then the same consideration applies to the Philippine National
Bank, for the drawer is a customer of both the Motor Service Co.,
Inc., and the Philippine National Bank. (B. of E., pp. 25, 28, 35.)
We are of opinion that the facts of the present case do not make it one
between two equally innocent persons, the drawee bank and the holder,
and that they are governed by the authorities already cited and also the
following:
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. The courts have shown a steadily increasing disposition to
extend the application of this rule over the new conditions of fact
which from time to time arise, until it can now rarely happen that
the holder, payee, or presenter can escape the imputation of
having been in some degree contributory towards the mistake.
Without any actual change in the abstract doctrines of the law,
which are clear, just, and simple enough, the gradual but sure
tendency and effect of the decisions have been to put as heavy a
burden of responsibility upon the payee as upon the drawee,
contrary to the original custom. . . . (2 Morse on Banks and
Banking, 5th ed., secs. 464 and 466, pp. 82-85 and 86, 87.)
In First National Bank vs. Brule National Bank (12 A. L. R., 1079, 1088,
1089), the following statement appears in the concurring opinion:
What, then, should be the rule? The drawee asks to recover for
money had and received. If his claim did not rest upon a
transaction relating to a negotiable instrument plaintiff could
recover as for money paid under mistake, unless defendant could
show some equitable reason, such as changed condition since, and
relying upon, payment by plaintiff. In the Wyndmere Case, the
North Dakota court holds that this rule giving right to recover
money paid under mistake should extend to negotiable paper, and

it rejects in its entirety the theory of estoppel and puts a case of

this kind on exactly the same basis as the ordinary case of
payment under mistake. But the great weight of authority, and that
based on the better reasoning, holds that the exigencies of
business demand a different rule in relation to negotiable paper.
What is that rule? Is it an absolute estoppel against the drawee in
favor of a holder, no matter how negligent such holder has been? It
surely is not. The correct rule recognizes the fact that, in case of
payment without a prior acceptance or certification, the holder
takes the paper upon the of the prior indorsers and the credit of
the drawer, and not upon the credit of the drawee, in making
payment, has a right to rely upon the assumption that the payee
used due diligence, especially where such payee negotiated the bill
or check to a holder, thus representing that it had so fully satisfied
itself as to the identity and signature of the maker that it was
willing to warrant as relates thereto to all subsequent holders.
(Uniform Act, secs. 65 and 66.) Such correct rule denies the drawee
the right to recover when the holder was without fault or when
there has been some change of position calling for equitable relief.
When a holder of a bill of exchange uses all due care in the taking
of bill or check and the drawee thereafter pays same, the
transaction is absolutely closed modern business could not be
done on any other basis. While the correct rule promotes the
fluidity of two recognized mediums of exchange, those mediums by
which the great bulk of business is carried on, checks and drafts,
upon the other hand it encourages and demands prudent business
methods upon the part of those receiving such mediums of
exchange. (Pennington County Bank vs. First State Bank, 110
Minn., 263; 26 L. R. A. [N. S.], 849; 136 Am. St. Rep., 496; 125 N.
W., 119; First National Bank vs. State Bank, 22 Neb., 769; 3 Am. St.
Rep., 294; 36 N. W., 289; Bank of Williamson, vs. McDowell County
Bank, 66 W. Va., 545; 36 L. R. A. [N. S.], 605; 66 S. E., 761;
Germania Bank vs. Boutell, 60 Minn., 189; 27 L. R. A., 635; 51 Am.
St. Rep., 519; 62 N. W., 327; American Express Co. vs. State
National Bank, 27 Okla., 824; 33 L. R. A. [N. S.], 188; 113 Pac., 711;
Farmers' National Bank vs. Farmers' & Traders Bank, L. R. A.,
1915A, 77, and note (159 Ky., 141; 166 S. W., 986].)
That the defendant bank did not use reasonable business prudence
is clear. It took this check from a stranger without other
identification than that given by another stranger; its cashier
witnessed the mark of such stranger thus vouching for the identity
and signature of the maker; and it indorsed the check as "Paid,"
thus further throwing plaintiff off guard. Defendant could not but

