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A collection of cases under Dean Raul Villanueva

Behiga-Manto-Villamor Digests
Chapter 1 – Form and Interpretation

Traders Royal Bank The appellate court ruled that the subject CBCI is not
vs. a negotiable instrument, stating that:
CA, Filriters, Central Bank As worded, the instrument provides a promise "to pay
(G.R. No. 93397 March 3, 1997) Filriters Guaranty Assurance Corporation, the
Form of negotiable instruments registered owner hereof." Very clearly, the instrument
is payable only to Filriters, the registered owner, whose
Facts: name is inscribed thereon. It lacks the words of
negotiability which should have served as an expression
Filriters Guaranty Assurance Corporation (Filriters) as of consent that the instrument may be transferred by
registered owner of Central Bank Certificates of negotiation.
Indebtedness (CBCI) of P500,000 and having an
aggregate value of P3,500,000.00. A reading of the subject CBCI indicates that the same
Filriters transferred the CBCI to Philippine CORPORATION, and to no one else, thus, discounting
Underwriters Finance Corporation (Philfinance). The the petitioner's submission that the same is a
transfer was made by one of its agents and without negotiable instrument, and that it is a holder in due
the knowledge and consent of the directors of course of the certificate.
The language of negotiability which characterize a
Subsequently, Philfinance transferred same CBCI to negotiable paper as a credit instrument is its freedom
Traders Royal Bank (TRB) under a repurchase to circulate as a substitute for money. Hence,
agreement. PhilFinance failed to repurchase the CBCI freedom of negotiability is the touchtone relating to
on the agreed date of maturity. the protection of holders in due course, and the
freedom of negotiability is the foundation for the
Petitioner sought to have its title registered in the
protection which the law throws around a holder in
books of respondent Central Bank. But Central Bank
due course (11 Am. Jur. 2d, 32). This freedom in
refused to register the transfer as requested, and
negotiability is totally absent in a certificate
continues to do so notwithstanding petitioner's valid
indebtedness as it merely to pay a sum of money to a
and just title over the same and despite repeated
specified person or entity for a period of time.
demands in writing.
As held in Caltex (Philippines), Inc. v. Court of Appeals:
Petitioner filed an action before the RTC praying for
the registration by the Central Bank of the subject The accepted rule is that the negotiability or non-
negotiability of an instrument is determined from the
CBCI in its name.
writing, that is, from the face of the instrument itself. In
the construction of a bill or note, the intention of the
The RTC found the assignment of CBCI in favor of
parties is to control, if it can be legally ascertained.
Philfinance, and the subsequent assignment of the While the writing may be read in the light of
same CBCI by Philfinance in favor of Traders Royal surrounding circumstance in order to more perfectly
Bank null and void and of no force and effect. understand the intent and meaning of the parties, yet
as they have constituted the writing to be the only
Petitioner appealed to CA, but it was denied. outward and visible expression of their meaning, no
other words are to be added to it or substituted in its
Issue: stead. The duty of the court in such case is to ascertain,
not what the parties may have secretly intended as
Whether the CBCI is a negotiable instrument. contradistinguished from what their words express, but
what is the meaning of the words they have used. What
Held: the parties meant must be determined by what they
Thus, the transfer of the instrument from Philfinance
The subject CBCI is not a negotiable instrument in the to TRB was merely an assignment, and is not
absence of words of negotiability within the meaning governed by the negotiable instruments law.
of the negotiable instruments law (Act 2031).


Chapter 1 – Form and Interpretation

Raymundo Crystal SC reconsidered its decision and remanded the case

vs. for further proceedings.
CA, De Gracia, Ocang
(G.R. No. L-35767 June 18, 1976)
Dishonored and stale check
Salvacion Vda. de Eduque, etc.
Jose Ocampo
In its decision promulgated on February 25, 1975, SC
affirmed the decision of CA in favor of private (G.R. No. L-222 April 26, 1950)
respondents which held that petitioner's redemption Cashier’s check representing war notes
of the property acquired by said respondents in an
execution sale pursuant to a final judgment of the CFI Facts:
of Cebu, was invalid inasmuch as the check which On February 16, 1935, Dr. Jose Eduque secured two
petitioner had used in paying the redemption price loans from Mariano Ocampo de Leon, Doña
had been either dishonored or had become stale. Escolastica de los Reyes and Don Jose M. Ocampo, the
Petitioner filed the instant motion for first in the amount of P40,000 and the second in the
reconsideration. sum of P15,000, both payable within the period of
twenty years, with interest at the rate of 5% per
Issue: annum. Payment of these two loans was guaranteed
Whether the check being dishonored and becoming by mortgage on real property. In the mortgage
stale affect the validity of the redemption sale. contract it is stipulated that any of the mortgage
creditors may receive payment and execute deeds of
Held: cancellation of the mortgage debts.
For a check to the dishonored upon presentment on
the one hand, and to be stale for not being presented On December 6, 1943, plaintiff and appellee, as
at all in time, on the other, are incompatible administratrix of the estate of the deceased Dr. Jose
developments that naturally have variant legal Eduque, tendered payment, by means of cashier's
consequences. Thus, if the check in question had check, of the total amount of the two loans, P55,000,
been dishonored, then there can be no doubt that to defendant-appellant Jose M. Ocampo, one of the
petitioner's redemption was null and void. On the creditors, who refused to accept payment. By reason
other hand, if it had only become stale, then it of such refusal, an action was brought and a cashier's
becomes imperative that the circumstances that check for the total amount of P55,000 deposited in
caused its non-presentment be determined, for if this court. After trial, judgment was rendered against
was not due to the fault of the petitioner, then it defendant compelling him to accept the P55,000
would be unfair to deprive him of the rights he had deposited in court, to issue deeds for cancellation of
acquired as redemptioner, particularly, the value of the mortgage debts, and to pay the expenses of
the check has otherwise been received or realized by consignation and costs.
the party concerned.
Defendant accepted the judgment with respect to the
There is a strong showing in the motion for second loan of P15,000 but appealed to the first loan.
reconsideration that not only was said check not
dishonored, although it became stale, but that Issue:
respondent Pelagia Ocang had actually been paid Whether tender of payment by means of a cashier's
already the full value thereof. And in this connection, check representing Japanese war notes is valid.
it is notable that in the comment of respondents on
petitioner's motion for reconsideration, there is no Held:
clear and categorical denial of these important and Yes.
decisive facts.


Chapter 1 – Form and Interpretation

SC previously held that Japanese military notes were that the sale must proceed and the Ex-Officio Sheriff
legal tender during the Japanese occupation. But proceeded with the auction sale. Private respondent
appellant argues, further, that the consignation of a is the highest bidder in the amount of P50, 000.00
cashier's check, which is not legal tender, is not with a deficiency of P13, 130.00.
binding upon him. This question, however, has never
been raised in the lower court. Upon the contrary, Subsequently, petitioner filed an ex-parte motion for
defendant accepted impliedly the consignation of the issuance of certificate of satisfaction of judgment.
cashier's check when he himself asked the court that This motion was denied by the respondent Judge. In
out of the money thus consigned he be paid the view thereof, petitioner now questions said order by
amount of the second loan of P15,000. It is a rule that alleging that said respondent Judge capriciously and
"a cashier's check may constitute a sufficient tender whimsically abused his discretion in not granting the
where no objection is made on this ground." motion for issuance of certificate of satisfaction of
judgment that there was already a full satisfaction of
the judgment before the auction sale was conducted
with the deposit made to the Ex-Officio Sheriff in the
New Pacific Timber & Supply amount of P63, 000 consisting of P50, 000 in Cashier's
Co. Inc. Check and P13, 130 in cash.
Seneris, Tong and ex-officio In upholding private respondent's claim that he has
sheriff Abdulwahid the right to refuse payment by means of a check, the
(G.R. No. L-41764 December 19, 1980) respondent Judge cited the following:
Cashier’s check - good as cash (old ruling)
Section 63 of the Central Bank Act:
Petitioner is the defendant in a complaint for Sec. 63. Legal Character. — Checks representing deposit
money do not have legal tender power and their
collection of a sum of money filed by the private
acceptance in payment of debts, both public and
respondent. On July 19, 1974, a compromise private, is at the option of the creditor, Provided,
judgment was rendered by the respondent Judge in however, that a check which has been cleared and
accordance with an amicable settlement entered into credited to the account of the creditor shall be
equivalent to a delivery to the creditor in cash in an
by the parties. It was agreed that petitioner will pay
amount equal to the amount credited to his account.
to private respondent P54, 500.00 at 6% interest per
annum and P6, 000 as attorney's fee, P5, 000 of which
Article 1249 of the New Civil Code:
was paid.
Art. 1249. — The payment of debts in money shall be
For failure of the petitioner to comply with his made in the currency stipulated, and if it is not possible
judgment obligation, the respondent Judge, upon to deliver such currency, then in the currency which is
legal tender in the Philippines.
motion of the private respondent, issued an order for
the issuance of a writ of execution for the amount of The delivery of promissory notes payable to order, or
P63, 130.00 pursuant to which, the Ex-Officio Sheriff bills of exchange or other mercantile documents shall
levied upon the personal properties of the petitioner produce the effect of payment only when they have
been cashed, or when through the fault of the creditor
and set the auction sale. However, prior to the
they have been impaired.
auction sale, petitioner deposited with the Clerk of
Court, CFI Zamboanga City the sum of P63, 130.00 for In the meantime, the action derived from the original
the payment of the judgment obligation, consisting of obligation shall be held in abeyance.
P50, 000.00 in Cashier's Check and P13, 130.00 in
cash. Article 1249 of the New Civil Code:

Art. 1248. Unless there is an express stipulation to that

Private respondent refused to accept the check as
effect, the creditor cannot be compelled partially to
well as the cash deposit. Private respondent insisted receive the presentations in which the obligation


Chapter 1 – Form and Interpretation

consists. Neither may the debtor be required to make creditor in cash in an amount equal to the amount
partial payment.
credited to his account" shall apply in this case.
However, when the debt is in part liquidated and in part
unliquidated, the creditor may demand and the debtor
may effect the payment of the former without waiting
for the liquidation of the latter. Roman Catholic Bishop of
Issue: Malolos
Whether payment of cashier’s check be considered vs.
valid payment of the judgment obligation. IAC and Robes-
Francisco Realty and Dev.
Held: Corp.
(G.R. No. 72110 November 16, 1990)
Check as tender of payment
It is to be emphasized in this connection that the Facts:
check deposited by the petitioner in the amount of Petitioner sold a parcel of land to private respondent
P50, 000 is not an ordinary check but a Cashier's through its then president, Mr. Carlos F. Robes, with
Check of the Equitable Banking Corporation. As a downpayment of P23,930.00 and the balance of
testified to by the Ex-Officio Sheriff with whom it has P100,000.00 plus 12% interest per annum to be paid
been deposited, it is a certified crossed check. within four (4) years from execution of the contract.
The contract likewise provides for cancellation,
It is a well-known and accepted practice in the forfeiture of previous payments, and reconveyance of
business sector that a Cashier's Check is deemed as the land in question in case the private respondent
cash. Moreover, since the said check had been would fail to complete payment within the period.
certified by the drawee bank, by the certification, the
funds represented by the check are transferred from Private respondent, through its new president, Atty.
the credit of the maker to that of the payee or holder, Adalia Francisco, addressed a letter to Father
and for all intents and purposes, the latter becomes Vasquez, parish priest of San Jose Del Monte,
the depositor of the drawee bank, with rights and Bulacan, requesting to be furnished with a copy of the
duties of one in such situation. Where a check is subject contract and the supporting documents.
certified by the bank on which it is drawn, the
certification is equivalent to acceptance. Said After the expiration of the stipulated period for
certification "implies that the check is drawn upon payment, the same Atty. Francisco wrote the
sufficient funds in the hands of the drawee, that they
petitioner a formal request that her company be
have been set apart for its satisfaction, and that they allowed to pay the principal amount of P100,000.00
shall be so applied whenever the check is presented in three (3) equal installments of six (6) months each
for payment. It is an understanding that the check is with the first installment and the accrued interest of
good then, and shall continue good, and this P24,000.00 to be paid immediately upon approval of
agreement is as binding on the bank as its notes in the said request.
circulation, a certificate of deposit payable to the
order of the depositor, or any other obligation it can The petitioner, through its counsel denied the said
assume. The object of certifying a check, as regards request of the private respondent, but granted the
both parties, is to enable the holder to use it as latter a grace period of five (5) days from the receipt
money." When the holder procures the check to be of the denial, otherwise, the provisions of the
certified, "the check operates as an assignment of a contract regarding cancellation, forfeiture, and
part of the funds to the creditors." Hence, the reconveyance would be implemented.
exception to the rule enunciated under Section 63 of
the Central Bank Act to the effect "that a check which Private respondent sought an extension of 30 days to
has been cleared and credited to the account of the fully settle its account. The counsel for the petitioner
creditor shall be equivalent to a delivery to the


Chapter 1 – Form and Interpretation

received the said letter on the same day. The request The case of the private respondent cannot succeed in
for extension was denied. view of the fact that it used a certified personal check
which is not legal tender nor the currency stipulated,
Consequently, private respondent’s president, wrote and therefore, cannot constitute valid tender of
a letter directly addressed to the petitioner, payment. The first paragraph of Art. 1249 of the Civil
protesting the alleged refusal of the latter to accept Code provides that "the payment of debts in money
tender of payment purportedly made by the former shall be made in the currency stipulated, and if it is
on the last day of the grace period. In the same letter, not possible to deliver such currency, then in the
received on the following day by the petitioner, the currency which is legal tender in the Philippines.
private respondent demanded the execution of a
deed of absolute sale over the land in question and The Court en banc in the recent case of Philippine
after which it would pay its account in full, otherwise, Airlines v. Court of Appeals, 24 G.R. No. L-49188,
judicial action would be resorted to. stated thus:

The petitioner’s counsel, Atty. Fernandez, wrote a Since a negotiable instrument is only a substitute for
money and not money, the delivery of such an
reply to the private respondent stating the refusal of
instrument does not, by itself, operate as payment
his client to execute the deed of absolute sale due to (citing Sec. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil
its (private respondent’s) failure to pay its full Code; Bryan London Co. v. American Bank, 7 Phil. 255;
obligation. Moreover, the petitioner denied that the Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check,
whether a manager’s check or ordinary check, is not
private respondent had made any tender of payment
legal tender, and an offer of a check in payment of a
whatsoever within the grace period. In view of this debt is not a valid tender of payment and may be
alleged breach of contract, the petitioner cancelled refused receipt by the obligee or creditor.
the contract and considered all previous payments
forfeited and the land as ipso facto reconveyed. Hence, where the tender of payment by the private
respondent was not valid for failure to comply with
Private respondent filed an action against the the requisite payment in legal tender or currency
petitioner for specific performance with damages, stipulated within the grace period and as such, was
based on a contract. CFI ruled in favor of petitioner. validly refused receipt by the petitioner, the
subsequent consignation did not operate to discharge
On appeal, IAC reversed the CFI decision. the former from its obligation to the latter.

Issue: In view of the foregoing, the petitioner in the

Whether an offer of a check a valid tender of payment legitimate exercise of its rights pursuant to the
of an obligation under a contract which stipulates subject contract, did validly order therefore the
that the consideration of the sale is in Philippine cancellation of the said contract, the forfeiture of the
Currency. previous payment, and the reconveyance ipso facto
of the land in question.

Tender of payment involves a positive and Norberto Tibajia Jr. and

unconditional act by the obligor of offering legal
Carmen Tibajia
tender currency as payment to the obligee for the vs.
former’s obligation and demanding that the latter
CA and Eden Tan
accept the same. Thus, tender of payment cannot be
presumed by a mere inference from surrounding (G.R. No. 100290 June 4, 1993)
Cashier’s check as tender of payment
circumstances. At most, sufficiency of available funds
is only affirmative of the capacity or ability of the
obligor to fulfill his part of the bargain.


Chapter 1 – Form and Interpretation

A suit for collection of a sum of money was filed by Whether payment by means of cashier’s check is
Eden Tan against the Tibajia spouses. A writ of considered payment in legal tender.
attachment was issued by the trial court. The Deputy
Sheriff filed a return stating that a deposit made by Held:
the Tibajia spouses in the RTC of Caloocan City for No.
P442,750.00. The RTC of Pasig, Metro Manila
rendered its decision in favor of the plaintiff Eden Tan, It is contended by the petitioners that the check,
ordering the Tibajia spouses to pay her an amount in which was a cashier's check of the Bank of the
excess P300, 000.00. Philippine Islands, undoubtedly a bank of good
standing and reputation, and which was a crossed
On appeal, CA modified the decision by reducing the
check marked "For Payee's Account Only" and
award of moral and exemplary damages. The decision
payable to private respondent Eden Tan, is
having become final, Eden Tan filed the
considered legal tender, payment with which
corresponding motion for execution and thereafter,
operates to discharge their monetary obligation.
the garnished funds which by then were on deposit
Petitioners, to support their contention, cite the case
with the cashier of the RTC of Pasig, Metro Manila, of New Pacific Timber and Supply Co., Inc. v. Señeris
were levied upon. where this Court held through Mr. Justice
The Tibajia spouses delivered to Deputy Sheriff Hermogenes Concepcion, Jr. that "It is a well-known
Eduardo Bolima the total money judgment in the and accepted practice in the business sector that a
following form: cashier's check is deemed as cash".
Cashier's Check P262, 750.00
Petition must fail.
Cash 135,733.70
———— In the recent cases of Philippine Airlines, Inc. vs. Court
Total P398, 483.70 of Appeals and Roman Catholic Bishop of Malolos,
Inc. vs. Intermediate Appellate Court, 5 this Court
held that —
Private respondent, Eden Tan, refused to accept the
payment made by the Tibajia spouses and instead A check, whether a manager's check or ordinary check,
is not legal tender, and an offer of a check in payment
insisted that the garnished funds deposited with the
of a debt is not a valid tender of payment and may be
cashier of the RTC of Pasig, Metro Manila be refused receipt by the obligee or creditor.
withdrawn to satisfy the judgment obligation.
The ruling in these two (2) cases merely applies the
Defendant spouses (petitioners) filed a motion to lift statutory provisions which lay down the rule that a
the writ of execution on the ground that the check is not legal tender and that a creditor may
judgment debt had already been paid. The motion validly refuse payment by check, whether it be a
was denied by the trial court on the ground that manager's, cashier's or personal check.
payment in cashier's check is not payment in legal
tender and that payment was made by a third party In the more recent case of Fortunado vs. Court of
other than the defendant. A motion for Appeals, this Court stressed that, "We are not, by this
reconsideration was denied. decision, sanctioning the use of a check for the
payment of obligations over the objection of the
Thereafter, the spouses Tibajia filed a petition for creditor."
certiorari, prohibition and injunction in the CA. The
appellate court dismissed the petition holding that Raul Sesbreño
payment by cashier's check is not payment in legal vs.
tender as required by Republic Act No. 529. The CA, Delta Motors Corp. and
motion for reconsideration was denied. Pilipinas Bank

Issue: (G.R. No. 89252 May 24, 1993)

Nature of non-negotiable instrument


Chapter 1 – Form and Interpretation

Petitioner Raul Sesbreño made a money market negotiable instrument under the relevant statute
placement in the amount of P300, 000 with the may be negotiated either by indorsement thereof
Philippine Underwriters Finance Corporation coupled with delivery, or by delivery alone where the
(Philfinance). In turn, Philfinance issued to petitioner negotiable instrument is in bearer form. A negotiable
a Delta Motors Corp promissory note (DMC PN) and instrument may, however, instead of being
postdated checks, with petitioner as payee. negotiated, also be assigned or transferred. The legal
consequences of negotiation as distinguished from
Petitioner handed Pilipinas Bank a demand letter
assignment of a negotiable instrument are, of course,
informing the bank that his placement with
different. A non-negotiable instrument may,
Philfinance had remained unpaid and outstanding,
obviously, not be negotiated; but it may be assigned
and that he in effect was asking for the physical
or transferred, absent an express prohibition against
delivery of the underlying promissory note. Petitioner
assignment or transfer written in the face of the
then examined the original of the DMC PN and found
that it had a face value of P2,300,833.33, with the
Philfinance as "payee" and private respondent Delta The words "not negotiable," stamped on the face of the
Motors Corporation (Delta) as "maker" and that on bill of lading, did not destroy its assignability, but the
face of the promissory note was stamped "NON sole effect was to exempt the bill from the statutory
provisions relative thereto, and a bill, though not
NEGOTIABLE." Pilipinas did not deliver the Note, nor
negotiable, may be transferred by assignment; the
any certificate of participation in respect thereof, to assignee taking subject to the equities between the
petitioner. original parties.