have known, when negotiating such check and putting it into the
channel through which it would finally be presented to plaintiff for
payment, that plaintiff, if it paid such check, as defendant was
asking it to do, would have to rely solely upon the apparent faith
and credit that defendant had placed in the drawer. From the very
circumstances of this case plaintiff had to act on the facts as
presented to it by defendant, upon such facts only.
But appellant argues that it so changed its position, after payment
by plaintiff, that in "equity and good conscience" plaintiff should
not recover it says it did not pay over any money to the forger
until after plaintiff had paid the check. There would be merit in
such contention if defendant had indorsed the check for
"collection," thus advising plaintiff that it was relying on plaintiff
and not on the drawer. It stands in court where it would have been
if it had done as it represented.
In Woods and Malone vs. Colony Bank (56 L. R. A., 929, 932), the court
said:
. . . If the holder has been negligent in paying the forged paper, or
has by his conduct, however innocent, misled or deceived the
drawee to his damage, it would be unjust for him to be allowed to
shield himself from the results of his own carelessness by asserting
that the drawee was bound in law to know his drawer's signature.
V. Section 23 of the Negotiable Instruments Act provides that "when a
signature is forged or made without the authority of the person whose
signature it purports to be, 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.
It not appearing that the appellee bank did not warrant to the appellant the
genuineness of the checks in question, by its acceptance thereof, nor did it
perform any act which would have induced the appellant to believe in the
genuineness of said instruments before appellant purchased them for
value, it can not be said that the appellee is precluded from setting up the
forgery and, therefore, the appellant is not entitled to retain the amount of
the forged check paid to it by the appellee.

VI. It has been held by many courts that a drawee of a check, who is
deceived by a forgery of the drawer's signature may recover the payment
back, unless his mistake has placed an innocent holder of the paper in a
worse position than he would have been in if the discovery of the forgery
had been made on presentation. (5 R. C. L., p. 559; 2 Daniel on Negotiable
Instruments, 1538.) Forgeries often deceived the eye of the most cautious
experts; and when a bank has been deceived, it is a harsh rule which
compels it to suffer although no one has suffered by its being deceived. (17
A. L. R. 891; 5 R. C. L., 559.)
In the instant case should the drawee bank be allowed recovery, the
appellant's position would not become worse than if the drawee had
refused the payment of these checks upon their presentation. The
appellant has lost nothing by anything which the drawee has done. It had
in its hands some forged worthless papers. It did not purchase or acquire
these papers because of any representation made to it by the drawee. It
purchased them from unknown persons and under suspicious
circumstances. It had no valid title to them, because the persons from
whom it received them did not have such title. The appellant could not
have compelled the drawee to pay them, and the drawee could have
refused payment had it been able to detect the forgery. By making a
refund, the appellant would only returning what it had received without any
title or right. And when appellant pays back the money it had received it
will be entitled to have restored to it the forged papers it parted with.
There is no good reason why the accidental payment made by the
appellant should inure to the benefit of the appellant. If there were injury
to the appellant said injury was caused not by the failure of the appellee to
detect the forgery but by the very negligence of the appellant in
purchasing commercial papers from unknown persons without making
inquiry as to their genuineness.
In the light of the foregoing discussion, we conclude:
1. That where a check is accepted or certified by the bank on which
it is drawn, the bank is estopped to deny the genuineness of the
drawer's signature and his capacity to issue the instrument;
2. That if a drawee bank pays a forged check which was previously
accepted or certified by the said bank it cannot recover from a
holder who did not participate in the forgery and did not have
actual notice thereof;

3. That the payment of a check does not include or imply its

acceptance in the sense that this word is used in section 62 of the
Negotiable Instruments Law;
4. That in the case of the payment of a forged check, even without
former acceptance, the drawee can not recover from a holder in
due course not chargeable with any act of negligence or disregard
of duty;
5. That to entitle the holder of a forged check to retain the money
obtained thereon, there must be a showing that the duty to
ascertain the genuineness of the signature rested entirely upon the
drawee, and that the constructive negligence of such drawee in
failing to detect the forgery was not affected by any disregard of
duty on the part of the holder, or by failure of any precaution
which, from his implied assertion in presenting the check as a
sufficient voucher, the drawee had the right to believe he had
taken;
6. That in the absence of actual fault on the part of the drawee, his
constructive fault in not knowing the signature of the drawer and
detecting the forgery will nor preclude his recovery from one who
took the check under circumstances of suspicion and without
proper precaution, or whose conduct has been such as to mislead
the drawee or induce him to pay the check without the usual
scrutiny or other precautions against mistake or fraud;
7. That on 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 performed his duty;
8. That while the foregoing rule, chosen from a welter of decisions
on the issue as the correct one, will not hinder the circulation of
two recognized mediums of exchange by which the great bulk of
business is carried on, namely, drafts and checks, on the other
hand, it will encourage and demand prudent business methods on
the part of those receiving such mediums of exchange;

9. That it being a matter of record in the present case, that the

appellee bank in no more chargeable with the knowledge of the
drawer's signature than the appellant is, as the drawer was as
much the customer of the appellant as of the appellee, the
presumption that a drawee bank is bound to know more than any
indorser the signature of its depositor does not hold;
10. That according to the undisputed facts of the case the
appellant in purchasing the papers in question from unknown
persons without making any inquiry as to the identity and authority
of the said persons negotiating and indorsing them, acted
negligently and contributed to the appellee's constructive
negligence in failing to detect the forgery;
11. That under the circumstances of the case, if the appellee bank
is allowed to recover, there will be no change of position as to the
injury or prejudice of the appellant.
Wherefore, the assignments of error are overruled, and the judgment
appealed from must be, as it is hereby, affirmed, with costs against the
appellant. So ordered.

TWENTY-TWO
Republic of the Philippines
SUPREME COURT
Manila
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 postaudited 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
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 twentyeight 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 Hundred (P203,300.00) Pesos with legal interest
thereon from March 20, 1981 until fully paid;

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.

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;.

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

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.

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

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 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.
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.
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
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 bankPNB 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
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:.

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:

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.

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
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.37 Had 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. 38Hence, 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
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.

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.:

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 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.

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.

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.

SO ORDERED.

About April 26, 1942, thru the recommendation of Provincial Treasurer

Laya, his assistant agent M. V. Ramos was inducted into the United States
Armed Forces in the Far East (USAFFE) as disbursing officer of an army
division. As such disbursing officer, M. V. Ramos on April 30, 1942, went to
the neighboring Province Lanao to procure a cash advance in the amount
of P800,000 for the use of the USAFFE in Cagayan de Misamis. Pedro
Encarnacion, Provincial Treasurer of Lanao did not have that amount in
cash. So, he gave Ramos P300,000 in emergency notes and a check for
P500,000. On May 2, 1942 Ramos went to the office of Provincial Treasurer
Laya at Misamis Oriental to encash the check for P500,000 which he had
received from the Provincial Treasurer of Lanao. Laya did not have enough
cash to cover the check so he gave Ramos P400,000 in emergency notes
and a check No. 1382 for P100,000 drawn on the Philippine National Bank.
According to Laya he had previously deposited P500,000 emergency notes
in the Philippine National Bank branch in Cebu and he expected to have
the check issued by him cashed in Cebu against said deposit.

TWENTY-THREE
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-2861

February 26, 1951

ENRIQUE P. MONTINOLA, plaintiff-appellant,

vs.
THE PHILIPPINE NATIONAL BANK, ET AL., defendants-appellees.

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 /8 of an inch therefrom, the edges of
the check appear to have been burned, but there are words
stamped apparently in rubber stamp which, according to
Montinola, are a facsimile of the signature of Ramos. There is a
signature which apparently reads "M. V. Ramos" also in green ink
but made in handwriting."

To the above description we may add that the name of M. V. Ramos is hand
printed in green ink, under the signature. According to Montinola, he asked
Ramos to hand print it because Ramos' signature was not clear.
Ramos in his turn told the court that the agreement between himself and
Montinola regarding the transfer of the check was that he was selling only
P30,000 of the check and for this reason, at the back of the document he
wrote in longhand the following:
Pay to the order of Enrique P. Montinola P30,000 only. The balance
to be deposited in the Philippine National Bank to the credit of M. V.
Ramos.
Ramos further said that in exchange for this assignment of P30,000
Montinola would pay him P90,000 in Japanese military notes but that
Montinola gave him only two checks of P20,000 and P25,000, leaving a
balance unpaid of P45,000. In this he was corroborated by Atty. Simeon
Ramos Jr. who told the court that the agreement between Ramos and
Montinola was that the latter, for the sale to him of P30,000 of the check,
was to pay Ramos P90,000 in Japanese military notes; that when the first
check for P20,000 was issued by Montinola, he (Simeon) prepared a
document evidencing said payment of P20,000; that when the second
check for P25,000 was issued by Montinola, he (Simeon) prepared another
document with two copies, one for Montinola and the other for Ramos,
both signed by Montinola and M. V. Ramos, evidencing said payment, with
the understanding that the balance of P45,000 would be paid in a few
days.
The indorsement or writing described by M. V. Ramos which had been
written by him at the back of the check, Exhibit A, does not now appear at
the back of said check. What appears thereon is the indosement testified
to by Montinola and described by the trial court as reproduced above.
Before going into a discussion of the merits of the version given by Ramos
and Montinola as to the indorsement or writing at the back of the check, it
is well to give a further description of it as we shall later.
When Montinola filed his complaint in 1947 he stated therein that the
check had been lost, and so in lieu thereof he filed a supposed photostic
copy. However, at the trial, he presented the check itself and had its face
marked Exhibit A and the back thereof Exhibit A-1. But the check is badly
mutilated, bottled, torn and partly burned, and its condition can best be
appreciated by seeing it. Roughly, it may be stated that looking at the face
of the check (Exhibit A) we see that the left third portion of the paper has
been cut off perpendicularly and severed from the remaining 2/3 portion; a