Petitioner later made similar demand letters asking

DMC PN, while marked "non-negotiable," was not at
private respondent Pilipinas for physical delivery of
the same time stamped "non-transferable" or "non-
the original of DMC PN. assignable." It contained no stipulation which
Petitioner also made a written demand upon private prohibited Philfinance from assigning or transferring,
respondent Delta for the partial satisfaction of DMC in whole or in part, that Note.
PN, 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
Philippine Bank of Commerce
petitioner on the promissory note.
As petitioner had failed to collect his investment and Jose Aruego
interest thereon, he filed an action for damages with
(G.R. Nos. L-25836-37 January 31, 1981)
the RTC of Cebu City against private respondents Bills of exchange – Accommodation party – Liability of a person
Delta and Pilipinas. The trial court, in a decision signing as an agent
dismissed the complaint and counterclaims for lack of
merit and for lack of cause of action. Facts:
To facilitate the payment of the printing of "World
Petitioner appealed to CA. CA denied the appeal. Current Events," a periodical published by the
defendant Aruego, he obtained a credit
accommodation from the plaintiff PBC. Thus, for
Whether non-negotiability of a promissory note
every printing of the "World Current Events," the
prevents its assignment.
printer, Encal Press and Photo Engraving (Encal),
collected the cost of printing by drawing a draft
against PBC, said draft being sent later to the
defendant for acceptance. As an added security for
The negotiation of a negotiable instrument must be
the payment of the amounts advanced to Encal, the
distinguished from the assignment or transfer of an
PBC also required Aruego to execute a trust receipt in
instrument whether that be negotiable or non-
favor of said bank wherein said Aruego undertook to
negotiable. Only an instrument qualifying as a
hold in trust for PBC the periodicals and to sell the


Chapter 1 – Form and Interpretation

same with the promise to turn over to the plaintiff the For failure to disclose his principal, Aruego is
proceeds of the sale of said publication to answer for personally liable for the drafts he accepted.
the payment of all obligations arising from the draft.
2. No.
PBC instituted against Aruego for the recovery of the An accommodation party is one who has signed the
total sum of about P35, 000. The complaint filed by instrument as maker, drawer, indorser, without
the PBC contains twenty-two (22) causes of action receiving value therefor and for the purpose of
referring to twenty-two (22) transactions entered lending his name to some other person. Such person
into by the said Bank and Aruego on different dates. is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of the taking
Aruego argued that he signed the document upon of the instrument knew him to be only an
which the plaintiff sues in his capacity as President of accommodation party.
the Philippine Education Foundation; that his liability
is only secondary; and that he believed that he was In lending his name to the accommodated party, the
signing only as an accommodation party. accommodation party is in effect a surety for the
latter. He lends his name to enable the
Issue: accommodated party to obtain credit or to raise
1. Whether Aruego can be held liable by the money. He receives no part of the consideration for
petitioner although he signed the supposed bills of the instrument but assumes liability to the other
exchange only as an agent of Philippine Education parties thereto because he wants to accommodate
Foundation Company. another.

2. Whether Aruego signed the drafts only as an In the instant case, the defendant signed as a
accommodation party and as such, should be made drawee/acceptor. Under the Negotiable Instrument
liable only after a showing that the drawer (Encal) is Law, a drawee is primarily liable. Thus, if the
incapable of paying. defendant who is a lawyer, he should not have signed
as an acceptor/drawee. In doing so, he became
3. Whether the drafts were bills of exchange or mere primarily and personally liable for the drafts.
pieces of evidence of indebtedness.
3. The drafts were bills of exchange.
1. Yes. Under the Negotiable Instruments Law, a bill of
exchange is an unconditional order in writing
Section 20 of the Negotiable Instruments Law addressed by one person to another, signed by the
provides that: person giving it, requiring the person to whom it is
"Where the instrument contains or a person adds to his addressed to pay on demand or at a fixed or
signature words indicating that he signs for or on behalf
determinable future time a sum certain in money to
of a principal or in a representative capacity, he is not
liable on the instrument if he was duly authorized; but order or to bearer.
the mere addition of words describing him as an agent
or as filing a representative character, without As long as a commercial paper conforms with the
disclosing his principal, does not exempt him from
definition of a bill of exchange, that paper is
personal liability."
considered a bill of exchange. The nature of
An inspection of the drafts accepted by the defendant acceptance is important only in the determination of
shows that nowhere has he disclosed that he was the kind of liabilities of the parties involved, but not
signing as a representative of the Philippine in the determination of whether a commercial paper
Education Foundation Company. He merely signed as is a bill of exchange or not.
follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE


Chapter 1 – Form and Interpretation

Baldomero Inciong, Jr. the creditor, they cannot be subrogated to the rights,
mortgages, and preferences of the latter."
CA and PBC
It is to be noted, however, that petitioner signed the
(G.R. No. 96405. June 26, 1996) promissory note as a solidary co-maker and not as a
Solidary obligation
guarantor. This is patent even from the first sentence
Facts: of the promissory note which states as follows:
Petitioner's liability resulted from the promissory
note in the amount of P50, 000 which he signed with "Ninety one (91) days after date, for value received,
Rene C. Naybe and Gregorio D. Pantanosas, holding I/we, JOINTLY and SEVERALLY promise to pay to the
themselves jointly and severally liable to private PHILIPPINE BANK OF COMMUNICATIONS at its office in
the City of Cagayan de Oro, Philippines the sum of FIFTY
respondent Philippine Bank of Communications
THOUSAND ONLY (P50,000. 00) Pesos, Philippine
(PBC). Currency, together with interest x x x at the rate of
SIXTEEN (16) per cent per annum until fully paid."
Said promissory note expired without the promisors
having paid their obligation. Consequently, PBC
A solidary or joint and several obligation is one in
telegrams demanding payment thereof. PBC also sent
which each debtor is liable for the entire obligation,
by registered mail a final letter of demand to Rene C.
and each creditor is entitled to demand the whole
Naybe. Since both obligors did not respond to the
obligation. On the other hand, Article 2047 of the Civil
demands made, PBC filed a complaint for collection
Code states:
of the sum of P50, 000 against the three obligors.
"By guaranty a person, called the guarantor, binds
The lower court dismissed the case against defendant himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.
Pantanosas. Meanwhile, only the summons
addressed to petitioner was served as the sheriff If a person binds himself solidarily with the principal
learned that defendant Naybe had gone to Saudi debtor, the provisions of Section 4, Chapter 3, Title I of
this Book shall be observed, In such a case the contract
is called a suretyship."
Inciong was left to face the suit. He argued that that
While a guarantor may bind himself solidarily with the
since the complaint against Naybe was dropped, and
principal debtor, the liability of a guarantor is
that Pantanosas was released from his obligations, he
different from that of a solidary debtor. Thus,
too should have been released.
Tolentino explains:
Issue: "A guarantor who binds himself in solidum with the
Whether Inciong should be held liable. principal debtor under the provisions of the second
paragraph does not become a solidary co-debtor to all
intents and purposes. There is a difference between a
solidary co-debtor, and a fiador in solidum (surety). The
Yes. later, outside of the liability he assumes to pay the debt
before the property of the principal debtor has been
Petitioner argues that the dismissal of the complaint exhausted, retains all the other rights, actions and
benefits which pertain to him by reason of the fiansa;
against Naybe, the principal debtor, and against
while a solidary co-debtor has no other rights than
Pantanosas, his co-maker, constituted a release of his those bestowed upon him in Section 4, Chapter 3, title
obligation, especially because the dismissal of the I, Book IV of the Civil Code."
case against Pantanosas was upon the motion of
private respondent itself. He cites as basis for his Section 4, Chapter 3, Title I, Book IV of the Civil Code
argument, Article 2080 of the Civil Code which states the law on joint and several obligations. Under
provides that: Art. 1207 thereof, when there are two or more
debtors in one and the same obligation, the
"The guarantors, even though they be solidary, are presumption is that the obligation is joint so that each
released from their obligation whenever by some act of of the debtors is liable only for a proportionate part
of the debt. There is a solidarity liability only when the


Chapter 1 – Form and Interpretation

obligation expressly so states, when the law so Worldwide Garment Manufacturing, Inc. noted to
provides or when the nature of the obligation so change its corporate name to Pinch Manufacturing
requires. Corporation.

Because the promissory note involved in this case RPB filed a complaint for the recovery of sums of
expressly states that the three signatories therein are money covered among others, by the nine promissory
jointly and severally liable, any one, some or all of notes with interest thereon, plus attorney's fees and
them may be proceeded against for the entire penalty charges.
obligation. The choice is left to the solidary creditor to
Defendants Pinch Manufacturing Corporation and
determine against whom he will enforce collection.
Consequently, the dismissal of the case against Judge Shozo Yamaguchi did not file an Amended Answer
Pontanosas may not be deemed as having discharged and failed to appear at the scheduled pre-trial
petitioner from liability as well. As regards Naybe, conference despite due notice. Only private
respondent Fermin Canlas filed an Amended Answer
suffice it to say that the court never acquired
wherein he, denied having issued the promissory
jurisdiction over him. Petitioner, therefore, may only
notes in question since according to him, he was not
have recourse against his co-makers, as provided by
an officer of Pinch Manufacturing Corporation, but
instead of Worldwide Garment Manufacturing, Inc.,
and that when he issued said promissory notes in
behalf of Worldwide Garment Manufacturing, Inc.,
Republic Planters Bank the same were in blank, the typewritten entries not
vs. appearing therein prior to the time he affixed his
CA and Fermin Canlas signature.
(G.R. No. 93073 December 21, 1992)
Solidary obligation
Facts: Whether private respondent Fermin Canlas is
Shozo Yamaguchi (President/Chief Operating Officer) solidarily liable with Pinch Manufacturing
and Fermin Canlas (Treasurer) by virtue of Board Corporation and Shozo Yamaguchi, on the nine
Resolution of Worldwide Garment Manufacturing, Inc promissory notes.
were authorized to apply for credit facilities with the
Republic Planters Bank (RPB) in the forms of export Held:
advances and letters of credit/trust receipts Yes.
accommodations. The promissory notes are negotiable instruments and
RPB issued 9 promissory notes each of which were must be governed by the Negotiable Instruments
uniformly worded in the following manner: Law.

___________, after date, for value received, I/we, Under the Negotiable lnstruments Law, persons who
jointly and severally promise to pay to the ORDER of the write their names on the face of promissory notes are
REPUBLIC PLANTERS BANK, at its office in Manila, makers and are liable as such. By signing the notes,
Philippines, the sum of ___________ PESOS(….)
the maker promises to pay to the order of the payee
Philippine Currency…
or any holder according to the tenor thereof. Based
Please credit proceeds of this note to: on the above provisions of law, there is no denying
________ Savings Account ______XX Current Account that private respondent Fermin Canlas is one of the
co-makers of the promissory notes. As such, he
No. 1372-00257-6 of WORLDWIDE GARMENT MFG.
cannot escape liability arising therefrom.

Sgd. Shozo Yamaguchi Where an instrument containing the words "I promise
to pay" is signed by two or more persons, they are
Sgd. Fermin Canlas
deemed to be jointly and severally liable thereon. An
instrument which begins" with "I”, “We”, or "Either of


Chapter 1 – Form and Interpretation

us" promise to, pay, when signed by two or more Private respondent Jesusa B. Afable, together with
persons, makes them solidarily liable. The fact that Felisa L. Mendoza and Ma. Aurora C. Diño executed a
the singular pronoun is used indicates that the promissory note in favor of petitioner Nelia G. Ponce
promise is individual as to each other; meaning that in the sum of P814, 868.42, without interest.
each of the co-signers is deemed to have made an
Upon the failure of the debtors to comply with the
independent singular promise to pay the notes in full.
terms of the promissory note, petitioners filed a
In the case at bar, the solidary liability of private complaint against them with the CFI of Manila for the
respondent Fermin Canlas is made clearer and recovery of the principal sum of P814, 868.42, plus
certain, without reason for ambiguity, by the interest and damages.
presence of the phrase "joint and several" as
describing the unconditional promise to pay to the The trial Court rendered judgment ordering
order of Republic Planters Bank. A joint and several respondent Afable and her co-debtors, Felisa L.
Mendoza and Ma. Aurora C. Diño to pay petitioners,
note is one in which the makers bind themselves both
jointly and individually to the payee so that all may be jointly and severally.
sued together for its enforcement, or the creditor Respondent Afable appealed to CA. She argued that
may select one or more as the object of the suit. A the contract under consideration involved the
joint and several obligation in common law payment of US dollars and was, therefore, illegal; and
corresponds to a civil law solidary obligation; that is, that under the in pari delicto rule, since both parties
one of several debtors bound in such wise that each are guilty of violating the law, neither one can
is liable for the entire amount, and not merely for his recover. It is to be noted that said defense was not
proportionate share. By making a joint and several raised in her Answer.
promise to pay to the order of Republic Planters Bank,
private respondent Fermin Canlas assumed the CA affirmed the decision of the trial court, but
solidary liability of a debtor and the payee may subsequently reversed its own decision and ruled in
choose to enforce the notes against him alone or favor of Afable. CA opined that the intent of the
jointly with Yamaguchi and Pinch Manufacturing parties was that the promissory note was payable in
Corporation as solidary debtors. US dollars, and, therefore, the transaction was illegal
with neither party entitled to recover under the in
As to whether the interpolation of the phrase "and pari delicto rule.
(in) his personal capacity" below the signatures of the
makers in the notes will affect the liability of the Issue:
makers, We do not find it necessary to resolve and Whether petitioners may recover.
decide, because it is immaterial and will not affect to
the liability of private respondent Fermin Canlas as a Held:
joint and several debtor of the notes. With or without Yes.
the presence of said phrase, private respondent It is to be noted that while an agreement to pay in
Fermin Canlas is primarily liable as a co-maker of each dollars is declared as null and void and of no effect,
of the notes and his liability is that of a solidary what the law specifically prohibits is payment in
debtor. currency other than legal tender. It does not defeat a
creditor's claim for payment, as it specifically provides
that "every other domestic obligation ... whether or
not any such provision as to payment is contained
Nelia Ponce and Vicente Ponce
therein or made with respect thereto, shall be
discharged upon payment in any coin or currency
CA and Jesusa Afable
which at the time of payment is legal tender for public
(G.R. No. L-49494 May 31, 1979) and private debts." A contrary rule would allow a
Agreement to pay in foreign currency person to profit or enrich himself inequitably at
Facts: another's expense.


Chapter 1 – Form and Interpretation

The promissory note in question provided on its face

for payment of the obligation in Philippine currency,
i.e., P814,868.42. So that, while the agreement Equitable Banking Corporation
between the parties originally involved a dollar vs.
transaction and that petitioners expected to be paid IAC and Edward J. Nell
in the amount of US$194,016.29, petitioners are not Company
now insisting on their agreement with respondent (G.R. No. 74451 May 25, 1988)
Afable for the payment of the obligation in dollars. On When instrument payable to order
the contrary, they are suing on the basis of the Facts:
promissory note whereby the parties have already In 1975, defendant Liberato Casals (represented
agreed to convert the dollar loan into Philippine himself as the majority stockholder, president and
currency at the rate of P4.20 to $1.00. It may likewise general manager of Casville Enterprises, Inc.)
be pointed out that the Promissory Note contains no purchased from plaintiff Edward J. Nell Company
provision "giving the obligee the right to require (Nell), a dealer of machineries, equipment and
payment in a particular kind of currency other than supplies, two units of Garrett skidders for P970,000.
Philippine currency, " which is what is specifically To pay thereof, Casals agreed to open a letter of
prohibited by RA No. 529. credit with the Equitable Banking Corporation
At any rate, even if we were to disregard the
promissory note providing for the payment of the
Plaintiff Nell shipped 1 unit of Garrett skidder.
obligation in Philippine currency and consider that
Plaintiff paid the shipping cost in the amount of
the intention of the parties was really to provide for
P10,640 because of the verbal assurance of
payment of the obligation would be made in dollars,
defendant Casville that it would be covered by the
petitioners can still recover the amount of
letter of credit soon to be opened.
US$194,016.29, which respondent Afable and her co-
debtors do not deny having received, in its peso
Casville informed the Nell that their application for a
equivalent. As held in Eastboard Navigation, Ltd. vs.
letter of credit for the payment of the Garrett
Juan Ysmael & Co. Inc., 102 Phil. 1 (1957), and Arrieta
skidders had been approved by the Equitable.
vs. National Rice & Corn Corp., if there is any
However, the defendants said that they would need
agreement to pay an obligation in a currency other
the sum of P300,000.00 to stand as collateral or
than Philippine legal tender, the same is null and void
marginal deposit in favor of Equitable. Nell agreed to
as contrary to public policy, pursuant to Republic Act
advance the necessary amount in order to facilitate
No. 529, and the most that could be demanded is to
the transaction. Accordingly, Nell issued a check for
pay said obligation in Philippine currency. In other
P427,300, which read:
words, what is prohibited by RA No. 529 is the
payment of an obligation in dollars, meaning that a Pay to the EQUITABLE BANKING CORPORATION Order
creditor cannot oblige the debtor to pay him in of A/C OF CASVILLE ENTERPRISES, INC.
dollars, even if the loan were given in said currency.
In such a case, the indemnity to be allowed should be Upon receiving the check for P427,300 entrusted to
expressed in Philippine currency on the basis of the him by plaintiff defendant Casals immediately
current rate of exchange at the time of payment. deposited it with the defendant bank and the bank
teller accepted the same for deposit in defendant
NOTE: RA 529 has already been repealed by Republic
Casville's checking account. After depositing said
Act 8183 which provides that every monetary
check, defendant Casville, acting through defendant
obligation must be paid in Philippine currency which
Casals, then withdrew all the amount deposited.
is legal tender in the Philippines. However, the parties
may agree that the obligation or transaction shall be
Meanwhile, upon their presentation for encashment,
settled in any other currency at the time of payment.
Nell discovered that the three checks in the total
(The Philippine Negotiable Instruments Law, De Leon
amount of P427,300, that were issued by defendant
and De Leon Jr., p. 30)


Chapter 1 – Form and Interpretation

Casville as collateral were all dishonored for having Facts:

been drawn against a closed account. PNB instituted an action to recover from the
defendants Concepcion Mining Company and Jose
Issue: Sarte in connection with a promissory note which
Whether petitioner Equitable is liable to private
respondent Edward J. Nell Co. for the value of the Manila, March 12, 1954
NINETY DAYS after date, for value received, I promise
to pay to the order of the Philippine National Bank . . . .
No. In case it is necessary to collect this note by or
through an attorney-at-law, the makers and indorsers
shall pay ten percent (10%) of the amount due on the
The subject check was equivocal and patently note as attorney's fees, which in no case shall be less
ambiguous. By making the check read: than P100.00 exclusive of all costs and fees allowed by
law as stipulated in the contract of real estate
Pay to the EQUITABLE BANKING CORPORATION Order mortgage. Demand and Dishonor Waived. Holder may
of A/C OF CASVILLE ENTERPRISES, INC. accept partial payment reserving his right of recourse
again each and all indorsers.