triangular portion of the upper right hand corner of said

remaining 2/3portion has been similarly cut off and severed, and to keep
and attach this triangular portion and the rectangular /3 portion to the rest
of the document, the entire check is pasted on both sides with cellophane;
the edges of the severed portions as well as of the remaining major
portion, where cut bear traces of burning and searing; there is a big blot
with indelible ink about the right middle portion, which seems to have
penetrated to the back of the check (Exhibit A-1), which back bears a
larger smear right under the blot, but not black and sharp as the blot itself;
finally, all this tearing, burning, blotting and smearing and pasting of the
check renders it difficult if not impossible to read some of the words and
figures on the check.
In explanation of the mutilation of the check Montinola told the court that
several months after indorsing and delivering the check to him, Ramos
demanded the return of the check to him, threatening Montinola with
bodily harm, even death by himself or his guerrilla forces if he did not
return said check, and that in order to justify the non-delivery of the
document and to discourage Ramos from getting it back, he (Montinola)
had to resort to the mutilation of the document.
As to what was really written at the back of the check which Montinola
claims to be a full indorsement of the check, we agree with trial court that
the original writing of Ramos on 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 A1 "unusual" to him, and that as far as he could remember this
writing did not appear on the instrument and he had no knowledge
as to how it happened to be there. Obviously Cortado had no
recollection as to how such marks ever were stamped at the back
of the check.
(b) Again Cortado, speaking of the endorsement as it now appears
at the back of the check (Exh. A-1) stated that Ramos typewrote
these words outside of the premises of Montinola, that is, a nearby
house. Montinola, on the other hand, testified that Ramos
typewrote the words "Enrique P. Montinola 517 Isabel Street", in his
own house. Speaking of the rubber stamp used at the back of the
check and which produced the words "pay to the order of", Cortado
stated that when he (Cortado), Atadero, Montinola and Ramos
returned in group to the house of Montinola, the rubber stamp was
already in the house of Montinola, and it was on the table of the
upper floor of the house, together with the stamp pad used to
stamp the same. Montinola, on the other hand, testified that
Ramos carried in his pocket the said rubber stamp as well as the
ink pad, and stamped it in his house.
The unusually big space occupied by the indorsement on the back
of the check and the discrepancies in the versions of Montinola and
his witness Cortado just noted, create doubts as to whether or not
really Ramos made the indorsement as it now appears at the back
of Exhibit A. One thing difficult to understand is why Ramos should
go into the laborious task of placing the rubber stamp "Pay to the
order of" and afterwards move to the typewriter and write the
words "Enrique P. Montinola" "and "517 Isabel Street", and finally
sign his name too far below the main indorsement.
(c) Another circumstances which bears heavily upon the claim of
plaintiff Montinola that he acquired the full value of the check and
paid the full consideration therefor is the present condition of said
check. It is now so unclean and discolored; it is pasted in
cellophane, bottled with ink on both sides torn three parts, and

with portions thereof burned-all done by plaintiff, the alleged owner

thereof.
The acts done by the very plaintiff on a document so important and
valuable to him, and which according to him involves his life
savings, approximate intentional cancellation. The only reason
advanced by plaintiff as to why tore check, burned the torn edges
and bottled out the registration at the back, is found in the
following: That Ramos came to his house, armed with a revolver,
threatened his life and demanded from him the return of the
check; that when he informed Ramos that he did not have it in the
house, but in some deposit outside thereof and that Ramos
promised to return the next day; that the same night he tore the
check into three parts, burned the sides with a parrafin candle to
show traces of burning; and that upon the return of Ramos the next
day he showed the two parts of the check, the triangle on the right
upper part and the torn piece on the left part, and upon seeing the
condition thereof Ramos did not bother to get the check back. He
also said that he placed the blots in indelible ink to prevent Ramos
if he would be forced to surrender the middle part of the check
from seeing that it was registered in the General Auditing Office.
Conceding at the moment these facts to be true, the question is:
Why should Montinola be afraid of Ramos? Montinola claims that
Ramos went there about April, 1945, that is, during liberation. If he
believed he was standing by his rights, he could have very well
sought police protection or transferred to some place where Ramos
could not bother him. And then, really Ramos did not have
anything more to do with this check for the reason that Montinola
had obtained in full the amount thereof, there could not be any
reason why Ramos should have threatened Montinola as stated by
the latter. Under the circumstances, the most logical conclusion is
that Ramos wanted the check at all costs because Montinola did
not acquire the check to such an extent that it borders on
intentional cancellation thereof (see Sections 119-123 Negotiable
Instruments Law) there is room to believe that Montinola did not
have so much investments in that check as to adopted an "what do
I care?" attitude.
And there is the circumstance of the alleged loss of the check. At
the time of the filing of the complaint the check was allegedly lost,
so much so that a photostatic copy thereof was merely attached to
the complaint (see paragraph 7 of the complaint). Yet, during the
trial the original check Exhibit A was produced in court.