the payee ceased to be indicated with reasonable (Purpose — mining industry)

certainty in contravention of Section 8 of the CONCEPCION MINING COMPANY, INC.,
Negotiable Instruments Law. As worded, it could be By:
accepted as deposit to the account of the party
named after the symbols "A/C," or payable to the (Sgd.) VICENTE LEGARDA
Bank as trustee, or as an agent, for Casville (Sgd.) JOSE S SARTE
Enterprises, Inc., with the latter being the ultimate
"Please issue check to —
beneficiary. That ambiguity is to be taken contra
Mr. Jose S. Sarte"
proferentem that is, construed against Nell who
caused the ambiguity and could have also avoided it
In their answer, defendants allege that the co-maker
by the exercise of a little more care. Thus, Article 1377
the promissory note Don Vicente L. Legarda died and
of the Civil Code, provides:
his estate is in the process of judicial determination.
Art. 1377. The interpretation of obscure words or
They prayed that the estate of said deceased Legarda
stipulations in a contract shall not favor the party who be included as party-defendant.
caused the obscurity.
Nell’s own acts and omissions in connection with the Whether the estate of Legarda should be included in
drawing, and its implicit trust in Casals, were the the suit.
proximate cause of its own defraudation.
Consequently, it must bear the loss. Held:
As between two innocent persons, one of whom must
suffer the consequence of a breach of trust, the one
who made it possible by his act of confidence must bear
Section 17 (g) of the Negotiable Instruments Law
the loss. provides as follows:

PNB SEC. 17. Construction where instrument is ambiguous.

vs. — Where the language of the instrument is ambiguous
or there are omissions therein, the following rules of
Concepcion Mining Co. Inc., et.
construction apply:
xxx xxx xxx
(G.R. No. L-16968 July 31, 1962)
Construction where instrument is ambiguous


Chapter 1 – Form and Interpretation

(g) Where an instrument containing the word "I promise Subsequently, the petition pending before the CA was
to pay" is signed by two or more persons, they are
dismissed. Thus the trial court directed petitioner to
deemed to be jointly and severally liable thereon.
submit his report showing the amount of the
garnished salaries of Mabanto, Jr. Sesbreño filed a
And Article 1216 of the Civil Code of the Philippines
motion to require petitioner to explain why he should
also provides as follows:
not be cited in contempt of court for failing to comply
ART. 1216. The creditor may proceed against any one of with the order.
the solidary debtors or some of them simultaneously.
The demand made against one of them shall not be an Petitioner moved to quash the notice of garnishment
obstacle to those which may subsequently be directed
claiming that he was not in possession of any money,
against the others so long as the debt has not been fully
collected. funds, credit, property or anything of value belonging
to Mabanto, Jr., except his salary and RATA checks,
In view of the above quoted provisions, and as the but that said checks were not yet properties of
promissory note was executed jointly and severally by Mabanto, Jr., until delivered to him. He further
the same parties, namely, Concepcion Mining claimed that, as such, they were still public funds
Company, Inc. and Vicente L. Legarda and Jose S. which could not be subject to garnishment.
Sarte, the payee of the promissory note had the right
to hold any one or any two of the signers of the Trial court denied both motions and ordered
promissory note responsible for the payment of the petitioner to immediately comply with its order.
amount of the note.
Whether a check still in the hands of the maker or its
duly authorized representative is owned by the payee
Loreto De la Victoria before physical delivery to the latter.
Hon. Jose P. Burgos, Presiding Held:
Judge, and Raul Sesbreño No.
(G.R. No. 111190 June 27, 1995)
Complete and undelivered instrument Under Sec. 16 of the Negotiable Instruments Law,
Facts: every contract on a negotiable instrument is
Sesbreño filed a complaint Mabanto, Jr. and Rama, incomplete and revocable until delivery of the
Jr., before the RTC of Cebu City. After trial, judgment instrument for the purpose of giving effect thereto.
was rendered ordering the defendants to pay As ordinarily understood, delivery means the transfer
P11,000.00 to Sesbreño. The decision having become of the possession of the instrument by the maker or
final and executory, the trial court ordered its drawer with intent to transfer title to the payee and
execution. This order was questioned by the recognize him as the holder thereof.
defendants before the CA. However, a writ of
execution was issued. According to the trial court, the checks of Mabanto,
Jr., were already released by the Department of
A notice of garnishment was served on petitioner Justice duly signed by the officer concerned through
Loreto D. de la Victoria as City Fiscal of Mandaue City petitioner and upon service of the writ of
where defendant Mabanto, Jr., was then detailed. garnishment by the sheriff petitioner was under
The notice directed petitioner not to disburse, obligation to hold them for the judgment creditor. It
transfer, release or convey to any other person recognized the role of petitioner as custodian of the
except to the deputy sheriff concerned the salary checks. At the same time however it considered the
checks or other checks, monies, or cash due or checks as no longer government funds and presumed
belonging to Mabanto, Jr. delivered to the payee based on the last sentence of
Sec. 16 of the Negotiable Instruments Law which
states: "And where the instrument is no longer in the


Chapter 1 – Form and Interpretation

possession of a party whose signature appears to the account of respondent Plastic Corporation of
thereon, a valid and intentional delivery by him is the Producers Bank. Cheng Uy, Branch Manager of
presumed." Yet, the presumption is not conclusive the Balintawak branch of Producers Bank, relying on
because the last portion of the provision says "until the assurance of respondent Samson Tung, President
the contrary is proved." However this phrase was of Plastic Corporation, that the transaction was legal
deleted by the trial court for no apparent reason. and regular, instructed the cashier of Producers Bank
Proof to the contrary is its own finding that the checks to accept the checks for deposit and to credit them to
were in the custody of petitioner. Inasmuch as said the account of said Plastic Corporation, inspite of the
checks had not yet been delivered to Mabanto, Jr., fact that the checks were crossed and payable to DBR
they did not belong to him and still had the character and bore no indorsement of the latter.
of public funds. In Tiro v. Hontanosas we ruled that —
Hence, DBR filed a complaint for a sum of money
The salary check of a government officer or employee against respondents Sima Wei and/or Lee Kian Huat,
such as a teacher does not belong to him before it is
Mary Cheng Uy, Samson Tung, Asian Industrial Plastic
physically delivered to him. Until that time the check
belongs to the government. Accordingly, before there is Corporation (Plastic Corporation for short) and the
actual delivery of the check, the payee has no power Producers Bank of the Philippines.
over it; he cannot assign it without the consent of the
Whether DBR may enforce payment of the two
checks executed by Sima Wei.

Development Bank of Rizal Held:

vs. No.
Sima Wei and/or Lee Kian
Huat, Mary Cheng Uy, Samson The normal parties to a check are the drawer, the
Tung, Asian Industrial Plastic payee and the drawee bank. Courts have long
Corp and Producers Bank of recognized the business custom of using printed
checks where blanks are provided for the date of
the Philippines
issuance, the name of the payee, the amount payable
(G.R. No. 85419 March 9, 1993) and the drawer's signature. All the drawer has to do
Complete and undelivered instrument
when he wishes to issue a check is to properly fill up
the blanks and sign it. However, the mere fact that he
In consideration for a loan extended by Development
has done these does not give rise to any liability on
Bank of Rizal (DBR) to respondent Sima Wei, the latter
his part, until and unless the check is delivered to the
executed and delivered to the former a promissory
payee or his representative. A negotiable instrument,
note, engaging to pay DBR or order the amount of
of which a check is, is not only a written evidence of a
P1,820,000.00 with interest at 32% per annum. Sima
contract right but is also a species of property. Just as
Wei made partial payments on the note, leaving a
a deed to a piece of land must be delivered in order
balance of P1,032,450.02.
to convey title to the grantee, so must a negotiable
instrument be delivered to the payee in order to
Sima Wei issued two crossed checks payable to DBR
evidence its existence as a binding contract. Section
drawn against China Banking Corporation in full
16 of the Negotiable Instruments Law, which governs
settlement of the drawer's account evidenced by the
checks, provides in part:
promissory note. These two checks were not
delivered to the petitioner-payee or to any of its Every contract on a negotiable instrument is incomplete
authorized representatives. For reasons not shown, and revocable until delivery of the instrument for the
these checks came into the possession of respondent purpose of giving effect thereto. . . .
Lee Kian Huat, who deposited the checks without the
petitioner-payee's indorsement (forged or otherwise)


Chapter 1 – Form and Interpretation

Thus, the payee of a negotiable instrument acquires demands upon defendant Ebrada, but Ebrada refused
no interest with respect thereto until its delivery to to do so. So Republic Bank sued defendant Ebrada
him. Delivery of an instrument means transfer of before the City Court of Manila.
possession, actual or constructive, from one person
to another. Without the initial delivery of the The back side of aforementioned check bears the
instrument from the drawer to the payee, there can following signatures, in this order:
be no liability on the instrument. Moreover, such
delivery must be intended to give effect to the 1) MARTIN LORENZO;
The allegations of the petitioner in the original
complaint show that the two (2) China Bank checks The check was delivered to Ebrada by Dominguez for
were not delivered to the payee, the petitioner the purpose of encashment. After defendant Ebrada
herein. Without the delivery of said checks to DBR, received the cash from the Republic Bank, she
DBR did not acquire any right or interest therein and immediately turned over the said amount to
cannot therefore assert any cause of action, founded Dominguez, who in turn handed the said amount to
on said checks, whether against the drawer Sima Wei Justina Tinio.
or against the Producers Bank or any of the other
respondents. RTC ruled in favor of Republic Bank.

Dispositive: Judgment of CA dismissing the Issue:

petitioner's complaint is AFFIRMED. The case is Whether Ebrada is liable for the value of the check.
REMANDED to the trial court for a trial on the merits
in order to determine whether respondent Sima Wei Held:
is liable to the Development Bank of Rizal for any Yes.
amount under the promissory note allegedly signed
by her. It is admitted that defendant-appellant was the last
indorser of the said check. As such indorser, she was
supposed to have warranted that she has good title
to said check; for under Section 65 of the Negotiable
Republic Bank
Instruments Law:
Mauricia Ebrada Every person negotiating an instrument by delivery or
by qualified indorsement, warrants:
(G.R. No. L-40796 July 31, 1975)
Right of DRAWEE to recover from last indorser where indorser’s
(a) That the instrument is genuine and in all respects
signature is forged
what it purports to be.
Ebrada encashed a “Back Pay Check” issued by the (b) That she has good title to it.
Bureau of Treasury at the Republic Bank in Escolta
xxx xxx xxx
Manila. Republic Bank was advised the said bureau
that the alleged indorsement on the reverse side of
the aforesaid check by the payee, "Martin Lorenzo" and under Section 65 of the same Act:
was a forgery since the latter had allegedly died, 11
Every indorser who indorses without qualification
years before the check was issued. Republic Bank was warrants to all subsequent holders in due course:
then requested by the Bureau of Treasury to refund
the amount of P1,246.08. (a) The matters and things mentioned in subdivisions
(a), (b), and (c) of the next preceding sections;

To recover what it had refunded to the Bureau of (b) That the instrument is at the time of his indorsement
Treasury, plaintiff Bank made verbal and formal valid and subsisting.


Chapter 1 – Form and Interpretation

In the case of State v. Broadway Mut. Bank, 282 S.W.

It turned out, however, that the signature of the 196, 197, it was held that the drawee of a check can
original payee of the check, Martin Lorenzo was a recover from the holder the money paid to him on a
forgery because he was already dead almost 11 years forged instrument. It is not supposed to be its duty to
before the check in question was issued by the ascertain whether the signatures of the payee or
Bureau of Treasury. Under Section 23 of the indorsers are genuine or not. This is because the
Negotiable Instruments Law (Act 2031): indorser is supposed to warrant to the drawee that
the signatures of the payee and previous indorsers
When a signature is forged or made without the are genuine, warranty not extending only to holders
authority of the person whose signature it purports to
in due course. One who purchases a check or draft is
be, it is wholly inoperative, and no right to retain the
instruments, or to give a discharge thereof against any bound to satisfy himself that the paper is genuine and
party thereto, can be acquired through or under such that by indorsing it or presenting it for payment or
signature unless the party against whom it is sought to putting it into circulation before presentation he
enforce such right is precluded from setting up the
impliedly asserts that he has performed his duty and
forgery or want of authority.
the drawee who has paid the forged check, without
actual negligence on his part, may recover the money
It is clear from the provision that where the signature
paid from such negligent purchasers. In such cases
on a negotiable instrument if forged, the negotiation
the recovery is permitted because although the
of the check is without force or effect. But does this
drawee was in a way negligent in failing to detect the
mean that the existence of one forged signature
forgery, yet if the encasher of the check had
therein will render void all the other negotiations of
performed his duty, the forgery would in all
the check with respect to the other parties whose
probability, have been detected and the fraud
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
Adalia Francisco
forged or unauthorized signature which is vs.
inoperative. Applying this principle to the case at bar,
CA, et. al.
it can be safely concluded that it is only the
negotiation predicated on the forged indorsement (G. R. No. 116320 November 29, 1999)
Liability of person signing as agent
that should be declared inoperative. This means that
the negotiation of the check in question from Martin
A. Francisco Realty & Development Corporation
Lorenzo, the original payee, to Ramon R. Lorenzo, the
(AFRDC), of which petitioner Francisco is the
second indorser, should be declared of no effect, but
president, entered into a Land Development and
the negotiation of the aforesaid check from Ramon R.
Construction Contract with private respondent Herby
Lorenzo to Adelaida Dominguez, the third indorser,
Commercial & Construction Corporation (HCCC),
and from Adelaida Dominguez to the defendant-
represented by its President and General Manager
appellant who did not know of the forgery, should be
private respondent Ong. Under the contract, HCCC
considered valid and enforceable, barring any claim
was to be paid on the basis of the completed houses
of forgery.
and developed lands delivered to and accepted by
AFRDC and the GSIS.
What happens then, if, after the drawee bank has
paid the amount of the check to the holder thereof, it
To facilitate payment, AFRDC executed a Deed of
was discovered that the signature of the payee was
Assignment in favor of HCCC to enable the latter to
forged? Can the drawee bank recover from the one
collect payments directly from the GSIS. Furthermore,
who encashed the check?
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 from which


Chapter 1 – Form and Interpretation

checks would be issued and co-signed by petitioner by HCCC to sign Ongs name, still, Francisco did not
Francisco and the GSIS Vice-President Armando Diaz indorse the instrument in accordance with law.
(Diaz). Instead of signing Ongs name, Francisco should have
signed her own name and expressly indicated that she
Sometime in 1979, Ong discovered that Diaz and was signing as an agent of HCCC. Thus, the
Francisco had executed and signed seven checks, of Certification cannot be used by Francisco to validate
various dates and amounts, drawn against the IBAA her act of forgery.
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
Philippine Commercial
Francisco custody of the checks since she promised
International Bank
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 (G.R. No. 121413 and 121479 January 29, 2001)
the checks; Francisco then indorsed the checks for a Bank paid a forged check
second time by signing her name at the back of the Facts:
checks and deposited the checks in her IBAA savings Ford drew and issued its Citibank Check in the amount
account. IBAA credited Franciscos account with the of P4,746,114.41, in favor of the Commissioner of
amount of the checks and the latter withdrew the Internal Revenue as payment of plaintiffs percentage
amount so credited. or manufacturers sales taxes for the third quarter of
1977. The aforesaid check was deposited with the
Ong filed complaints with the office of the city fiscal defendant IBAA (now PCIBank) and was subsequently
of Quezon City, charging Francisco with estafa thru cleared at the Central Bank. Upon presentment with
falsification of commercial documents. Francisco the defendant Citibank, the proceeds of the check
denied having forged Ongs signature on the checks, was paid to IBAA as collecting or depository bank.
claiming that Ong himself indorsed the seven checks
in behalf of HCCC and delivered the same to Francisco The proceeds of the same Citibank check of the
in payment of the loans extended by Francisco to plaintiff was never paid to or received by the payee
HCCC. thereof, the CIR. As a consequence, upon demand of
CIR, the Ford was compelled to make a second
Issue: payment to BIR.
Whether petitioner can be held liable on the
questioned checks by virtue of the Certification Meanwhile, according to the NBI report, one of the
executed by Ong giving her the authority to collect checks issued by petitioner was withdrawn from PCIB
such checks from the GSIS. for alleged mistake in the amount to be paid. This was
replaced with manager’s check by PCIB, which were
Held: allegedly stolen by the syndicate and deposited in
Yes. their own account.

The Negotiable Instruments Law provides that where Issue:

any person is under obligation to indorse in a Whether Ford has the right to recover from the
representative capacity, he may indorse in such terms collecting bank (PCIBank) and the drawee bank
as to negative personal liability. An agent, when so (Citibank) the value of the checks intended as
signing, should indicate that he is merely signing in payment to the Commissioner of Internal Revenue.
behalf of the principal and must disclose the name of
his principal; otherwise he shall be held personally Held:
liable. Even assuming that Francisco was authorized Yes.


Chapter 1 – Form and Interpretation

The checks were drawn against the drawee bank, but It appears that although the employees of Ford
the title of the person negotiating the same was initiated the transactions attributable to an organized
allegedly defective because the instrument was syndicate, in our view, their actions were not the
obtained by fraud and unlawful means, and the proximate cause of encashing the checks payable to
proceeds of the checks were not remitted to the the CIR. The degree of Fords negligence, if any, could
payee. It was established that instead of paying the not be characterized as the proximate cause of the
checks to the CIR, for the settlement of the injury to the parties.
appropriate quarterly percentage taxes of Ford, the
checks were diverted and encashed for the eventual The mere fact that the forgery was committed by a
distribution among the members of the syndicate. As drawer-payors confidential employee or agent, who
to the unlawful negotiation of the check the by virtue of his position had unusual facilities for
applicable law is Section 55 of the Negotiable perpetrating the fraud and imposing the forged paper
Instruments Law (NIL), which provides: upon the bank, does not entitle the bank to shift the
loss to the drawer-payor, in the absence of some
When title defective -- The title of a person who circumstance raising estoppel against the drawer.
negotiates an instrument is defective within the
meaning of this Act when he obtained the instrument,
or any signature thereto, by fraud, duress, or force and Note: SC found that PCIB was negligent for the
fear, or other unlawful means, or for an illegal payment of the three checks involved. Citibank is also
consideration, or when he negotiates it in breach of responsible for negligence. Citibank was negligent in
faith or under such circumstances as amount to a fraud.
the performance of its duties as a drawee bank. It
failed to establish its payments of Ford’s checks
Pursuant to this provision, it is vital to show that the
were made in due course and legally in order.
negotiation is made by the perpetrator 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 Associated Bank
was no negligence in the performance of his duties, vs.
he may set up the personal defense to escape liability CA
and recover from other parties who, through their
own negligence, allowed the commission of the (G.R. No. 107382. January 31, 1996)
Rights of parties in forgery of an order instrument
The Province of Tarlac maintains a current account
In this case, we note that the direct perpetrators of
with the Philippine National Bank (PNB) where the
the offense, namely the embezzlers belonging to a
provincial funds are deposited.
syndicate, are now fugitives from justice. They have,
even if temporarily, escaped liability for the
A portion of the funds of the province is allocated to
embezzlement of millions of pesos. We are thus left
the Concepcion Emergency Hospital. The allotment
only with the task of determining who of the present
checks for said government hospital are drawn to the
parties before us must bear the burden of loss of
order of Concepcion. Emergency Hospital,
these millions. It all boils down to the question of
Concepcion, Tarlac or The Chief, Concepcion
liability based on the degree of negligence among the
Emergency Hospital, Concepcion, Tarlac. The checks
parties concerned.
are released by the Office of the Provincial Treasurer
and received for the hospital by its administrative
Foremost, we must resolve whether the injured
officer and cashier.
party, Ford, is guilty of the imputed contributory
negligence that would defeat its claim for
In January 1981, the books of account of the
reimbursement, bearing in mind that its employees,
Provincial Treasurer were post-audited by the
Godofredo Rivera and Alexis Marindo, were among
Provincial Auditor. It was then discovered that the
the members of the syndicate.


Chapter 1 – Form and Interpretation

hospital did not receive several allotment checks 2) Associated Bank should pay the same
drawn by the Province. amount to PNB and
3) Dismissed the complaints against Canlas
After the checks were examined, the Provincial and Pangilinan.
Treasurer learned that 30 checks amounting to
P203,300.00 were encashed by one Fausto On appeal, the CA affirmed the ruling of the trial
Pangilinan, with the Associated Bank acting as court.
collecting bank.
It turned out that Fausto Pangilinan, who was the Who should bear the loss.
administrative officer and cashier of payee hospital
until his retirement on February 1978, collected the Held:
questioned checks from the office of the Provincial Checks having forged indorsements should be
Treasurer. He claimed to be assisting or helping the differentiated from forged checks or checks bearing
hospital follow up the release of the checks and had the forged signature of the drawer.
official receipts. Pangilinan sought to encash the first
check with Associated Bank. However, the manager Forged signature wholly inoperative
of Associated Bank refused and suggested that Section 23 of the Negotiable Instruments Law (NIL)
Pangilinan deposit the check in his personal savings provides:
account with the same bank. Pangilinan was able to
withdraw the money when the check was cleared and Sec. 23. FORGED SIGNATURE, EFFECT OF. - When a
signature is forged or made without authority of the
paid by the drawee bank, PNB.
person whose signature it purports to be, it is wholly
inoperative, and no right to retain the instrument, or to
After forging the signature of Dr. Adena Canlas who give a discharge therefor, or to enforce payment
was chief of the payee hospital, Pangilinan followed thereof against any party thereto, can be acquired
through or under such signature unless the party
the same procedure for the second check, in the
against whom it is sought to enforce such right is
amount of P5,000.00 and as well as for twenty-eight precluded from setting up the forgery or want of
other checks, of various amounts and on various authority.
dates. All the checks bore the stamp of Associated
Bank which reads “All prior endorsements A forged signature, whether it be that of the drawer
guaranteed ASSOCIATED BANK.” or the payee, is wholly inoperative and no one can
gain title to the instrument through it. A person
The Provincial Treasurer wrote the manager of the whose signature to an instrument was forged was
PNB seeking the restoration of the various amounts never a party and never consented to the contract
debited from the current account of the Province. which allegedly gave rise to such instrument.18
Section 23 does not avoid the instrument but only the
In turn, the PNB manager demanded reimbursement forged signature. Thus, a forged indorsement does
from the Associated Bank. not operate as the payees indorsement.

As both banks resisted payment, the Province of Exception

Tarlac brought suit against PNB which, in turn, The exception to the general rule in Section 23 is
impleaded Associated Bank as third-party defendant. where a party against whom it is sought to enforce a
The latter then filed a fourth-party complaint against right is precluded from setting up the forgery or want
Adena Canlas and Fausto Pangilinan. of authority. Parties who warrant or admit the
genuineness of the signature in question and those
The trial court ruled that: who, by their acts, silence or negligence are estopped
1) PNB should pay the Province of Tarlac the from setting up the defense of forgery, are precluded
P203,300 with legal interests, from using this defense. Indorsers, persons
negotiating by delivery and acceptors are warrantors


Chapter 1 – Form and Interpretation

of the genuineness of the signatures on the the drawers order. When the drawee bank pays a
instrument. person other than the payee, it does not comply with
the terms of the check and violates its duty to charge
In bearer instruments, the signature of the payee or its customers (the drawer) account only for properly
holder is unnecessary to pass title to the instrument. payable items. Since the drawee bank did not pay a
Hence, when the indorsement is a forgery, only the holder or other person entitled to receive payment, it
person whose signature is forged can raise the has no right to reimbursement from the drawer. The
defense of forgery against a holder in due course. general rule then is that the drawee bank may not
debit the drawers account and is not entitled to
The checks involved in this case are order indemnification from the drawer. The risk of loss
instruments, hence, the following discussion is made must perforce fall on the drawee bank.
with reference to the effects of a forged indorsement
on an instrument payable to order. Exceptions
However, if the drawee bank can prove a failure by
Where the instrument is payable to order at the time the customer/drawer to exercise ordinary care that
of the forgery, such as the checks in this case, the substantially contributed to the making of the forged
signature of its rightful holder (here, the payee signature, the drawer is precluded from asserting the
hospital) is essential to transfer title to the same forgery.
instrument. When the holders indorsement is forged,
all parties prior to the forgery may raise the real If at the same time the drawee bank was also
defense of forgery against all parties subsequent negligent to the point of substantially contributing to
thereto. the loss, then such loss from the forgery can be
apportioned between the negligent drawer and the
Liability of general indorser negligent bank.
An indorser of an order instrument warrants that the
instrument is genuine and in all respects what it In cases of forged indorsements, the loss falls on the
purports to be; that he has a good title to it; that all party who took the check from the forger or the forger
prior parties had capacity to contract; and that the himself
instrument is at the time of his indorsement valid and In cases involving checks with forged indorsements,
subsisting. He cannot interpose the defense that such as the present petition, the chain of liability does
signatures prior to him are forged. not end with the drawee bank. The drawee bank may
not debit the account of the drawer but may generally
Collecting bank where check is deposited and indorses pass liability back through the collection chain to the
check, an indorser party who took from the forger and, of course, to the
A collecting bank where a check is deposited and forger himself, if available. In other words, the
which indorses the check upon presentment with the drawee bank can seek reimbursement or a return of
drawee bank, is such an indorser. So even if the the amount it paid from the presentor bank or
indorsement on the check deposited by the banks person. Theoretically, the latter can demand
client is forged, the collecting bank is bound by his reimbursement from the person who indorsed the
warranties as an indorser and cannot set up the check to it and so on. The loss falls on the party who
defense of forgery as against the drawee bank. took the check from the forger, or on the forger
himself. Since a forged indorsement is inoperative,
Payment under a forged indorsement is not to the the collecting bank had no right to be paid by the
drawers order; reason drawee bank. The former must necessarily return the
The bank on which a check is drawn, known as the money paid by the latter because it was paid
drawee bank, is under strict liability to pay the check wrongfully.
to the order of the payee. The drawers instructions
are reflected on the face and by the terms of the Case at bar
check. Payment under a forged indorsement is not to


Chapter 1 – Form and Interpretation

In this case, the checks were indorsed by the

collecting bank (Associated Bank) to the drawee bank Duty of drawee bank to promptly inform presentor of
(PNB). The former will necessarily be liable to the the forgery upon discovery; effect of failure to
latter for the checks bearing forged indorsements. If promptly inform
the forgery is that of the payees or holders The drawee bank can recover the amount paid on the
indorsement, the collecting bank is held liable, check bearing a forged indorsement from the
without prejudice to the latter proceeding against the collecting bank. However, a drawee bank has the duty
forger. to promptly inform the presentor of the forgery upon
discovery. If the drawee bank delays in informing the
General indorser; collecting bank or last endorser presentor of the forgery, thereby depriving said
suffers loss on forged in-dorsement; reason presentor of the right to recover from the forger, the
More importantly, by reason of the statutory former is deemed negligent and can no longer
warranty of a general indorser in Section 66 of the recover from the presentor.
Negotiable Instruments Law, a collecting bank which
indorses a check bearing a forged indorsement and Effect of contributory negligence in case at bar
presents it to .the drawee bank guarantees all prior Applying these rules to the case at bench, PNB, the
indorsements, including the forged indorsement. It drawee bank, cannot debit the current account of the
warrants that the instrument is genuine, and that it is Province of Tarlac because it paid checks which bore
valid and subsisting at the time of his indorsement. forged indorsements. However, if the Province of
Because the indorsement is a forgery, the collecting Tarlac as drawer was negligent to the point of
bank commits a breach of this warranty and will be substantially contributing to the loss, then the
accountable to the drawee bank. This liability scheme drawee bank PNB can charge its account. If both
operates without regard to fault on the part of the drawee bank-PNB and drawer-Province of Tarlac
collecting/presenting bank. Even if the latter bank were negligent, the loss should be properly
was not negligent, it would still be liable to the apportioned between them. The loss incurred by
drawee bank because of its indorsement. The Court drawee bank-PNB can be passed on to the collecting
has consistently ruled that the collecting bank or last bank-Associated Bank which presented and indorsed
endorser generally suffers the loss because it has the the checks to it. Associated Bank can, in turn, hold the
duty to ascertain the genuineness of all prior forger, Fausto Pangilinan, liable. If PNB negligently
endorsements considering that the act of presenting delayed in informing Associated Bank of the forgery,
the check for payment to the drawee is an assertion thus depriving the latter of the opportunity to recover
that the party making the presentment has done its from the forger, it forfeits its right to reimbursement
duty to ascertain the genuineness of the and will be made to bear the loss. After careful
endorsements. Moreover, the collecting bank is made examination of the records, the Court finds that the
liable because it is privy to the depositor who Province of Tarlac was equally negligent and should,
negotiated the check. The bank knows him, his therefore, share the burden of loss from the checks
address and history because he is a client. It has taken bearing a forged indorsement. The Province of Tarlac
a risk on his deposit. The bank is also in a better permitted Fausto Pangilinan to collect the checks
position to detect forgery, fraud or irregularity in the when the latter, having already retired from
indorsement. government service, was no longer connected with
the hospital. With the exception of the first check, all
Drawee bank not liable for loss on forged the checks were issued and released after Pangilinans
indorsement; reason retirement. After nearly three years, the Treasurers
The drawee bank is not similarly situated as the office was still releasing the checks to the retired
collecting bank because the former makes no cashier. In addition, some of the aid allotment checks
warranty as to the genuineness of any indorsement. were released to Pangilinan and the others to
The drawee banks duty is but to verify the Elizabeth Juco, the new cashier. The fact that there
genuineness of the drawer’s signature and not of the were now two persons collecting the checks for the
indorsement because the drawer is its client. hospital is an unmistakable sign of an irregularity


Chapter 1 – Form and Interpretation

which should have alerted employees in the Under Section 4(c) of CB Circular No. 580, items
Treasurers office of the fraud being committed. There bearing a forged endorsement shall be returned
is also evidence indicating that the provincial within twenty-four (24) hours after discovery of the
employees were aware of Pangilinans retirement and forgery but in no event beyond the period fixed or
consequent dissociation from the hospital. The failure provided by law for filing of a legal action by the
of the Province of Tarlac to exercise due care returning bank. Section 23 of the PCHC Rules deleted
contributed to a significant degree to the loss the requirement that items bearing a forged
tantamount to negligence. Hence, the Province of endorsement should be returned within twenty-four
Tarlac should be liable for part of the total amount hours. Associated Bank now argues that the
paid on the questioned checks. The drawee bank PNB aforementioned Central Bank Circular is applicable.
also breached its duty to pay only according to the Since PNB did not return the questioned checks
terms of the check. Hence, it cannot escape liability within twenty-four hours, but several days later,
and should also bear part of the loss. The Court finds Associated Bank alleges that PNB should be
as reasonable, the proportionate sharing of fifty considered negligent and not entitled to
percent - fifty percent (50%-50%). Due to the reimbursement of the amount it paid on the checks.
negligence of the Province of Tarlac in releasing the The Central Bank circular was in force for all banks
checks to an unauthorized person (Fausto until June 1980 when the Philippine Clearing House
Pangilinan), in allowing the retired hospital cashier to Corporation (PCHC) was set up and commenced
receive the checks for the payee hospital for a period operations. Banks in Metro Manila were covered by
close to three years and in not properly ascertaining the PCHC while banks located elsewhere still had to
why the retired hospital cashier was collecting checks go through Central Bank Clearing. In any event, the
for the payee hospital in addition to the hospitals real twenty-four-hour return rule was adopted by the
cashier, respondent Province contributed to the loss PCHC until it was changed in 1982. The contending
amounting to P203,300.00 and shall be liable to the banks herein, which are both branches in Tarlac
PNB for fifty (50%) percent thereof. In effect, the province, are therefore not covered by PCHC Rules
Province of Tarlac can only recover fifty percent (50%) but by CB Circular No. 580. Clearly then, the CB
of P203,300.00 from PNB. The collecting bank, circular was applicable when the forgery of the checks
Associated Bank, shall be liable to PNB for fifty (50%) was discovered in 1981.
percent of P203,300.00. It is liable on its warranties as
indorser of the checks which were deposited by Rationale
Fausto Pangilinan, having guaranteed the The rule mandates that the checks be returned within
genuineness of all prior indorsements, including that twenty-four hours after discovery of the forgery but
of the chief of the payee hospital, Dr. Adena Canlas. in no event beyond the period fixed by law for filing a
Associated Bank was also remiss in its duty to legal action. The rationale of the rule is to give the
ascertain the genuineness of the payees collecting bank (which indorsed the check) adequate
indorsement. opportunity to proceed against the forger. If prompt
notice is not given, the collecting bank may be
Forgery; delay in informing collecting bank of forgery prejudiced and lose the opportunity to go after its
by the drawee bank signifies negligence depositor.
A delay in informing the collecting bank (Associated
Bank) of the forgery, which deprives it of the Failure to return forged indorsement within 24 hours
opportunity to go after the forger, signifies from discovery does not prejudice collecting bank
negligence on the part of the drawee bank (PNB) and which presented forger as its rebuttal witness
will preclude it from claiming reimbursement. The Court finds that even if PNB did not return the
questioned checks to Associated Bank within twenty-
Return of forged indorsement; 24-hour period but four hours, as mandated by the rule, PNB did not
not beyond period for filing legal action for banks commit negligent delay. Under the circumstances,
outside Metro Manila; case at bar PNB gave prompt notice to Associated Bank and the
latter bank was not prejudiced in going after Fausto


Chapter 1 – Form and Interpretation

Pangilinan. After the Province of Tarlac informed PNB Francisco S. Gozon II, who was a depositor of PNB,
of the forgeries, PNB necessarily had to inspect the went to the bank in his car accompanied by his friend
checks and conduct its own investigation. Thereafter, Ernesto Santos whom he left in the car while he
it requested the Provincial Treasurers office on March transacted business in the bank. When Santos saw
31, 1981 to return the checks for verification. The that Gozon left his check book, he took a check
Province of Tarlac returned the checks only on April therefrom, filled it up for the amount of P5,000.00,
22, 1981. Two days later, Associated Bank received forged the signature of Gozon, and thereafter he
the checks from PNB. Associated Bank was also encashed the check in the bank on the same day. The
furnished a copy of the Provinces letter of demand to account of Gozon was debited the said amount. Upon
PNB dated March 20, 1981, thus giving it notice of the receipt of the statement of account from the bank,
forgeries. At this time, however, Pangilinans account Gozon asked that the said amount of P5,000.00
with Associated had only P24.63 in it. Had Associated should be returned to his account as his signature on
Bank decided to debit Pangilinans account, it could the check was forged but the bank refused.
not have recovered the amounts paid on the
Gozon filed a complaint for recovery of the amount of
questioned checks. In addition, while Associated Bank
filed a fourth-party complaint against Fausto P5,000.00 against PNB at CFI of Rizal. Trial court ruled
Pangilinan, it did not present evidence against in favor of Gozon.
Pangilinan and even presented him as its rebuttal PNB appealed where it argued that Gozon was
witness. Hence, Associated Bank was not prejudiced negligent and precluded from setting up forgery.
by PNBs failure to comply with the twenty-four-hour
return rule. Issue:
Whether Gozon may recover from PNB.
Ruling on liabilities of parties:
The SC held that the Province and Associated Bank Held:
should bear losses in the proportion of 50-50. Yes.

The Province can only recover 50% of the P203,300 A bank is bound to know the signatures of its
from PNB because of the negligence they exhibited in customers; and if it pays a forged check, it must be
releasing the checks to the then already retired considered as making the payment out of its own
Pangilinan who is an unauthorized person to handle funds, and cannot ordinarily change the amount so
the said checks. paid to the account of the depositor whose name was
forged' (San Carlos Milling Co. vs. Bank of the P.I., 59
On the other hand, Associated Bank is liable to PNB Phil. 59).
only to 50% of the same amount because of its
liability as indorser of the checks that were deposited The prime duty of a bank is to ascertain the
by Pangilinan, and guaranteed the genuineness of the genuineness of the signature of the drawer or the
said checks. They failed to exercise due diligence in depositor on the check being encashed. It is expected
checking the veracity of indorsements. to use reasonable business prudence in accepting and
cashing a check presented to it.

PNB There is nothing inequitable in such a rule. If the

vs. paper comes to the drawee in the regular course of
Romulo Quimpo and Francisco business, and he, having the opportunity ascertaining
Gozon its character, pronounces it to be valid and pays it, it
is not only a question of payment under mistake, but
(G.R. No. L-53194 March 14, 1988)
Right of drawee to recover payment made where drawer’s payment in neglect of duty which the commercial law
signature was forged places upon him, and the result of his negligence must
Facts: rest upon him.


Chapter 1 – Form and Interpretation

Petitioner was negligent in encashing said forged NWSA addressed a letter to PNB requesting the
check without carefully examining the signature immediate restoration to its Account No. 6, of the
which shows marked variation from the genuine total sum of P3,457,903.00 corresponding to the total
signature of private respondent. The trial court found amount of these twenty-three (23) checks claimed by
that a comparison of the signature on the forged NWSA to be forged and/or spurious checks. In view of
check and the sample signatures of private the refusal of PNB, MWSS filed a complaint on CFI of
respondent show marked differences. Manila.

In its answer, PNB contended among others, that the

checks in question were regular on its face in all
Metropolitan Waterworks and respects, including the genuineness of the signatures
Sewerage System of authorized NWSA signing officers and there was
vs. nothing on its face that could have aroused any
CA suspicion as to its genuineness and due execution
(G.R. No. L-62943 July 14, 1986) and; that NWSA was guilty of negligence which was
Barred to set up defense of forgery due to negligence the proximate cause of the loss.
Metropolitan Waterworks and Sewerage System Issue:
(hereinafter referred to as MWSS) is a government Whether PNB is liable to MWSS.
owned and controlled corporation, the successor-in-
interest of the defunct NWSA. The Philippine National Held:
Bank (PNB) is the depository bank of MWSS and its No.
predecessor-in-interest NWSA. The authorized
signature for the account were those of MWSS There is no express and categorical finding in these
treasurer Jose Sanchez, auditor Pedro Aguilar, and documents that the twenty-three (23) questioned
acting General Manager Victor L. Recio. By special checks were indeed signed by persons other than the
arrangement with the PNB, the MWSS used authorized MWSS signatories. On the contrary, the
personalized checks in drawing from this account. findings of the NBI show that the MWSS fraud was an
"inside job" and that the petitioner's delay in the
During the months of March, April and May 1969, reconciliation of bank statements and the laxity and
twenty-three (23) checks were prepared, processed, loose records control in the printing of its
issued and released by NWSA, all of which were paid personalized checks facilitated the fraud.
and cleared by PNB and debited by PNB against NWSA
Account. Likewise, the questioned documents of the NBI does
not declare or prove that the signatures appearing on
The foregoing checks were deposited by the payees the questioned checks are forgeries.
Raul Dizon, Arturo Sison and Antonio Mendoza in
their respective current accounts with the Philippine It is clear that these three (3) NBI Reports relied upon
Commercial and Industrial Bank (PCIB) and Philippine by the petitioner are inadequate to sustain its
Bank of Commerce (PBC). At the time of their allegations of forgery. These reports did not touch on
presentation to PNB these checks bear the standard the inherent qualities of the signatures which are
indorsement which reads 'all prior indorsement indispensable in the determination of the existence of
and/or lack of endorsement guaranteed.' forgery. There must be conclusive findings that there
is a variance in the inherent characteristics of the
Subsequent investigation however, conducted by the signatures and that they were written by two or more
NBI showed that Raul Dizon, Arturo Sison and Antonio different persons.
Mendoza were all fictitious persons.
Forgery cannot be presumed (Siasat, et al. v.
Intermediate Appellate Court, et al, 139 SCRA 238). It


Chapter 1 – Form and Interpretation

must be established by clear, positive, and convincing amount to the PCIB. PNB debited it against the
evidence. This was not done in the present case. account of the GSIS.