But a comparison between the photostatic copy and the original

check reveals discrepancies between the two. The condition of the
check as it was produced is such that it was partially burned,
partially blotted, badly mutilated, discolored and pasted with
cellophane. What is worse is that Montinola's excuse as to how it
was lost, that it was mixed up with household effects is not
plausible, considering the fact that it involves his life savings, and
that before the alleged loss, he took extreme pains and
precautions to save the check from the possible ravages of the
war, had it photographed, registered said check with the General
Auditing Office and he knew that Ramos, since liberation, was hot
after the possession of that check.
(d) It seems that Montinola was not so sure as to what he had
testified to in reference to the consideration he paid for the check.
In court he testified that he paid P450,000 in cash from June to
December 1944, and P400,000 worth of sulphatiazole in January
1945 to complete the alleged consideration of P850,000. When
Montinola testified this way in court, obviously he overlooked a
letter he wrote to the provincial treasurer of Cagayan, Oriental
Misamis, dated May 1, 1947, Exhibit 3 the record. In that letter
Exhibit 3, Montinola told Provincial Treasurer Elizalde of Misamis
Oriental that "Ramos endorsed it (referring to check) to me for
goods in kind, medicine, etc., received by him for the use of the
guerrillas." In said letter Exhibit 3, Montinola did not mention the
cash that he paid for the check.
From the foregoing the court concludes that plaintiff Montinola
came into the possession of the check in question about the end of
December 1944 by reason of the fact that M. V. Ramos sold to him
P30,000 of the face value thereof in consideration of the sum of
P90,000 Japanese money, of which only one-half or P45,000 (in
Japanese money) was actually paid by said plaintiff to Ramos. (R.
on A., pp. 31-33; Brief of Appellee, pp. 14-20.)
At the beginning of this decision, we stated that as Provincial Treasurer of
Misamis Oriental, Ubaldo D. Laya wasex 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".
After considering the testimony of the one and the other, the court
finds that the preponderance of the evidence supports Laya's
testimony. In the first place, his testimony was corroborated by the
payee M. V. Ramos. But what renders more probable the testimony
of Laya and Ramos is the fact that the money for which the check
was issued was expressly for the use of the USAFFE of which
Ramos was then disbursing officer, so much so that upon the
delivery of the P400,000 in emergency notes and the P100,000
check to Ramos, Laya credited his depository accounts as
provincial treasurer with the corresponding credit entry. In the

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

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

Annex A in the complaint, with the original Annex A, the photostatic copy,
but said original Annex A appears to be missing from the record. How it
disappeared is not explained. Of course, now we have in the list of exhibit
a photostatic copy marked Annex A and Exhibit B, but according to the
manifestation of counsel for the plaintiff dated October 15, 1948, said
photostatic copy now marked Annex A and Exhibit B was submitted on
October 15, 1948, in compliance with the verbal order of the trial court. It
is therefore evident that the Annex A now available is not the same original
Annex A attached to the complaint in 1947.
There is one other circumstance, important and worth nothing. If Annex A
also marked Exhibit B is the photostatic copy of the original check No.
1382 particularly the face thereof (Exhibit A), then said photostatic copy
should be a faithful and accurate reproduction of the check, particularly of
the phrase "Agent, Phil. National Bank" now appearing under the signature
of the Provincial Treasurer on the face of the original check (Exhibit A). But
a minute examination of and comparison between Annex A, the photostatic
copy also marked Exhibit B and the face of the check, Exhibit A, especially
with the aid of a handlens, show notable differences and discrepancies. For
instance, on Exhibit A, the letter A of the word "Agent" is toward the right
of the tail of the beginning letter of the signature of Ubaldo D. Laya; this
same letter "A" however in Exhibit B is directly under said tail.
The letter "N" of the word "National" on Exhibit A is underneath the space
between "Provincial" and "Treasurer"; but the same letter "N" is directly
under the letter "I" of the word "Provincial" in Exhibit B.
The first letter "a" of the word "National" is under "T" of the word
"Treasurer" in Exhibit A; but the same letter "a" in Exhibit "B" is just below
the space between the words "Provincial" and "Treasurer".
The letter "k" of the word "Bank" in Exhibit A is after the green
perpendicular border line near the lower right hand corner of the edge of
the check (Exh. A); this same letter "k" however, on Exhibit B is on the very
border line itself or even before said border line.
The closing parenthesis ")" on Exhibit A is a little far from the perpendicular
green border line and appears to be double instead of one single line; this
same ")" on Exhibit B appears in a single line and is relatively nearer to the
border line.
There are other notable discrepancies between the check Annex A and the
photostatic copy, Exhibit B, as regards the relative position of the phrase

"Agent, Phil. National Bank", with the title Provincial Treasurer, giving
ground to the doubt that Exhibit B is a photostatic copy of the check
(Exhibit A).
We then have the following facts. Exhibit A was issued by Laya in his
capacity as Provincial Treasurer of Misamis Oriental as drawer on the
Philippine National Bank as drawee. Ramos sold P30,000 of the check to
Enrique P. Montinola for P90,000 Japanese military notes, of which only
P45,000 was paid by Montinola. The writing made by Ramos at the back of
the check was an instruction to the bank to pay P30,000 to Montinola and
to deposit the balance to his (Ramos) credit. This writing was obliterated
and in its place we now have the supposed indorsement appearing on the
back of the check (Exh. A-1).
At the time of the transfer of this check (Exh. A) to Montinola about the last
days of December, 1944, or the first days of January, 1945, the check
which, being a negotiable instrument, was payable on demand, was long
overdue by about 2 years. It may therefore be considered, even then, a
stable check. Of course, Montinola claims that about June, 1944 when
Ramos supposedly approached him for the purpose of negotiating the
check, he (Montinola) consulted President Carmona of the Philippine
National Bank who assured him that the check was good and negotiable.
However, President Carmona on the witness stand flatly denied Montinola's
claim and assured the court that the first time that he saw Montinola was
after the Philippine National Bank, of which he was President, reopened,
after liberation, around August or September, 1945, and that when shown
the check he told Montinola that it was stale. M. V. Ramos also told the
court that it is not true that he ever went with Montinola to see President
Carmona about the check in 1944.
On the basis of the facts above related there are several reasons why the
complaint of Montinola cannot prosper. The insertion of the words "Agent,
Phil. National Bank" which converts the bank from a mere drawee to a
drawer and therefore changes its liability, constitutes a material alteration
of the instrument without the consent of the parties liable thereon, and so
discharges the instrument. (Section 124 of the Negotiable Instruments
Law). The check was not legally negotiated within the meaning of the
Negotiable Instruments Law. Section 32 of the same law provides that "the
indorsement must be an indorsement of the entire instrument. An
indorsement which purports to transfer to the indorsee a part only of the
amount payable, . . . (as in this case) does not operate as a negotiation of
the instrument." Montinola may therefore not be regarded as an indorsee.
At most he may be regarded as a mere assignee of the P30,000 sold to him
by Ramos, in which case, as such assignee, he is subject to all defenses

available to the drawer Provincial Treasurer of Misamis Oriental and against

Ramos. Neither can Montinola be considered as a holder in due course
because section 52 of said law defines a holder in due course as a holder
who has taken the instrument under certain conditions, one of which is
that he became the holder before it was overdue. When Montinola received
the check, it was long overdue. And, Montinola is not even a holder
because section 191 of the same law defines holder as the payee or
indorsee of a bill or note and Montinola is not a payee. Neither is he an
indorsee for as already stated, at most he can be considered only as
assignee. Neither could it be said that he took it in good faith. As already
stated, he has not paid the full amount of P90,000 for which Ramos sold
him P30,000 of the value of the check. In the second place, as was stated
by the trial court in its decision, Montinola speculated on the check and
took a chance on its being paid after the war. Montinola must have known
that at the time the check was issued in May, 1942, the money circulating
in Mindanao and the Visayas was only the emergency notes and that the
check was intended to be payable in that currency. Also, he should have
known that a check for such a large amount of P100,000 could not have
been issued to Ramos in his private capacity but rather in his capacity as
disbursing officer of the USAFFE, and that at the time that Ramos sold 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 premises.