Moreover, the petitioner is barred from setting up the Subsequently, upon demand from the GSIS, said sum
defense of forgery under Section 23 of the Negotiable of P57,415.00 was re-credited to the GSIS’s account,
Instruments Law which provides that: for the reason that the signatures of its officers on the
check were forged. PNB demanded from the PCIB the
SEC. 23. FORGED SIGNATURE; EFFECT OF.- When the refund of said sum, which the PCIB refused to do.
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 The signatures of the General Manager and the
give a discharge therefor, or to enforce payment Auditor of the GSIS on the check, as drawer thereof,
thereof against any party thereto can be acquired are forged. The person named in the check as its
through or under such signature unless the party
payee was one Mariano D. Pulido, who purportedly
against whom it is sought to enforce such right is
precluded from setting up the forgery or want of indorsed it to one Manuel Go. The check purports to
authority. have been indorsed by Manuel Go to Augusto Lim,
who, in turn, deposited it with the PCIB, which it
because it was guilty of negligence not only before stamped the following on the back of the check: "All
the questioned checks were negotiated but even prior indorsements and/or Lack of Endorsement
after the same had already been negotiated. The Guaranteed, Philippine Commercial and Industrial
records show that at the time the twenty-three (23) Bank,"
checks were prepared, negotiated, and encashed, the
petitioner was using its own personalized checks, Issue:
instead of the official PNB Commercial blank checks. Whether PCIB should refund the amount to PNB.
In the exercise of this special privilege, however, the
petitioner failed to provide the needed security Held:
measures. No.

Even if the twenty-three (23) checks in question are PNB argues that, since the signatures of the drawer
considered forgeries, considering the petitioner's are forged, so must the signatures of the supposed
gross negligence, it is barred from setting up the indorsers be; but this conclusion does not necessarily
defense of forgery under Section 23 of the Negotiable follow from said premise. Besides, there is absolutely
Instruments Law. no evidence, and the PNB has not even tried to prove
that the aforementioned indorsements are spurious.

Again, the PNB refunded the amount of the check to

PNB the GSIS, on account of the forgery in the signatures,
vs. not of the indorsers or supposed indorsers, but of the
CA officers of the GSIS as drawer of the instrument. In
(G.R. No. L-26001 October 29, 1968)
other words, the question whether or not the
Liability of drawee of encashing a check where the maker’s indorsements have been falsified is immaterial to the
signature is forged PNB's liability as a drawee, or to its right to recover
Facts: from the PCIB, for, as against the drawee, the
Augusto Lim deposited in his current account with the indorsement of an intermediate bank does not
PCIB branch a GSIS check in the sum of P57,415.00, guarantee the signature of the drawer, since the
drawn against the PNB. forgery of the indorsement is not the cause of the
Following an established banking practice, the check loss.
was forwarded for clearing through the Central Bank
to the PNB, which did not return said check the next With respect to the warranty on the back of the
day, or at any other time, but retained it and paid its check, to which the third assignment of error refers,


Chapter 1 – Form and Interpretation

it should be noted that the PCIB thereby guaranteed Since MLT was not a client of China Bank, i.e., did not
"all prior indorsements," not the authenticity of the maintain an account in said Bank, the latter had no
signatures of the officers of the GSIS who signed on way of ascertaining the authenticity of its
its behalf, because the GSIS is not an indorser of the indorsements on the checks which were deposited in
check, but its drawer. Said warranty is irrelevant, the accounts of the third-party defendants in said
therefore, to the PNB's alleged right to recover from Bank. China Bank was not negligent because, in
the PCIB. It could have been availed of by a accordance with banking practice, it caused the
subsequent indorsee or a holder in due course checks to pass through the clearing house before it
subsequent to the PCIB, but, the PNB is neither. allowed their proceeds to be withdrawn by the three
Indeed, upon payment by the PNB, as drawee, the depositors.
check ceased to be a negotiable instrument, and
became a mere voucher or proof of payment.
Republic Bank
Manila Lighter Transportation, CA
Inc. (G.R. No. 42725 April 22, 1991)
vs. 24-hour clearing house rule
CA Facts:
San Miguel Corporation (SMC) drew a dividend check
(G.R. No. L-50373 February 15, 1990)
for P240, Philippine currency First National City Bank
Liability of collecting bank
(FNCB) in favor of J. Roberto C. Delgado, a
stockholder. After the check had been delivered to
From January 1960 to June 1961, Augusto Perez,
Delgado, the amount on its face was fraudulently and
collector of the Manila Lighter Transportation (MLT),
without authority of the drawer, SMC, altered by
collected 49 checks from MLT’s clients. The checks
increasing it from P240 to P9,240. The check was
amounted to P91,153.11. The checks were
indorsed and deposited by Delgado in his account
subsequently indorsed and the signature of Luis
with the petitioner Republic Bank (Republic).
Gaskell, MLT’s general manager, appeared on the
checks as indorser. The checks were indorsed to three
Republic accepted the check for deposit without
persons who deposited the checks with their
ascertaining its genuineness and regularity. Later,
respective accounts with China Bank.
Republic endorsed the check to FNCB by stamping on
Luis Gaskell disclaimed such signatures and presented the back of the check “all prior and/or lack of
a handwriting expert who gave the opinion that the indorsement guaranteed” and presented it to FNCB
signatures “L. Gaskell” on the indorsement were for payment through the Central Bank Clearing
indeed forgeries. House.

MLT then demanded China Bank to refund the

Believing the check was genuine, and relying on the
aggregate amount of the checks. The trial court ruled
guaranty and endorsement of Republic appearing on
that both MLT and China Bank are negligent hence the back of the check, FNCB paid P9,240 to Republic
they should share the loss at 50-50 basis. The Court of
through the Central Bank Clearing House.
Appeals absolved China Bank of its liabilities.

Issue: SMC notified FNCB of the material alteration in the

Whether China Bank should refund the checks. amount of the check in question. FNCB lost no time in
recrediting P9,240 to SMC. FNCB informed Republic
Held: in writing of the alteration and the forgery of the
No. endorsement of J. Roberto C. Delgado. By then,
Delgado had already withdrawn his account from


Chapter 1 – Form and Interpretation

familiar with the drawer’s signature. It should possess

FNCB demanded that Republic refund the P9,240 on appropriate detecting devices for uncovering
the basis of the latter’s endorsement and guaranty. forgeries and/or alterations on these instruments.
Republic refused, claiming there was delay in giving it Unless an alteration is attributable to the fault or
notice of the alteration and that FNCB, as drawee, negligence of the drawer himself, such as when he
was absolved of any liability to the drawer (SMC). leaves spaces on the check which would allow the
Thus, FNCB had no right of recourse against Republic. fraudulent insertion of additional numerals in the
amount appearing thereon, the remedy of the
Trial court rendered judgment ordering Republic to drawee bank that negligently clears a forged and/or
pay P9,240 to FNCB. CA affirmed the decision. altered check for payment is against the party
responsible for the forgery or alteration (Hongkong &
Issue: Shanghai Banking Corp. vs. People’s Bank & Trust Co.,
Whether Republic, as the collecting bank, is 35 SCRA 140), otherwise, it bears the loss.
protected, by the 24-hour clearing house rule, found
in CB Circular No. 9, as amended, from liability to The Court of Appeals erred in laying upon Republic,
refund the amount paid by FNCB, as drawee of the instead of on FNCB the drawee bank, the burden of
SMC dividend check. loss for the payment of the altered SMC check, the
fraudulent character of which FNCB failed to detect
Held: and warn Republic about, within the 24-hour clearing
Yes. house rule. The Court of Appeals departed from the
ruling of this Court in an earlier PNB case, that:
The 24-hour clearing house rule embodied in Section
4(c) of Central Bank Circular No. 9, as amended, “Where a loss, which must be borne by one of two
applies to this case. This rule mandates banks that parties alike innocent of forgery, can be traced to the
after a clearing, all cleared items must be returned neglect or fault of either, it is reasonable that it would
not later than 3:00 PM of the following business day. be borne by him, even if innocent of any intentional
fraud, through whose means it has succeeded. (Phil.
It is true that when an endorsement is forged, the National Bank vs. National City Bank of New York, 63
collecting bank or last endorser, as a general rule, Phil. 711, 733.)”
bears the loss (Banco de Oro Savings & Mortgage
Bank vs. Equitable Banking Corp., 167 SCRA 188). But
the unqualified endorsement of the collecting bank
on the check should be read together with the 24- Natividad Gempesaw
hour regulation on clearing house operation vs.
(Metropolitan Bank & Trust Co. vs. First National City CA
Bank, supra). Thus, when the drawee bank fails to (G.R. No. 92244 February 9, 1993)
return a forged or altered check to the collecting bank Liabilities of parties
within the 24-hour clearing period, the collecting Facts:
bank is absolved from liability. Petitioner Natividad O. Gempesaw (petitioner) owns
and operates four grocery stores. Petitioner
Every bank that issues checks for the use of its maintains a checking account with the Caloocan City
customers should know whether or not the drawer’s Branch of respondent PBCom.
signature thereon is genuine, whether there are
sufficient funds in the drawers account to cover To facilitate payment of debts to her suppliers,
checks issued, and it should be able to detect petitioner draws checks against her checking account
alterations, erasures, superimpositions or with the respondent bank as drawee. Her customary
intercalations thereon, for these instruments are practice of issuing checks in payment of her suppliers
prepared, printed and issued by itself, it has control was as follows: the checks were prepared and filled
of the drawer’s account, and it is supposed to be up as to all material particulars by her trusted


Chapter 1 – Form and Interpretation

bookkeeper, Alicia Galang, an employee for more Held:

than eight (8) years. After the bookkeeper prepared No.
the checks, the completed checks were submitted to
the petitioner for her signature, together with the As a matter of practical significance, problems arising
corresponding invoice receipts which indicate the from forged indorsements of checks may generally be
correct obligations due and payable to her suppliers. broken into two types of cases: (1) where forgery was
Petitioner signed each and every check without accomplished by a person not associated with the
bothering to verify the accuracy of the checks against drawer — for example a mail robbery; and (2) where
the corresponding invoices because she reposed full the indorsement was forged by an agent of the
and implicit trust and confidence on her bookkeeper. drawer.
The issuance and delivery of the checks to the payees
named therein were left to the bookkeeper. This difference in situations would determine the
Petitioner admitted that she did not make any effect of the drawer’s negligence with respect to
verification as to whether or not the checks were forged indorsements. While there is no duty resting
delivered to their respective payees. Although the on the depositor to look for forged indorsements on
respondent drawee Bank notified her of all checks his cancelled checks in contrast to a duty imposed
presented to and paid by the bank, petitioner did not upon him to look for forgeries of his own name, a
verify the correctness of the returned checks, much depositor is under a duty to set up an accounting
less check if the payees actually received the checks system and a business procedure as are reasonably
in payment for the supplies she received. calculated to prevent or render difficult the forgery of
indorsements, particularly by the depositor’s own
In the course of her business operations covering a employees. And if the drawer (depositor) learns that
period of two years, petitioner issued, following her a check drawn by him has been paid under a forged
usual practice stated above, a total of eighty-two (82) indorsement, the drawer is under duty promptly to
checks in favor of several suppliers. These checks report such fact to the drawee bank. For his
were all presented by the indorsees as holders negligence or failure either to discover or to report
thereof to, and honored by, the respondent drawee promptly the fact of such forgery to the drawee, the
Bank. Most of the checks were for amounts in excess drawer loses his right against the drawee who has
of her actual obligations to the various payees as debited his account under a forged indorsement. In
shown in their corresponding invoices. other words, he is precluded from using forgery as a
basis for his claim for re-crediting of his account.
All the eighty-two (82) checks with forged signatures
of the payees were brought to Ernest L. Boon, Chief Gempesaw cannot set up the defense of forgery by
Accountant of respondent drawee Bank at the reason of her negligence.
Buendia branch, who, without authority therefor,
accepted them all for deposit at the Buendia branch As a rule, a drawee bank who has paid a check on
to the credit and/or in the accounts of Alfredo Y. which an indorsement has been forged cannot charge
Romero and Benito Lam. the drawer’s account for the amount of said check. An
exception to this rule is where the drawer is guilty of
Petitioner made a written demand on respondent such negligence which causes the bank to honor such
drawee Bank to credit her account with the money a check or checks. If a check is stolen from the payee,
value of the eighty-two (82) checks totaling it is quite obvious that the drawer cannot possibly
P1,208.606.89 for having been wrongfully charged discover the forged indorsement by mere
against her account. Respondent drawee Bank examination of his cancelled check. This accounts for
refused to grant petitioner’s demand. the rule that although a depositor owes a duty to his
drawee bank to examine his cancelled checks for
Issue: forgery of his own signature, he has no similar duty as
Whether drawee bank should refund the money lost to forged indorsements. A different situation arises
by reason of the forged indorsements. where the indorsement was forged by an employee


Chapter 1 – Form and Interpretation

or agent of the drawer, or done with the active Petitioner cleared the check as good and, thereafter,
participation of the latter. PBCom credited Capitols account for the amount
stated in the check. However, petitioner returned the
The negligence of a depositor which will prevent check to PBCom and debited PBComs account for the
recovery of an unauthorized payment is based on amount covered by the check, the reason being that
failure of the depositor to act as a prudent there was a material alteration of the check number.
businessman would under the circumstances. In the
case at bar, the petitioner relied implicitly upon the PBCom, as collecting agent of Capitol, then
honesty and loyalty of her bookkeeper, and did not proceeded to debit the latter’s account for the same
even verify the accuracy of amounts of the checks she amount, and subsequently, sent the check back to
signed against the invoices attached thereto. petitioner. Petitioner, however, returned the check to
Furthermore, although she regularly received her PBCom.
bank statements, she apparently did not carefully
examine the same nor the check stubs and the On the other hand, Capitol could not, in turn, debit F.
returned checks, and did not compare them with the Abante Marketings account since the latter had
same invoices. Otherwise, she could have easily already withdrawn the amount of the check. Capitol
discovered the discrepancies between the checks and sought clarification from PBCom and demanded the
the documents serving as bases for the checks. With re-crediting of the amount. PBCom followed suit by
such discovery, the subsequent forgeries would not requesting an explanation and re-crediting from
have been accomplished. It was not until two years petitioner.
after the bookkeeper commenced her fraudulent
scheme that petitioner discovered that eighty-two Since the demands of Capitol were not heeded, it filed
(82) checks were wrongfully charged to her account, a civil suit with the RTC of Manila against PBCom
at which she notified the respondent drawee bank. which, in turn, filed a third-party complaint against
petitioner for reimbursement/indemnity with respect
to the claims of Capitol. Petitioner, on its part, filed a
fourth-party complaint against F. Abante Marketing.

PNB Issue:
vs. Whether an alteration of the serial number of a check
CA is a material alteration under the Negotiable
(G.R. No. 107508. April 25, 1996) Instruments Law.
Material alteration
Facts: Held:
A check in the amount of P97,650.00 was issued by No.
the Ministry of Education and Culture (now
Department of Education, Culture and Sports [DECS]) Section 1 of the Negotiable Instruments Law
payable to F. Abante Marketing. This check was provides:
drawn against PNB.
Section 1. - Form of negotiable instruments. An
instrument to be negotiable must conform to the
F. Abante Marketing, a client of Capitol City
following requirements:
Development Bank (Capitol), deposited the (a) It must be in writing and signed by the maker or
questioned check in its savings account with said drawer;
bank. In turn, Capitol deposited the same in its (b) Must contain an unconditional promise or order to
pay a sum certain in money;
account with the Philippine Bank of Communications
(c) Must be payable on demand, or at a fixed or
(PBCom) which, in turn, sent the check to petitioner determinable future time;
for clearing. (d) Must be payable to order or to bearer; and


Chapter 1 – Form and Interpretation

(e) Where the instrument is addressed to a drawee, he

must be named or otherwise indicated therein with
reasonable certainty.

An alteration is said to be material if it alters the effect

of the instrument. It means an unauthorized change
in the instrument that purports to modify in any
respect the obligation of a party or an
unauthorized addition of words or numbers or other
change to an incomplete instrument relating to the
obligation of the party. In other words, a material
alteration is one which changes the items which are
required to be stated under Section 1 of the NIL.

In this case, the alleged material alteration was the

alteration of the serial number of the check in
issue—which is not an essential element of a
negotiable instrument under Section 1. PNB alleges
that the alteration was material since it is an
accepted concept that a TCAA check by its very
nature is the medium of exchange of governments,
instrumentalities and agencies. As a safety measure,
every government office or agency is assigned checks
bearing different serial numbers.

But this contention has to fail. The check’s serial

number is not the sole indicia of its origin. The name
of the government agency issuing the check is clearly
stated therein. Thus, the check’s drawer is
sufficiently identified, rendering redundant the
referral to its serial number.

Therefore, there being no material alteration in the

check committed, PNB could not return the check to
PBCOM. It should pay the same.


Chapter 2 – Consideration

Jesus Pineda previously he loaned P3,000.00 but Pineda paid this

vs. other loan two days afterward.
Jose dela Rama and CA
These allegations of Dela Rama are belied by the
(G.R. No. L-31831 April 28, 1983)
promissory note itself. The second sentence of the
Presumption of consideration
Facts: note reads - "This represents the cash advances made
Jose V. dela Rama is a lawyer whose services were by him in connection with my case for which he is my
retained by Jesus Pineda for the purpose of making attorney-in- law."
representations with the chairman and general
manager of the National Rice and Corn The terms of the note sustain the version of Pineda
Administration to stop and delay the institution of that he signed the P9,300.00 promissory note
criminal charges against Pineda who allegedly because he believed Dela Rama's story that these
misappropriated 11,000 cavans of palay deposited at amounts had already been advanced by Dela Rama
his ricemill in Concepcion, Tarlac. Subsequently, Dela and given as gifts for NARIC officials. Dela Rama
Rama filed suit to collect a P9,300 loan, evidenced by himself admits that Pineda engaged his services to
the matured promissory note, and P5,000 as delay by one month the filing of the NARIC case
attorney’s fees. The Court of First Instance ruled in against Pineda while the latter was trying to work out
favor of Pineda, which was reversed by the Court of an amicable settlement.
SC agreed with the trial court which believed Pineda.
Issue: It is indeed unusual for a lawyer to lend money to his
Whether the promissory note is void for lack of client whom he had known for only three months,
consideration. with no security for the loan and on interest. Dela
Rama testified that he did not even know what Pineda
Held: was going to do with the money he borrowed from
No. him.

The Court of Appeals relied on the efficacy of the SC further agreed with the trial court that the
promissory note for its decision, citing Section 24 of promissory note was executed for an illegal
the Negotiable Instruments Law which reads: consideration. Articles 1409 and 1412 of the Civil
Code in part, provide:
SECTION 24. Presumption of consideration.—Every
negotiable instrument is deemed prima facie to have Art. 1409. The following contracts are inexistent and
been issued for a valuable consideration; and every void from the beginning:
person whose signature appears thereon to have
become a party thereto for value. (1) Those whose cause, object or purpose is contrary to
law, morals, good customs, public order and public
The Court of Appeals' reliance on the above provision xxx xxx xxx
is misplaced. The presumption that a negotiable Art. 1412. If the act in which the unlawful or forbidden
instrument is issued for a valuable consideration is cause consists does not constitute a criminal offense,
only prima facie. It can be rebutted by proof to the the following rules shall be observed:

contrary. (Bank of the Philippine Islands v. Laguna (1) When the fault is on the part of both contracting
Coconut Oil Co. et al., 48 Phil. 5). parties, neither may recover what he has given by virtue
of the contract, or demand the performance of the
other's undertaking.
According to Dela Rama, he loaned the P9,300.00 to
xxx xxx xxx
Pineda in two installments on two occasions five days
apart - first loan for P5,000.00 and second loan for
Whether or not the supposed cash advances reached
P4,300.00, both given in cash. He also alleged that
their destination is of no moment. The consideration
for the promissory note - to influence public officers


Chapter 2 – Consideration

in the performance of their duties - is contrary to law person placing his signature upon an instrument
and public policy. The promissory note is void ab initio otherwise than as maker, drawer or acceptor" a
and no cause of action for the collection cases can general indorser, — "unless he clearly indicates
arise from it. plaintiff appropriate words his intention to be bound
in some other capacity," which he did not do.

And section 66 ordains that "every indorser who

Ang Tiong indorses without qualification, warrants to all
vs. subsequent holders in due course" (a) that the
Lorenzo Ting instrument is genuine and in all respects what it
(G.R. No. L-26767 February 22, 1968) purports to be; (b) that he has a good title to it; (c)
Accommodation party that all prior parties have capacity to contract; and (d)
Facts: that the instrument is at the time of his indorsement
Lorenzo Ting issued Philippine Bank of valid and subsisting.
Communications check for the sum of P4,000,
payable to "cash or bearer". With Felipe Ang's In addition, "he engages that on due presentment, it
signature (indorsement in blank) at the back thereof, shall be accepted or paid, or both, as the case may be,
the instrument was received by the plaintiff Ang Tiong and that if it be dishonored, he will pay the amount
who thereafter presented it to the drawee bank for thereof to the holder."
payment. The bank dishonored it. The plaintiff then
made written demands on both Lorenzo Ting and Even on the assumption that the appellant is a
Felipe Ang that they make good the amount mere accommodation party, as he professes to be, he
represented by the check. These demands went is nevertheless, by the clear mandate of section 29 of
unheeded; so he filed in the municipal court of Manila the Negotiable Instruments Law, yet "liable on the
an action for collection of the sum of P4,000. On The instrument to a holder for value, notwithstanding
municipal court adjudged for the plaintiff against the that such holder at the time of taking the instrument
two defendants. knew him to be only an accommodation party." To
paraphrase, the accommodation party is liable to a
Only Felipe Ang appealed to the CFI of Manila, which holder for value as if the contract was not for
amended the previous order directing him to pay to accommodation. It is not a valid defense that the
plaintiff. Felipe Ang then elevated the case to CA, accommodation party did not receive any valuable
which certified it to SC because the issues raised are consideration when he executed the instrument. Nor
purely of law. is it correct to say that the holder for value is not a
holder in due course merely because at the time he
Respondent contend that the trial court erred that it acquired the instrument, he knew that the indorser
adjudged him a general indorser under the was only an accommodation party.
Negotiable Instruments Law.
3. That the appellant, again assuming him to be
Issue: an accommodation indorser, may obtain security
Whether Ang is an accommodating indorser and not from the maker to protect himself against the danger
a general indorser. of insolvency of the latter, cannot in any manner
affect his liability to the appellee, as the said remedy
Held: is a matter of concern exclusively between
No. accommodation indorser and accommodated party.
So that the fact that the appellant stands only as a
SC agreed with the trial judge that nothing in the surety in relation to the maker, granting this to be
check in question indicates that the appellant is not a true for the sake of argument, is immaterial to the
general indorser within the purview of section 63 of claim of the appellee, and does not a whit diminish
the Negotiable Instruments Law which makes "a nor defeat the rights of the latter who is a holder for


Chapter 2 – Consideration

value. The liability of the appellant remains primary Board of Directors that Travel-On was financially
and unconditional. To sanction the appellant's theory stable.
is to give unwarranted legal recognition to the patent
absurdity of a situation where an indorser, when sued Issue:
on an instrument by a holder in due course and for Whether the checks are evidence of the liability of the
value, can escape liability on his indorsement by the respondent to the petitioner even assuming that they
convenient expedient of interposing the defense that were for purposes of accommodation.
he is a mere accomodation indorser.

Travel-On Inc. The checks clearly established private respondent's

vs. indebtedness to petitioner; that private respondent
CA and Arturo Miranda was liable thereunder.
(G.R. No. L-56169 June 26, 1992)
Accommodation party – Presumption of consideration It is important to stress that a check which is regular
Facts: on its face is deemed prima facie to have been issued
Petitioner Travel-On. Inc. is a travel agency selling for a valuable consideration and every person whose
airline tickets on commission basis for and in behalf signature appears thereon is deemed to have become
of different airline companies. Private respondent a party thereto for value. Thus, the mere introduction
Arturo S. Miranda had a revolving credit line with of the instrument sued on in evidence prima facie
petitioner. He procured tickets from petitioner on entitles the plaintiff to recovery. Further, the rule is
behalf of airline passengers and derived commissions quite settled that a negotiable instrument is
therefrom. presumed to have been given or indorsed for a
sufficient consideration unless otherwise
Travel-On filed suit before the CFI of Manila to collect contradicted and overcome by other competent
on six (6) checks issued by private respondent with a evidence.
total face amount of P115,000.00. The complaint
averred that from a certain period, petitioner sold In the case at bar, the CA, contrary to these
and delivered various airline tickets to respondent at established rules, placed the burden of proving the
a total price of P278,201.57; that to settle said existence of valuable consideration upon petitioner.
account, private respondent paid various amounts in This cannot be countenanced; it was up to private
cash and in kind, and thereafter issued six (6) respondent to show that he had indeed issued the
postdated checks amounting to P115,000.00 which checks without sufficient consideration. The SC
were all dishonored by the drawee banks. considers that private respondent was unable to
rebut satisfactorily this legal presumption. It must
Private respondent claimed that he had already fully also be noted that those checks were issued
paid and even overpaid his obligations and that immediately after a letter demanding payment had
refunds were in fact due to him. He argued that he been sent to private respondent by petitioner Travel-
had issued the postdated checks for purposes of On.
accommodation, as he had in the past accorded
similar favors to petitioner. The conclusion that the checks involved were issued
for "accommodation" and that accordingly private
The trial court ruled that private respondent's respondent maker of those checks was not liable
indebtedness to petitioner was not satisfactorily thereon to petitioner payee of those checks is
established and that the postdated checks were without merit.
issued not for the purpose of encashment to pay his
indebtedness but to accommodate the General In the first place, while the Negotiable Instruments
Manager of Travel-On to enable her to show to the Law does refer to accommodation transactions, no


Chapter 2 – Consideration

such transaction was here shown. Section 29 of the which the vendee bound itself to pay for. This loan
Negotiable Instruments Law provides as follows: was to cover for the payment of P1,000,000. This
addendum was not notarized.
Sec. 29. Liability of accommodation party. — An
accommodation party is one who has signed the
Consequently, petitioner Mario Soriano signed as
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of maker several promissory notes, payable to the
lending his name to some other person. Such a person respondent bank. Thereafter, the bank released the
is liable on the instrument to a holder for value, proceeds of the loan to petitioners. However,
notwithstanding such holder, at the time of taking the
petitioners failed to meet their obligations as they fell
instrument, knew him to be only an accommodation
party. due. During that time, the bank was experiencing
financial turmoil and was under the supervision of the
In the case at bar, Travel-On was payee of all six (6) Central Bank.
checks, it presented these checks for payment at the
drawee bank but the checks bounced. Travel-On Respondent bank filed three separate complaints
obviously was not an accommodated party; it realized before the RTC of Manila for collection of sum of
no value on the checks which bounced. money.

The argument of the respondent that the checks were Petitioners interposed the defense of novation and
merely “simulated” cannot stand without the clearest insisted there was a valid substitution of debtor. They
and most convincing kinds of evidence. No such alleged that the addendum specifically states that
evidence was submitted by the respondent. although the promissory notes were in their names,
Wonderland shall be responsible for the payment

Agro Conglomerates and The trial court held that petitioners are liable. CA
Mario Soriano affirmed the trial court decision.
CA and Regent Savings and Issue:
Loan Bank, Inc. Whether petitioners should be liable to respondent
(G.R. No. 117660. December 18, 2000)
Accommodation party
Facts: Held:
Petitioner Agro Conglomerates, Inc. as vendor, sold Yes.
two parcels of land to Wonderland Food Industries,
Inc. In their Memorandum of Agreement, the parties No sale materialized.
covenanted that the purchase price of P5,000,000
would be settled by the vendee, under the following A contract of sale is a reciprocal transaction. The
terms and conditions: (1) P1,000,000 shall be paid in obligation or promise of each party is the cause or
cash upon the signing of the agreement; (2) consideration for the obligation or promise by the
P2,000,000 worth of common shares of stock of the other. The vendee is obliged to pay the price, while
Wonderland Food Industries, Inc.; and (3) the balance the vendor must deliver actual possession of the land.
of P2,000,000.00 shall be paid in four equal In the instant case the original plan was that the initial
installments. payments would be paid in cash. Subsequently, the
parties (with the participation of respondent bank)
Subsequently, the vendor, the vendee, and the executed an addendum providing instead, that the
respondent bank Regent Savings & Loan Bank petitioners would secure a loan in the name of Agro
executed an Addendum to the previous Conglomerates Inc. for the total amount of the initial
Memorandum of Agreement. The vendee authorized payments, while the settlement of said loan would be
the vendor to obtain a loan from the financier on assumed by Wonderland. Thereafter, petitioner


Chapter 2 – Consideration

Soriano signed several promissory notes and received Eulalio Prudencio and Elisa
the proceeds in behalf of petitioner-company. Prudencio
By this time, we note a subsidiary contract of CA
suretyship had taken effect since petitioners signed
(G.R. No. L-34539 July 14, 1986)
the promissory notes as maker and accommodation Accommodation party
party for the benefit of Wonderland. Petitioners Facts:
became liable as accommodation party. An Petitioners are the owners of a property, which
accommodation party is a person who has signed the they mortgaged to help secure a loan of a certain
instrument as maker, acceptor, or indorser, without Domingo Prudencio. On a later date, they were
receiving value therefor, and for the purpose of approached by their relative who was the attorney-
lending his name to some other person and is liable in-fact of a construction company, which was in dire
on the instrument to a holder for value, need of funds for the completion of a municipal
notwithstanding such holder at the time of taking the building. After some persuasion, the appellants
instrument knew (the signatory) to be an amended the mortgage wherein the terms and
accommodation party. He has the right, after paying conditions of the original mortgage was made an
the holder, to obtain reimbursement from the party integral part of the new mortgage. The
accommodated, since the relation between them has promissory note covering the “second loan” was
in effect become one of principal and surety, the signed by their relative. It was also signed by them,
accommodation party being the surety. indicating the request that the check be released by
the bank.
Suretyship is defined as the relation which exists
where one person has undertaken an obligation and After the amendment of the mortgage was executed,
another person is also under the obligation or other a deed of assignment was made by Toribio,
duty to the obligee, who is entitled to but one assigning all the payments to the Bureau to the
performance, and as between the two who are construction company. This notwithstanding, the
bound, one rather than the other should perform. Bureau with approval of the bank, conditioned
The surety’s liability to the creditor or promisee of the however that they should be for labor and materials,
principal is said to be direct, primary and absolute; in made three payments to the company. The last
other words, he is directly and equally bound with the request was denied by the bank, averring that the
principal. And the creditor may proceed against any account was long overdue, the remaining balance of
one of the solidary debtors. the contract price should be applied to the loan.

Petitioners had no legal or just ground to retain the The company abandoned the work and as
proceeds of the loan at the expense of private consequence, the Bureau rescinded the contract
respondent. Neither could petitioners excuse and assumed the work. Later on, the appellants
themselves and hold Wonderland still liable to pay wrote to the PNB that since the latter has
the loan upon the rescission of their sales contract. If authorized payments to the company instead of on
petitioners sustained damages as a result of the account of the loan guaranteed by the mortgage,
rescission, they should have impleaded Wonderland there was a change in the conditions of the contract
and asked damages. The non-inclusion of a necessary without the knowledge of appellants, which entitled
party does not prevent the court from proceeding in the latter to cancel the mortgage contract.
the action, and the judgment rendered therein shall
be without prejudice to the rights of such necessary The trial court held them still liable together with
party. their co-makers. It has also been held that if the
judgment is not satisfied within a period of time, the
mortgaged properties would be foreclosed and sold
in public auction.


Chapter 2 – Consideration

In their appeal, petitioners contend that as does not release him because as far as a holder for
accommodation makers, the nature of their liability value is concerned, he is a solidary co- debtor.
is only that of mere sureties instead of solidary co-
debtors such that a material alteration in the principal Expounding on the nature of the liability of an
contract, effected by the creditor without the accommodation petition party under the
knowledge and consent of the sureties, completely aforequoted section, we ruled in Ang Tiong v. Ting (22
discharges the sureties from all liabilities on the SCRA 713, 716):
contract of suretyship.
3. That the appellant, again assuming him to be an
accommodation indorser, may obtain security from the
maker to protect himself against the danger of
Whether petitioners were solidary-debtors or insolvency of the latter, cannot in any manner affect his
sureties. liability to the appellee, as the said remedy is a matter
of concern exclusively between accommodation
indorser and accommodated party. So that the
appellant stands only as a surety in relation to the
The petitioners contend that as accommodation maker, granting this to be true for the sake of argument,
makers, the nature of their liability is only that of is immaterial to the claim of the appellee, and does not
mere sureties instead of solidary co-debtors such that a whit diminish nor defeat the rights of the latter who is
a holder for value. The liability of the appellant remains
"a material alteration in the principal contract,
primary and unconditional. To sanction the appellant's
effected by the creditor without the knowledge and theory is to give unwarranted legal recognition to the
consent of the sureties, completely discharges the patent absurdity of a situation where an indorser, when
sureties from all liability on the contract of sued on an instrument by a holder in due course and for
value, can escape liability on his indorsement by the
suretyship.” They state that when respondent PNB
convenient expedient of interposing the defense that
did not apply the initial and subsequent payments to he is a mere accommodation indorser.
the petitioners' debt as provided for in the deed of
assignment, they were released from their obligation There is, therefore, no question that as
as sureties and, therefore, the real estate mortgage accommodation makers, petitioners would be
executed by them should have been cancelled. primarily and unconditionally liable on the
promissory note to a holder for value, regardless of
Section 29 of the Negotiable Instrument Law whether they stand as sureties or solidary co-debtors
provides: since such distinction would be entirely immaterial
Liability of accommodation party. —An accommodation
and inconsequential as far as a holder for value is
party is one who has signed the instrument as maker,
drawer, acceptor, or indorser, without receiving value concerned. Consequently, the petitioners cannot
therefor, and for the purpose of lending his name to claim to have been released from their obligation
some other person. Such a person is liable on the simply because the time of payment of such
instrument to a holder for value, notwithstanding such
obligation was temporarily deferred by PNB without
holder at the time of taking the instrument knew him to
be only an accommodation party. their knowledge and consent. There has to be
another basis for their claim of having been freed
In the case of Philippine Bank of Commerce v. Aruego from their obligation. The question which should be
(102 SCRA 530, 539), we held that "... in lending his resolved in this instant petition, therefore, is whether
name to the accommodated party, the or not PNB can be considered a holder for value under
accommodation party is in effect a surety. ... ." Section 29 of the Negotiable Instruments Law such
However, unlike in a contract of suretyship, the that the petitioners must be necessarily barred from
liability of the accommodation party remains not only setting up the defense of want of consideration or
primary but also unconditional to a holder for value some other personal defenses which may be set up
such that even if the accommodated party receives an against a party who is not a holder in due course.
extension of the period for payment without the
consent of the accommodation party, the latter is still
liable for the whole obligation and such extension


Chapter 2 – Consideration

People acceptor ** unless he clearly indicates by appropriate

vs. words his intention to be bound in some other
Julia Maniego capacity. " Such an indorser "who indorses without
qualification," inter alia "engages that on due
(G.R. No. L-30910 February 27, 1987)
Accommodation party presentment, ** (the instrument) shall be accepted
Facts: or paid, or both, as the case may be, according to its
Lt. Rizalino M. Ubay is a duly appointed officer in the tenor, and that if it be dishonored, and the necessary
AFP. He was designated as Disbursing Officer in the proceedings on dishonor be duly taken, he will pay
Office of the Chief of Finance, GHQ, Camp Murphy, the amount thereof to the holder, or to any
Quezon City. He was entrusted with and had under subsequent indorser who may be compelled to pay
his custody and control public funds. it."

He conspired with co-accused Milagros Pamintuan Maniego may also be deemed an "accommodation
and Julia T. Maniego. The accused take, receive, and party" in the light of the facts, i.e., a person "who has
accept from his said co-accused several personal signed the instrument as maker, drawer, acceptor, or
checks drawn against the PNB and BPI of which indorser, without receiving value therefor, and for the
Pamintuan is the drawer and Maniego is the indorser, purpose of lending his name to some other person."
in the total amount of P66,434.50. The checks were As such, she is under the law "liable on the instrument
dishonored and rejected by the said banks when to a holder for value, notwithstanding such holder at
presented for encashment. the time of taking the instrument knew ** (her) to be
only an accommodation party," although she has the
An information for the crime of malversation was right, after paying the holder, to obtain
filed against the 3. Only Lt. Ubay and Mrs. Maniego reimbursement from the party accommodated,
were arraigned, Mrs. Pamintuan having apparently "since the relation between them is in effect that of
fled to the United States. Both Ubay and Maniego principal and surety, the accommodation party being
entered a plea of not guilty. the surety."

Maniego was acquitted but both she and Ubay are

ordered to pay jointly and severally the amount of
P57,434.50 to the government.

Whether Maniego should be held liable to the


Appellant's contention that as mere indorser, she

may not be made liable on account of the dishonor of
the checks indorsed by her, is untenable.

Under the law, the holder or last indorsee of a

negotiable instrument has the right to "enforce
payment of the instrument for the full amount
thereof against all parties liable thereon." Among the
"parties liable thereon" is an indorser of the
instrument i.e., "a person placing his signature upon
an instrument otherwise than as maker, drawer, or


Chapter 3 – Negotiation

Ang Tek Lian A check payable to the order of cash is a bearer

vs. instrument.
Where a check is made payable to the order of "cash",
(G.R. No. L-2516 September 25, 1950)
the word cash "does not purport to be the name of
Check payable to bearer
Facts: any person", and hence the instrument is payable to
Ang Tek Lian, knowing he had no funds, drew a check bearer. The drawee bank need not obtain any
upon the China Banking Corporation for the sum of indorsement of the check, but may pay it to the
P4,000, payable to the order of "cash". He delivered person presenting it without any indorsement.
it to Lee Hua Hong in exchange for money. The next
business day, the check was presented by Lee Hua If the bank is not sure of the bearer's identity or
Hong to the drawee bank for payment, but it was financial solvency, it has the right to demand
dishonored for insufficiency of funds. identification and /or assurance against possible
complications, — for instance, (a) forgery of drawer's
Ang Tek Lian was convicted for estafa. signature, (b) loss of the check by the rightful owner,
(c) raising of the amount payable, etc. The bank may
On appeal, he argued that as the check had been therefore require, for its protection, that the
made payable to "cash" and had not been endorsed indorsement of the drawer — or of some other
by him, he is not guilty of the offense charged. Based person known to it — be obtained. But where the
on the proposition that "by uniform practice of all Bank is satisfied of the identity and /or the economic
banks in the Philippines a check so drawn is invariably standing of the bearer who tenders the check for
dishonored," the following line of reasoning is collection, it will pay the instrument without further
advanced in support of the argument: question; and it would incur no liability to the drawer
When the offended party accepted the in thus acting.
check 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."

Whether the check issued by Ang Tek Lian that is
payable to the order to “cash” and not have been
indorsed by Ang Tek Lian.

No. It is a check payable to bearer.

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.


Chapter 4 – Rights of the holder

Republic of the Philippines of the alleged defect of said warrants and demanded
vs. reimbursement of the amounts and this demand was
Equitable Bank Corp. rejected by the Equitable Bank.