TWENTY-FOUR
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 168274

August 20, 2008

FAR EAST BANK & TRUST COMPANY, petitioner,

vs.
GOLD PALACE JEWELLERY CO., as represented by Judy L. Yang,
Julie Yang-Go and Kho Soon Huat, respondent.
DECISION
NACHURA, J.:
For the review of the Court through a Rule 45 petition are the following
issuances of the Court of Appeals (CA) in CA-G.R. CV No. 71858: (1) the
March 15, 2005 Decision1 which reversed the trial court's ruling, and (2)
the May 26, 2005 Resolution2 which denied the motion for reconsideration
of the said CA decision.

The instant controversy traces its roots to a transaction consummated

sometime in June 1998, when a foreigner, identified as Samuel Tagoe,
purchased from the respondent Gold Palace Jewellery Co.'s (Gold Palace's)
store at SM-North EDSA several pieces of jewelry valued
at P258,000.00.3 In payment of the same, he offered Foreign Draft No. M069670 issued by the United Overseas Bank (Malaysia) BHD Medan Pasar,
Kuala Lumpur Branch (UOB), addressed to the Land Bank of the Philippines,
Manila (LBP), and payable to the respondent company for P380,000.00.4
Before receiving the draft, respondent Judy Yang, the assistant general
manager of Gold Palace, inquired from petitioner Far East Bank & Trust
Company's (Far East's) SM North EDSA Branch, its neighbor mall tenant,
the nature of the draft. The teller informed her that the same was similar to
a manager's check, but advised her not to release the pieces of jewelry
until the draft had been cleared.5 Following the bank's advice, Yang issued
Cash Invoice No. 16096 to the foreigner, asked him to come back, and
informed him that the pieces of jewelry would be released when the draft
had already been cleared.7 Respondent Julie Yang-Go, the manager of Gold
Palace, consequently deposited the draft in the company's account with
the aforementioned Far East branch on June 2, 1998. 8
When Far East, the collecting bank, presented the draft for clearing to LBP,
the drawee bank, the latter cleared the same9-UOB's account with LBP was
debited,10 and Gold Palace's account with Far East was credited with the
amount stated in the draft.11
The foreigner eventually returned to respondent's store on June 6, 1998 to
claim the purchased goods. After ascertaining that the draft had been
cleared, respondent Yang released the pieces of jewelry to Samuel Tagoe;
and because the amount in the draft was more than the value of the goods
purchased, she issued, as his change, Far East Check No.
173088112 for P122,000.00.13 This check was later presented for
encashment and was, in fact, paid by the said bank. 14
On June 26, 1998, or after around three weeks, LBP informed Far East that
the amount in Foreign Draft No. M-069670 had been materially altered
from P300.00 to P380,000.00 and that it was returning the same. Attached
to its official correspondence were Special Clearing Receipt No. 002593 and
the duly notarized and consul-authenticated affidavit of a corporate officer
of the drawer, UOB.15It is noted at this point that the material alteration
was discovered by UOB after LBP had informed it that its funds were being
depleted following the encashment of the subject draft. 16 Intending to debit
the amount from respondent's account, Far East subsequently refunded
the P380,000.00 earlier paid by LBP.

Gold Palace, in the meantime, had already utilized portions of the amount.
Thus, on July 20, 1998, as the outstanding balance of its account was
already inadequate, Far East was able to debit onlyP168,053.36,17 but this
was done without a prior written notice to the account holder. 18 Far East
only notified by phone the representatives of the respondent company. 19
On August 12, 1998, petitioner demanded from respondents the payment
of P211,946.64 or the difference between the amount in the materially
altered draft and the amount debited from the respondent company's
account.20 Because Gold Palace did not heed the demand, Far East
consequently instituted Civil Case No. 99-296 for sum of money and
damages before the Regional Trial Court (RTC), Branch 64 of Makati City. 21

Bank and Trust Company is hereby ordered to pay appellant Gold

Palace Jewellery Company the amount of Php168,053.36 for actual
damages plus legal interest of 12% per annum from 20 July 1998,
Php50,000.00 for exemplary damages, and Php50,000.00 for
attorney's fees. Costs against appellee Far East Bank and Trust
Company.29
The appellate court, in the further challenged May 26, 2005
Resolution,30 denied petitioner's Motion for Reconsideration,31 which
prompted the petitioner to institute before the Court the instant Petition for
Review on Certiorari.32
We deny the petition.