(G.R. No. L-15894-95 January 30, 1964)

Thus, the Government seeks to recover: (1) from the
Right of drawee and collecting banks
Facts: Equitable Banking Corporation the sum of P17,100,
representing the aggregate value of four (4) treasury
In G.R. No. L-15895, the Corporacion de los Padres
warrants; and (2) from BPI the total sum of
Dominicos had acquired 24 treasury warrants by
P342,767.63, representing the aggregate value of
accommodating its former trusted employee who
twenty-four (24) warrants similarly paid by the
asked the Corporacion to cash the warrants. The
Treasurer to the PI Bank.
Corporacion acceded to the request, provided that
the warrants would first be deposited with BPI Bank,
and that actual payment of the value of the warrants
Whether the Government can recover the amounts
would be made only after the same had been duly
paid erroneously in consideration of the 28 treasury
accepted and cleared by the Treasurer of the
warrants, which in fact, were forged.
Philippines and the proceeds thereof duly credited to
the account of the Corporacion in the BPI Bank.
The warrants were, accordingly, deposited by the
The Government maintains that it is not bound by this
Corporacion with said bank, which accepted them
rule because: (1) the Treasury is not a bank; and (2)
"subject to collection only". When the warrants were
the Treasurer has objected to the application of said
deposited with the PI Bank, each bore the
rule to his office.
indorsement of the respective payees and that of the
Corporation. Subsequently, the PI Bank presented the
This contention, however, untenable for, admittedly,
warrants for payment to the drawee thereof — the
the Treasury is a member of the aforementioned
Government — thru the Clearing Office of the Central
Clearing Office and clearly shows that the former "has
Bank. After being cleared, the warrants were paid by
agreed to clear its clearable items through" the latter
the Treasurer.
"subject to the rules and regulations of the Central
Bank." Besides, the rule applies not only to banks, but,
Accordingly, the PI Bank credited the proceeds of said
also, to the institutions and entities therein alluded
warrants to the Corporation, which, in turn, withdrew
to. Then too, the opposition of the Treasurer to the
said proceeds by means of its own checks. The
"24-hour clearing house rule" is not sufficient to
Treasurer returned, on separate dates, returned the
exempt the Treasury from the operation thereof.
warrants to the Central Bank, and demanded, on the
ground that they had been forged, that the value
Further, the aforementioned twenty-eight (28)
thereof be charged against the accounts of the PI
warrants were cleared and paid by the Treasurer, in
Bank in the Clearing Office and credited back to the
view which the PI Bank and the Equitable Bank
demand deposit of the Bureau of the Treasury.
credited the corresponding amounts to the
respective depositors of the warrants and then
In G.R. No. L-15894, 4 warrants involved were
honored their checks for said amounts. Thus, the
deposited with the Equitable Bank by persons known
Treasury had not only been negligent in clearing its
thereto as its depositors or customers, namely,
own warrants, but had, also, thereby induced the BPI
Robert Wong, Lu Chill Kau and Chung Ching. In due
and the Equitable Bank to pay the amounts thereof to
course, the Equitable Bank cleared said warrants, thru
said depositors.
the Clearing Office, then collected the corresponding
amounts from the Treasurer and thereafter credited
The gross nature of the negligence of the Treasury
said amounts to the accounts of the respective
becomes more apparent when we consider that each
depositors. The Treasurer notified the Equitable Bank
one of the twenty-four (24) warrants involve was for


Chapter 4 – Rights of the holder

over P5,000, and, hence; beyond the authority of the the check for safekeeping to a bank official, a certain
auditor of the Treasury — whose signature thereon Albert Uy, who had then a visitor in the person of
had been forged — to approve. In other words, the Alexander Lim. Uy had to answer a phone call on a
irregularity of said warrants was apparent the face nearby telephone after which he proceeded to the
thereof, from the viewpoint of the Treasury. men's room. When he returned to his desk, his visitor
Moreover, the same had not advertised the loss of Lim was already gone. When Jose Go inquired for his
genuine forms of its warrants. Neither had the BPI nor cashier's check from Albert Uy, the check was not in
the Equitable Bank been informed of any irregularity his folder and nowhere to be found. The latter
in connection with any of the warrants involved in advised Jose Go to go to the bank to accomplish a
these two (2) cases, until after the warrants had been "STOP PAYMENT" order, which suggestion Jose Go
cleared and honored — when the Treasury gave immediately followed. He also executed an affidavit
notice of the forgeries adverted to above. As a of loss. Albert Uy went to the police to report the loss
consequence, the loss of the amounts thereof is of the check, pointing to the person of Alexander Lim
mainly imputable to acts and omissions of the as the one who could shed light on it.
Treasury, for which the BPI and the Equitable Bank
should not and cannot be penalized. The records of the police show that Associated Bank
received the lost check for clearing, coming from
Where a loss, which must be borne by one of two Prudential Bank. The check was immediately
parties alike innocent of forgery, can be traced to the dishonored by Associated Bank by sending it back to
neglect or fault of either, it is reasonable that it would Prudential Bank, with the words "Payment Stopped"
be borne by him, even if innocent of any intentional stamped on it. However, the same was again returned
fraud, through whose means it has succeeded. to Associated Bank and for the second time it was
Generally, where a drawee bank otherwise would
have a right of recovery against a collecting or Several days later, respondent Associated Bank
indorsing bank for its payment of a forged check its received a letter from a certain Atty. Lorenzo Navarro
action will be barred if it is guilty of an unreasonable demanding payment on the cashier's check in
delay in discovering the forgery and in giving notice question, which was being held by his client. He
thereof. however refused to reveal the name of his client and
threatened to sue, if payment is not made.
Where defendant bank, on presentation to it on Respondent bank, in its letter, replied saying the
September 2, of forged check drawn on another bank, check belonged to Jose Go who lost it in the bank and
paid part of amount to presenter, drawee paying is laying claim to it.
check through clearing house on said day, held that
the latter, not giving notice of forgery until December Respondent Associated Bank filed an action for
5, could not hold defendant for amount so paid. Interpleader naming as respondent, Jose Go and one
John Doe, Atty. Navarro's then unnamed client. On
even date, respondent bank received summons and
copy of the complaint for damages of a certain
Mesina Marcelo Mesina from the RTC of Caloocan City.
IAC Petitioner claims that a cashier's check cannot be
(G.R. No. 70145 November 13, 1986) countermanded in the hands of a holder in due
Holder in due course course.
Jose Go purchased from Associated Bank cashier's Issue:
check for P800,000. Unfortunately, Jose Go left said Whether petitioner can collect on the stolen check on
check on the top of the desk of the bank manager the ground that he is a holder in due course.
when he left the bank. The bank manager entrusted


Chapter 4 – Rights of the holder

Held: not be drawer and drawee for clearly, Jose Go owns

No. the money it represents and he is therefore the
drawer and the drawee in the same manner as if he
Petitioner's allegations hold no water. Theories and has a current account and he issued a check against
examples advanced by petitioner on causes and it; and from the moment said cashier's check was lost
effects of a cashier's check such as 1) it cannot be and/or stolen no one outside of Jose Go can be
countermanded in the hands of a holder in due termed a holder in due course because Jose Go had
course and 2) a cashier's check is a bill of exchange not indorsed it in due course. The check in question
drawn by the bank against itself-are general suffers from the infirmity of not having been properly
principles which cannot be aptly applied to the case negotiated and for value by respondent Jose Go who
at bar, without considering other things. has already been said is the real owner of said
Petitioner failed to substantiate his claim that he is a
holder in due course and for consideration or value as
shown by the established facts of the case.
Admittedly, petitioner became the holder of the Banco Atlantico
cashier's check as endorsed by Alexander Lim who vs.
stole the check. He refused to say how and why it was Auditor General
passed to him. He had therefore notice of the defect (G.R. No. L-33549 January 31, 1978)
of his title over the check from the start. Holder in due course
The holder of a cashier's check who is not a holder in Petitioner is a commercial Bank doing business in
due course cannot enforce such check against the Madrid, Spain. Virginia Boncan, then the Finance
issuing bank which dishonors the same. If a payee of Officer of the Philippine Embassy in Madrid, Spain,
a cashier's check obtained it from the issuing bank by negotiated with Banco Atlantico several Philippine
fraud, or if there is some other reason why the payee Embassy checks signed by Luis M. Gonzales, its
is not entitled to collect the check, the respondent ambassador, and by said Virginia Boncan as Finance
bank would, of course, have the right to refuse Officer payable to Azucena Pace and drawn against
payment of the check when presented by the payee, the Philippine National Bank branch in New York,
since respondent bank was aware of the facts U.S.A. The check was endorsed by Azucena Pace and
surrounding the loss of the check in question. Virginia Boncan. The petitioner, without clearing the
checks with the drawn bank in New York, U.S.A., paid
Moreover, there is no similarity in the cases cited by the full amount to Virginia Boncan.
petitioner since respondent bank did not issue the
cashier's check in payment of its obligation. Jose Go Upon presentment for acceptance and payment of
bought it from respondent bank for purposes of the aforementioned checks by Banco Atlantico
transferring his funds from respondent bank to through its collecting bank in New York, U.S.A. to the
another bank near his establishment realizing that drawn bank, the Philippine National Bank branch in
carrying money in this form is safer than if it were in U.S.A., said drawee bank dishonored the checks by
cash. The check was Jose Go's property when it was non-acceptance allegedly on the ground that the
misplaced or stolen, hence he stopped its payment. drawer had ordered payments to be stopped. Upon
At the outset, respondent bank knew it was Jose Go's receipt of the notice of the dishonor, the collecting
check and no one else since Go had not paid or bank of the petitioner in New York, U.S.A. sent
indorsed it to anyone. The bank was therefore liable individual notices of protest with respect to the
to nobody on the check but Jose Go. The bank had no checks in question to the Philippine Embassy in
intention to issue it to petitioner but only to buyer Madrid, Spain and to Virginia Boncan as endorser
Jose Go. When payment on it was therefore stopped, payee that Virginia Boncan and the Philippine
respondent bank was not the one who did it but Jose Embassy in Madrid, Spain refused to pay the
Go, the owner of the check. Respondent bank could


Chapter 4 – Rights of the holder

petitioner the amounts of the aforementioned

c. That he took it in good faith and for value;
d. That at the time it was negotiated to him he had no
The petitioner, Banco Atlantico, filed the notice of infirmity in the instrument or defect in the title
corresponding money claim with the Auditor General. of the person negotiating it.

Issue: All four conditions enumerated under this section

Whether petitioner is a holder in due course and thus, must concur before a holder can be considered as a
it is not precluded from setting up forgery. holder in due course. The absence or failure to
comply with any of the conditions set forth under this
Held: section will make one's title to the instrument
No. defective.

Banco Atlantico argues that it has every right to The check for US$90,000.00 was a demand note.
recover from the Embassy as drawer of the checks When Miss Boncan the payee of this check,
because it is a holder in due course. Basis for the claim negotiated the same by depositing it in her account,
is Section 61 of the Negotiable Instruments Law, to at the game time informing the bank in writing that it
wit: be not presented for collection until a later date,
Banco Atlantico through its agent teller or cashier
SEC. 61. Liability of drawer — The drawer by drawing should have been put on guard that there was
the instrument admits the existence of the payee and something wrong with the check. The fact that the
his then capacity to endorse and engages that on the
amount involved was quite big and it was the payee
due presentment the instrument will be accepted or
paid, or both, according to its tenor and that if it be herself who made the request that the same not be
dishonored, and the n proceedings on dishonor be duly presented for collection until a fixed date in the future
taken, he will pay the amount thereof to the holder, or was proof of a glaring infirmity or defect in the
to any subsequent indorser who may be compelled to
instrument. It loudly proclaims, "Take me at your
pay it. But the drawer may insert in the instrument an
express stipulation negativing or limiting his own risk." The interest of the payee was the immediate
liability to the holder. punishment of the check of which she was the
beneficiary and not the deferment of the
It is erroneous for claimant bank's Counsel to single presentment for collection of the same to the drawee
out this particular provision because the bank. This being the case, Banco Atlantico was not a
interpretation thereof would be out of context. All holder in due course as defined by Section of the
the other related provisions of said law must be N.I.L., because it was obvious that it had knowledge
interpreted together, and it would then be doubtful if of the infirmity or defect of the cheek. The fact that
Banco Atlantico could qualify as a holder in due the check was honored by claimant bank was proof
course. not only of their gross negligence but a further
manifestation of the special treatment they were
Section 61 of the Negotiable instruments Law can according Miss Boncan.
only be availed of by holders in due course and Banco
Atlantico cannot be considered as one under the
definition of Section 52 of the N.I.L., to wit:
Vicente De Ocampo & Co.
SEC. 52. What constitutes a holder in due course — A vs.
holder in due course is a holder who has taken the Anita Gatchalian, et. al.
instrument under the following conditions:
(G.R. No. L-15126 November 30, 1961)
a. That it is complete and regular on its face; Holder in due course
b. That he became the holder of it before it was
Defendant Anita Gatchalian was shown and offered a
overdue, and without notice that it has been previously
dishonored, if such was the fact; car by Manuel Gonzales who was accompanied by


Chapter 4 – Rights of the holder

Emil Fajardo, the latter being personally known to which the check was delivered to Manuel Gonzales,
defendant Gatchalian. Gonzales represented to but SC agreed with the defendants-appellants that
defend Gatchalian that he was duly authorized by the the circumstances indicated by them in their briefs,
owner of the car, Ocampo Clinic, to look for a buyer such as the fact that appellants had no obligation or
of said car and to negotiate for and accomplish said liability to the Ocampo Clinic; that the amount of the
sale, but which facts were not known to plaintiff check did not correspond exactly with the obligation
Vicente De Ocampo. of Matilde Gonzales to Dr. V. R. de Ocampo; and that
the check had two parallel lines in the upper left hand
Gatchalian requested Gonzales to bring the car the corner, which practice means that the check could
day following together with the certificate of only be deposited but may not be converted into cash
registration of the car. Gonzales advised her that the — all these circumstances should have put the
owner of the car will not be willing to give the plaintiff-appellee to inquiry as to the why and
certificate of registration unless there is a showing wherefore of the possession of the check by Manuel
that the party interested in the purchase of said car is Gonzales, and why he used it to pay Matilde's
ready and willing to make such purchase and for this account.
purpose Gonzales requested defendant Gatchalian to
give him a check which will be shown to the owner as It was payee's duty to ascertain from the holder
evidence of buyer's good faith in the intention to Manuel Gonzales what the nature of the latter's title
purchase the said car. The said check to be for to the check was or the nature of his possession.
safekeeping only of Gonzales and to be returned to Having failed in this respect, we must declare that
defendant Gatchalian the following day when Manuel plaintiff-appellee was guilty of gross neglect in not
Gonzales brings the car and the certificate of finding out the nature of the title and possession of
registration. Thus, Gatchalian drew and issued a Manuel Gonzales, amounting to legal absence of
check . good faith, and it may not be considered as a holder
of the check in good faith. To such effect is the
On the failure of Gonzales to appear the day consensus of authority.
following, defendant Anita C. Gatchalian issued a
"Stop Payment Order" on the check with the drawee In order to show that the defendant had "knowledge
bank. of such facts that his action in taking the instrument
amounted to bad faith," it is not necessary to prove
Gonzales delivered the check to the Ocampo Clinic, in that the defendant knew the exact fraud that was
payment of the fees and expenses arising from the practiced upon the plaintiff by the defendant's
hospitalization of his wife. Plaintiff accepted said assignor, it being sufficient to show that the
check, applying P441.75 thereof to payment of said defendant had notice that there was something
fees and expenses and delivering to Gonzales the wrong about his assignor's acquisition of title,
amount of P158.25 representing the balance on the although he did not have notice of the particular
amount of the said check. wrong that was committed.

CFI ordered Gatchalian to pay the amount of the It is sufficient that the buyer of a note had notice or
check to De Ocampo. knowledge that the note was in some way tainted
with fraud. It is not necessary that he should know the
Issue: particulars or even the nature of the fraud, since all
Whether or not De Ocampo is a holder in due course. that is required is knowledge of such facts that his
action in taking the note amounted bad faith.
No. The above considerations would seem sufficient to
justify our ruling that plaintiff-appellee should not be
The stipulation of facts expressly states that plaintiff- allowed to recover the value of the check. Let us now
appellee was not aware of the circumstances under examine the express provisions of the Negotiable


Chapter 4 – Rights of the holder

Instruments Law pertinent to the matter to find if our

ruling conforms thereto. Section 52 (c) provides that
a holder in due course is one who takes the
instrument "in good faith and for value;" Section 59,
"that every holder is deemed prima facie to be a
holder in due course;" and Section 52 (d), that in
order that one may be a holder in due course it is
necessary that "at the time the instrument was
negotiated to him "he had no notice of any . . . defect
in the title of the person negotiating it;" and lastly
Section 59, that every holder is deemed prima facie
to be a holder in due course.

In the case at bar the rule that a possessor of the

instrument is prima facie a holder in due course does
not apply because there was a defect in the title of
the holder (Manuel Gonzales), because the
instrument is not payable to him or to bearer. On the
other hand, the stipulation of facts indicated by the
appellants in their brief, like the fact that the drawer
had no account with the payee; that the holder did
not show or tell the payee why he had the check in his
possession and why he was using it for the payment
of his own personal account — show that holder's
title was defective or suspicious, to say the least. As
holder's title was defective or suspicious, it cannot be
stated that the payee acquired the check without
knowledge of said defect in holder's title, and for this
reason the presumption that it is a holder in due
course or that it acquired the instrument in good faith
does not exist. And having presented no evidence
that it acquired the check in good faith, it (payee)
cannot be considered as a holder in due course. In
other words, under the circumstances of the case,
instead of the presumption that payee was a holder
in good faith, the fact is that it acquired possession of
the instrument under circumstances that should have
put it to inquiry as to the title of the holder who
negotiated the check to it. The burden was, therefore,
placed upon it to show that notwithstanding the
suspicious circumstances, it acquired the check in
actual good faith.


Chapter 5 – Liabilities of Parties

J. Antonio Araneta trust estate. And on the basis of a motion to dismiss

vs. filed by Araneta as trustee, and over the opposition
Antonio Perez of Perez, the municipal court dismissed the latter's
complaint. His motion for reconsideration having
(G.R. Nos. L-20787-8 June 29, 1965)
been denied, Perez appealed to the court a quo
Liability of maker
Facts: where he filed an amended complaint against
Antonio M. Perez executed a promissory note Araneta.
wherein he agreed to pay J. Antonio Araneta, or
order, the sum of P3,700.00, and if it is not paid on Considering that the two cases involved the same
the date of maturity, to pay interest at 9% per annum parties and the same promissory note, they were
on the amount of the loan, and P370.00 as attorney's ordered consolidated.
fees in addition to costs and other disbursements
taxable under the Rules of Court. Issue:
Whether Perez is liable for the value of the check.
The note having become due and Antonio M. Perez
having failed to pay it despite demand made upon Held:
him to do so, Araneta filed on October 31, 1961 a Yes.
complaint in the Municipal Court of Manila to collect
its import under the terms therein stipulated. The promissory note signed by Perez clearly states
that he agreed to pay Araneta or order the sum of
In his answer, defendant Perez alleged that the P3,700.00 and if the same is not paid on said date to
proceeds of the note were applied by him to the pay 9% interest thereon per annum until fully paid,
payment of the medical treatment of his minor plus the sum of P370.00 as attorney's fees, in addition
daughter Angela Perez y Tuason, who is the to the costs and other disbursements taxable under
beneficiary of the trust then administered by Araneta the Rules of Court. Under these terms it is clear that
as trustee in Special Proceeding No. Q-73 of the Court Perez bound himself to pay personally said
of First Instance of Quezon City, and that the trust promissory note which he cannot shift to another
estate is bound to pay the expenses of said treatment without the consent of the payee. Such is the
because they were for the benefit of said minor and undertaking of the maker. Indeed, Section 60 of the
so the personal fund he borrowed from Araneta and Negotiable Instrument, Law provides that "the maker
for which he executed the aforesaid promissory note of a negotiable instrument by making it engages that
should be paid by Araneta in the manner above- he will pay it according to its tenor and admits the
stated. existence of the payee and his then capacity to
indorse so that appellant cannot now escape liability
The trial court ruled in favor of Araneta and ordered as maker by alleging that he spent the money for the
Perez to pay the amount of the check. medical treatment of his daughter since it is not the
payee's concern to know how said proceeds should
In the meantime, or on February 8, 1962, Perez filed be spent. That is the sole concern of the maker.
a complaint in the Municipal Court of Manila against Payee's interest is merely to see that the note be paid
Araneta in his capacity as trustee of the minor child according to its terms.
Angela Perez y Tuason in Special Proceeding No. Q-73
of the Court of First Instance of Quezon City wherein, It is clear that insofar as the personal liability of
making reference to civil case filed against him by appellant Perez on the promissory note is concerned,
Araneta, he repeated the same allegations contained which he admittedly executed for value in favor of
in the answer he interposed to the complaint of appellee Araneta, all the above recited allegations are
Araneta and prayed that Araneta as trustee be irrelevant and immaterial and cannot tender any
required to pay Perez the amount of P3,700 advanced issue that will affect his personal liability under the
by the latter in order to meet the obligation of the note. And this is so because the allegation regarding
the existence of the trust and its mismanagement on


Chapter 5 – Liabilities of Parties

the part of appellee Araneta as trustee, certainly, has

nothing to do with the money lent by him to In her Amended Answer with Counterclaim,
appellant. Neither has the allegation that the petitioner alleged that immediately after the loan
proceeds of the note were spent by appellant for the matured, she offered to settle the obligation with
medical treatment of minor Angela anything to do respondent corporation but the latter informed her
with his personal obligation because the destination that they would try to collect from the spouses
of the proceeds of said note is certainly not the Azarraga and that she need not worry about it; that
concern of Araneta. there has already been a partial payment in the
amount of P17,010; that the interest of 6% per month
But even assuming for the sake of argument that compounded at the same rate per month, as well as
what is claimed by appellant as to how he spent the the penalty charges of 3% per month, are usurious
proceeds of the notes is true, that will not exempt him and unconscionable; and that while she agrees to be
from his liability to Araneta but would merely give liable on the note but only upon default of the
him some basis to claim for recoupment against the principal debtor, respondent corporation acted in bad
share of the trust fund belonging to the benefited faith in suing her alone without including the
minor if it is properly shown that there is fund coming Azarragas when they were the only ones who
to said minor. Here, no such showing was made. benefited from the proceeds of the loan.
Moreover, the trust herein created merely provides
for delivery to the beneficiaries of the share that may RTC dismissed the complaint without prejudice to the
correspond to them in the net income of the trust filing of a separate action for a sum of money against
fund, but does not impose upon the trustee the duty the spouses Osmeña and Merlyn Azarraga who are
to pay any obligation or expenses that may be needed primarily liable on the instrument. On appeal, CA
by said beneficiaries. reversed the RTC decision and held Palmares liable.