In their Answer, respondents specifically denied the material allegations in

the complaint and interposed as a defense that the complaint states no
cause of action-the subject foreign draft having been cleared and the
respondent not being the party who made the material alteration.
Respondents further counterclaimed for actual damages, moral and
exemplary damages, and attorney's fees considering, among others, that
the petitioner had confiscated without basis Gold Palace's balance in its
account resulting in operational loss, and had maliciously imputed to the
latter the act of alteration.22
After trial on the merits, the RTC rendered its July 30, 2001 Decision 23 in
favor of Far East, ordering Gold Palace to pay the former P211,946.64 as
actual damages and P50,000.00 as attorney's fees.24The trial court ruled
that, on the basis of its warranties as a general indorser, Gold Palace was
liable to Far East.25
On appeal, the CA, in the assailed March 15, 2005 Decision, 26 reversed the
ruling of the trial court and awarded respondents' counterclaim. It ruled in
the main that Far East failed to undergo the proceedings on the protest of
the foreign draft or to notify Gold Palace of the draft's dishonor; thus, Far
East could not charge Gold Palace on its secondary liability as an
indorser.27 The appellate court further ruled that the drawee bank had
cleared the check, and its remedy should be against the party responsible
for the alteration. Considering that, in this case, Gold Palace neither altered
the draft nor knew of the alteration, it could not be held liable. 28 The
dispositive portion of the CA decision reads:
WHEREFORE, premises considered, the appeal is GRANTED; the
assailed Decision dated 30 July 2001 of the Regional Trial Court of
Makati City, Branch 64 is hereby REVERSED and SET ASIDE; the
Complaint dated January 1999 is DISMISSED; and appellee Far East

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

and not being negligent (it delivered the purchased jewelry only when the
draft was cleared and paid), respondent is amply protected by the said
Section 62. Commercial policy favors the protection of any one who, in due
course, changes his position on the faith of the drawee bank's clearance
and payment of a check or draft.38
This construction and application of the law gives effect to the plain
language of the NIL39 and is in line with the sound principle that where one
of two innocent parties must suffer a loss, the law will leave the loss where
it finds it.40 It further reasserts the usefulness, stability and currency of
negotiable paper without seriously endangering accepted banking
practices. Indeed, banking institutions can readily protect themselves
against liability on altered instruments either by qualifying their
acceptance or certification, or by relying on forgery insurance and special
paper which will make alterations obvious.41 This is not to mention, but we
state nevertheless for emphasis, that the drawee bank, in most cases, is in
a better position, compared to the holder, to verify with the drawer the
matters stated in the instrument. As we have observed in this case, were it
not for LBP's communication with the drawer that its account in the
Philippines was being depleted after the subject foreign draft had been
encashed, then, the alteration would not have been discovered. What we
cannot understand is why LBP, having the most convenient means to
correspond with UOB, did not first verify the amount of the draft before it
cleared and paid the same. Gold Palace, on the other hand, had no facility
to ascertain with the drawer, UOB Malaysia, the true amount in the draft. It
was left with no option but to rely on the representations of LBP that the
draft was good.
In arriving at this conclusion, the Court is not closing its eyes to the other
view espoused in common law jurisdictions that a drawee bank, having
paid to an innocent holder the amount of an uncertified, altered check in
good faith and without negligence which contributed to the loss, could
recover from the person to whom payment was made as for money paid
by mistake.42 However, given the foregoing discussion, we find no
compelling reason to apply the principle to the instant case.
The Court is also aware that under the Uniform Commercial Code in the
United States of America, if an unaccepted draft is presented to a drawee
for payment or acceptance and the drawee pays or accepts the draft, the
person obtaining payment or acceptance, at the time of presentment, and
a previous transferor of the draft, at the time of transfer, warrant to the
drawee making payment or accepting the draft in good faith that the draft
has not been altered.43 Nonetheless, absent any similar provision in our
law, we cannot extend the same preferential treatment to the paying bank.

Thus, considering that, in this case, Gold Palace is protected by Section 62

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

However, we delete the exemplary damages awarded by the appellate

court. Respondents have not shown that they are entitled to moral,
temperate or compensatory damages.49 Neither was petitioner impelled by
malice or bad faith in debiting the account of the respondent company and
in pursuing its cause.50 On the contrary, petitioner was honestly convinced
of the propriety of the debit. We also delete the award of attorney's fees
for, in a plethora of cases, we have ruled that it is not a sound public policy
to place a premium on the right to litigate. No damages can be charged to
those who exercise such precious right in good faith, even if done
erroneously.51

WHEREFORE, premises considered, the March 15, 2005 Decision and the
May 26, 2005 Resolution of the Court of Appeals in CA-G.R. CV No. 71858
are AFFIRMED WITH THE MODIFICATION that the award of exemplary
damages and attorney's fees is DELETED.
SO ORDERED.