Whether Estrella Palmares is only a guarantor with a
subsidiary liability and not a co-maker with primary
Palmares liability.
CA and MB Lending Corp. Held:
(G.R. No. 126490 March 31, 1998) Palmares is a surety or a co-maker.
Liability of co-maker
Facts: The basis of petitioner Palmares' liability under the
Pursuant to a promissory note, private respondent promissory note is expressed in this wise:
M.B. Lending Corporation extended a loan to the
spouses Osmeña and Merlyn Azarraga, together with ATTENTION TO CO-MAKERS: PLEASE READ WELL
petitioner Estrella Palmares, in the amount of
I, Mrs. Estrella Palmares, as the Co-maker of the above-
P30,000. On four occasions after the execution of the quoted loan, have fully understood the contents of this
promissory note and even after the loan matured, Promissory Note for Short-Term Loan:
petitioner and the Azarraga spouses were able to pay
That as Co-maker, I am fully aware that I shall be jointly
a total of P16,300, thereby leaving a balance of
and severally or solidarily liable with the above principal
P13,700. maker of this note;

Consequently, on the basis of petitioner's solidary That in fact, I hereby agree that M.B. LENDING
CORPORATION may demand payment of the above loan
liability under the promissory note, respondent
from me in case the principal maker, Mrs. Merlyn
corporation filed a complaint against petitioner Azarraga defaults in the payment of the note subject to
Palmares as the lone party-defendant, to the the same conditions above-contained.
exclusion of the principal debtors, allegedly by reason
of the insolvency of the latter.


Chapter 5 – Liabilities of Parties

Petitioner contends that the provisions of the second contents of an instrument does not ordinarily affect
and third paragraph are conflicting in that while the the liability of one who signs it also applies to
second paragraph seems to define her liability as that contracts of suretyship. And the mistake of a surety
of a surety which is joint and solidary with the as to the legal effect of her obligation is ordinarily no
principal maker, on the other hand, under the third reason for relieving her of liability.
paragraph her liability is actually that of a mere
guarantor because she bound herself to fulfill the Petitioner would like to make capital of the fact that
obligation only in case the principal debtor should fail although she obligated herself to be jointly and
to do so, which is the essence of a contract of severally liable with the principal maker, her liability
guaranty. More simply stated, although the second is deemed restricted by the provisions of the third
paragraph says that she is liable as a surety, the third paragraph of her contract wherein she agreed "that
paragraph defines the nature of her liability as that of M.B. Lending Corporation may demand payment of
a guarantor. According to petitioner, these are two the above loan from me in case the principal maker,
conflicting provisions in the promissory note and the Mrs. Merlyn Azarraga defaults in the payment of the
rule is that clauses in the contract should be note," which makes her contract one of guaranty and
interpreted in relation to one another and not by not suretyship. The purported discordance is more
parts. In other words, the second paragraph should apparent than real.
not be taken in isolation, but should be read in
relation to the third paragraph. A surety is an insurer of the debt, whereas a
guarantor is an insurer of the solvency of the debtor.
In the case at bar, petitioner expressly bound herself A suretyship is an undertaking that the debt shall be
to be jointly and severally or solidarily liable with the paid; a guaranty, an undertaking that the debtor shall
principal maker of the note. The terms of the contract pay. Stated differently, a surety promises to pay the
are clear, explicit and unequivocal that petitioner's principal's debt if the principal will not pay, while a
liability is that of a surety. guarantor agrees that the creditor, after proceeding
against the principal, may proceed against the
Her pretension that the terms "jointly and severally guarantor if the principal is unable to pay. A surety
or solidarily liable" contained in the second paragraph binds himself to perform if the principal does not,
of her contract are technical and legal terms which without regard to his ability to do so. A guarantor, on
could not be easily understood by an ordinary layman the other hand, does not contract that the principal
like her is diametrically opposed to her manifestation will pay, but simply that he is able to do so. In other
in the contract that she "fully understood the words, a surety undertakes directly for the payment
contents" of the promissory note and that she is "fully and is so responsible at once if the principal debtor
aware" of her solidary liability with the principal makes default, while a guarantor contracts to pay if,
maker. Petitioner admits that she voluntarily affixed by the use of due diligence, the debt cannot be made
her signature thereto; ergo, she cannot now be heard out of the principal debtor.
to claim otherwise. Any reference to the existence of
fraud is unavailing. Fraud must be established by clear Quintessentially, the undertaking to pay upon default
and convincing evidence, mere preponderance of of the principal debtor does not automatically
evidence not even being adequate. Petitioner's remove it from the ambit of a contract of suretyship.
attempt to prove fraud must, therefore, fail as it was The second and third paragraphs of the aforequoted
evidenced only by her own uncorroborated and, portion of the promissory note do not contain any
expectedly, self-serving allegations. other condition for the enforcement of respondent
corporation's right against petitioner. It has not been
Having entered into the contract with full knowledge shown, either in the contract or the pleadings, that
of its terms and conditions, petitioner is estopped to respondent corporation agreed to proceed against
assert that she did so under a misapprehension or in herein petitioner only if and when the defaulting
ignorance of their legal effect, or as to the legal effect principal has become insolvent. A contract of
of the undertaking. The rule that ignorance of the suretyship, to repeat, is that wherein one lends his


Chapter 5 – Liabilities of Parties

credit by joining in the principal debtor's obligation, corporation as creditable directly upon the account
so as to render himself directly and primarily and inuring to the benefit of petitioner. The
responsible with him, and without reference to the concomitant and simultaneous compliance of
solvency of the principal. petitioner's obligation with that of her principals only
goes to show that, from the very start, petitioner
In a desperate effort to exonerate herself from considered herself equally bound by the contract of
liability, petitioner erroneously invokes the rule on the principal makers.
strictissimi juris, which holds that when the meaning
of a contract of indemnity or guaranty has once been In this regard, we need only to reiterate the rule that
judicially determined under the rule of reasonable a surety is bound equally and absolutely with the
construction applicable to all written contracts, then principal, and as such is deemed an original promisor
the liability of the surety, under his contract, as thus and debtor from the beginning. This is because in
interpreted and construed, is not to be extended suretyship there is but one contract, and the surety is
beyond its strict meaning. The rule, however, will bound by the same agreement which binds the
apply only after it has been definitely ascertained that principal. In essence, the contract of a surety starts
the contract is one of suretyship and not a contract of with the agreement, which is precisely the situation
guaranty. It cannot be used as an aid in determining obtaining in this case before the Court.
whether a party's undertaking is that of a surety or a
guarantor. It will further be observed that petitioner's
undertaking as co-maker immediately follows the
Prescinding from these jurisprudential authorities, terms and conditions stipulated between respondent
there can be no doubt that the stipulation contained corporation, as creditor, and the principal obligors. A
in the third paragraph of the controverted suretyship surety is usually bound with his principal by the same
contract merely elucidated on and made more instrument, executed at the same time and upon the
specific the obligation of petitioner as generally same consideration; he is an original debtor, and his
defined in the second paragraph thereof. Resultantly, liability is immediate and direct. Thus, it has been held
the theory advanced by petitioner, that she is merely that where a written agreement on the same sheet of
a guarantor because her liability attaches only upon paper with and immediately following the principal
default of the principal debtor, must necessarily fail contract between the buyer and seller is executed
for being incongruent with the judicial simultaneously therewith, providing that the signers
pronouncements adverted to above. of the agreement agreed to the terms of the principal
contract, the signers were "sureties" jointly liable
It is a well-entrenched rule that in order to judge the with the buyer. A surety usually enters into the same
intention of the contracting parties, their obligation as that of his principal, and the signatures
contemporaneous and subsequent acts shall also be of both usually appear upon the same instrument,
principally considered. Several attendant factors in and the same consideration usually supports the
that genre lend support to our finding that petitioner obligation for both the principal and the surety.
is a surety. For one, when petitioner was informed
about the failure of the principal debtor to pay the There is no merit in petitioner's contention that the
loan, she immediately offered to settle the account complaint was prematurely filed because the
with respondent corporation. Obviously, in her mind, principal debtors cannot as yet be considered in
she knew that she was directly and primarily liable default, there having been no judicial or extrajudicial
upon default of her principal. For another, and this is demand made by respondent corporation. Petitioner
most revealing, petitioner presented the receipts of has agreed that respondent corporation may demand
the payments already made, from the time of initial payment of the loan from her in case the principal
payment up to the last, which were all issued in her maker defaults, subject to the same conditions
name and of the Azarraga spouses. This can only be expressed in the promissory note. Significantly,
construed to mean that the payments made by the paragraph (G) of the note states that "should I fail to
principal debtors were considered by respondent pay in accordance with the above schedule of


Chapter 5 – Liabilities of Parties

payment, I hereby waive my right to notice and

demand." Hence, demand by the creditor is no longer A creditor's right to proceed against the surety exists
necessary in order that delay may exist since the independently of his right to proceed against the
contract itself already expressly so declares. As a principal. Under Article 1216 of the Civil Code, the
surety, petitioner is equally bound by such waiver. creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The
Even if it were otherwise, demand on the sureties is rule, therefore, is that if the obligation is joint and
not necessary before bringing suit against them, since several, the creditor has the right to proceed even
the commencement of the suit is a sufficient demand. against the surety alone. Since, generally, it is not
On this point, it may be worth mentioning that a necessary for the creditor to proceed against a
surety is not even entitled, as a matter of right, to be principal in order to hold the surety liable, where, by
given notice of the principal's default. Inasmuch as the terms of the contract, the obligation of the surety
the creditor owes no duty of active diligence to take is the same that of the principal, then soon as the
care of the interest of the surety, his mere failure to principal is in default, the surety is likewise in default,
voluntarily give information to the surety of the and may be sued immediately and before any
default of the principal cannot have the effect of proceedings are had against the principal. Perforce, in
discharging the surety. The surety is bound to take accordance with the rule that, in the absence of
notice of the principal's default and to perform the statute or agreement otherwise, a surety is primarily
obligation. He cannot complain that the creditor has liable, and with the rule that his proper remedy is to
not notified him in the absence of a special pay the debt and pursue the principal for
agreement to that effect in the contract of suretyship. reimbursement, the surety cannot at law, unless
permitted by statute and in the absence of any
The alleged failure of respondent corporation to agreement limiting the application of the security,
prove the fact of demand on the principal debtors, by require the creditor or obligee, before proceeding
not attaching copies thereof to its pleadings, is against the surety, to resort to and exhaust his
likewise immaterial. In the absence of a statutory or remedies against the principal, particularly where
contractual requirement, it is not necessary that both principal and surety are equally bound.
payment or performance of his obligation be first
demanded of the principal, especially where demand
would have been useless; nor is it a requisite, before
proceeding against the sureties, that the principal be Associated Bank and
called on to account. The underlying principle Conrado Cruz
therefor is that a suretyship is a direct contract to pay vs.
the debt of another. A surety is liable as much as his CA and Merle Reyes
principal is liable, and absolutely liable as soon as
(G.R. No. 89802 May 7, 1992)
default is made, without any demand upon the
Liability of a bank for encashing a crossed check
principal whatsoever or any notice of default. As an Facts:
original promisor and debtor from the beginning, he The private respondent is engaged in the business of
is held ordinarily to know every default of his ready-to-wear garments under the firm name
principal. "Melissa's RTW." She deals with, among other
customers, Robinson's Department Store, Payless
Petitioner questions the propriety of the filing of a
Department Store, Rempson Department Store, and
complaint solely against her to the exclusion of the the Corona Bazaar.
principal debtors who allegedly were the only ones
who benefited from the proceeds of the loan. What When she went to these companies to collect on what
petitioner is trying to imply is that the creditor, herein she thought were still unpaid accounts, she was
respondent corporation, should have proceeded first informed of the issuance of the above-listed crossed
against the principal before suing on her obligation as checks. Further inquiry revealed that the said checks
surety. We disagree.


Chapter 5 – Liabilities of Parties

had been deposited with the Associated Bank and definite purpose so that he must inquire if he has
subsequently paid by it to one Rafael Sayson, one of received the check pursuant to that purpose."
its "trusted depositors," in the words of its branch
manager and co-petitioner, Conrado Cruz, Sayson had The effects therefore of crossing a check relate to the
not been authorized by the private respondent to mode of its presentment for payment. Under Sec. 72
deposit and encash the said checks. of the Negotiable Instruments Law, presentment for
payment, to be sufficient, must be made by the
The private respondent sued the petitioners in the holder or by some person authorized to receive
RTC of Quezon City for recovery of the total value of payment on his behalf. Who the holder or authorized
the checks plus damages. After trial, judgment was person is depends on the instruction stated on the
rendered requiring them to pay the private face of the check.
respondent the total value of the subject checks in
the amount of P15,805 plus interest and damages. The six checks in the case at bar had been crossed and
issued "for payee's account only." This could only
The petitioners appealed to the respondent court, signify that the drawers had intended the same for
reiterating their argument that the private deposit only by the person indicated, to wit, Melissa's
respondent had no cause of action against them and RTW.
should have proceeded instead against the
companies that issued the checks. CA dismissed the The petitioners argue that the cause of action for
appeal. violation of the common instruction found on the
face of the checks exclusively belongs to the issuers
Issue: thereof and not to the payee. Moreover, having acted
Whether the private respondent has a cause of action in good faith as they merely facilitated the
against the petitioners for their encashment and encashment of the checks, they cannot be made
payment to another person of certain crossed checks liable to the private respondent.
issued in her favor.
The subject checks were accepted for deposit by the
Held: Bank for the account of Rafael Sayson although they
Yes. were crossed checks and the payee was not Sayson
but Melissa's RTW. The Bank stamped thereon its
Under accepted banking practice, crossing a check is guarantee that "all prior endorsements and/or lack of
done by writing two parallel lines diagonally on the endorsements (were) guaranteed." By such
left top portion of the checks. The crossing is special deliberate and positive act, the Bank had for all legal
where the name of a bank or a business institution is intents and purposes treated the said checks as
written between the two parallel lines, which means negotiable instruments and, accordingly, assumed
that the drawee should pay only with the intervention the warranty of the endorser.
of that company. The crossing is general where the
words written between the two parallel lines are "and The weight of authority is to the effect that "the
Co." or "for payee's account only," as in the case at possession of check on a forged or unauthorized
bar. This means that the drawee bank should not indorsement is wrongful, and when the money is
encash the check but merely accept it for deposit. collected on the check, the bank can be held 'for
moneys had and received." The proceeds are held for
In State Investment House vs. IAC, this Court declared the rightful owner of the payment and may be
that "the effects of crossing a check are: (1) that the recovered by him. The position of the bank taking the
check may not be encashed but only deposited in the check on the forged or unauthorized indorsement is
bank; (2) that the check may be negotiated only once the same as if it had taken the check and collected
–– to one who has an account with a bank; and (3) without indorsement at all. The act of the bank
that the act of crossing the check serves as a warning amounts to conversion of the check.
to the holder that the check has been issued for a


Chapter 5 – Liabilities of Parties

It is not disputed that the proceeds of the subject authorized to make the signature and the affixing of a
checks belonged to the private respondent. As she name to a check as an endorsement by a person not
had not at any time authorized Rafael Sayson to authorized to endorse it.
endorse or encash them, there was conversion of the
funds by the Bank. The Bank does not deny collecting the money on the
endorsement. It was its responsibility to inquire as to
When the Bank paid the checks so endorsed the authority of Rafael Sayson to deposit crossed
notwithstanding that title had not passed to the checks payable to Melissa's RTW upon a prior
endorser, it did so at its peril and became liable to the endorsement by Eddie Reyes. The failure of the Bank
payee for the value of the checks. This liability to make this inquiry was a breach of duty that made
attached whether or not the Bank was aware of the it liable to the private respondent for the amount of
unauthorized endorsement. the checks.

The petitioners were negligent when they permitted There being no evidence that the crossed checks were
the encashment of the checks by Sayson. The Bank actually received by the private respondent, she
should have first verified his right to endorse the would have a right of action against the drawer
crossed checks, of which he was not the payee, and companies, which in turn could go against their
to deposit the proceeds of the checks to his own respective drawee banks, which in turn could sue the
account. The Bank was by reason of the nature of the herein petitioner as collecting bank. In a similar
checks put upon notice that they were issued for situation, it was held that, to simplify proceedings,
deposit only to the private respondent's account. Its the payee of the illegally encashed checks should be
failure to inquire into Sayson's authority was a breach allowed to recover directly from the bank responsible
of a duty it owed to the private respondent. for such encashment regardless of whether or not the
checks were actually delivered to the payee.
As the Court stressed in Banco de Oro Savings and
Mortgage Bank vs. Equitable Banking Corp., "the law It is worth repeating that before presenting the
imposes a duty of diligence on the collecting bank to checks for clearing and for payment, the Bank had
scrutinize checks deposited with it, for the purpose of stamped on the back thereof the words: "All prior
determining their genuineness and regularity. The endorsements and/or lack of endorsements
collecting bank, being primarily engaged in banking, guaranteed," and thus made the assurance that it had
holds itself out to the public as the expert on this field, ascertained the genuineness of all prior
and the law thus holds it to a high standard of endorsements.

The petitioners insist that the private respondent has

no cause of action against them because they have no Myron Papa, Administrator of
privity of contract with her. They also argue that it the Testate Estate of Angela
was Eddie Reyes, the private respondent's own Butte
husband, who endorsed the checks. vs.
A.U. Valencia and Co. Inc.,
Assuming that Eddie Reyes did endorse the crossed Felix Penarroyo, Sps Arsenio
checks, we hold that the Bank would still be liable to Reyes and Amanda Santos and
the private respondent because he was not Delfin Jao
authorized to make the endorsements. And even if (G.R. No. 105188 January 23, 1998)
the endorsements were forged, as alleged, the Bank Unencashed check
would still be liable to the private respondent for not Facts:
verifying the endorser's authority. There is no Private respondents A.U. Valencia and Co., Inc. and
substantial difference between an actual forging of a Felix Peñarroyo, filed with the RTC of Pasig a
name to a check as an endorsement by a person not complaint for specific performance against herein


Chapter 5 – Liabilities of Parties

petitioner Myron C. Papa, in his capacity as purchase price of the subject lot. He maintained that
administrator of the Testate Estate of one Angela M. what said respondent had actually paid was only the
Butte. amount of P5,000 (in cash) as earnest money.

The complaint alleged that petitioner Myron C. Papa, Issue:

acting as attorney-in-fact of Angela M. Butte, sold to Whether the sale was consummated.
respondent Peñarroyo, through respondent Valencia,
a parcel of land, consisting of 286.60 square meters, Held:
located at corner Retiro and Cadiz Streets, La Loma, Yes.
Quezon City. Prior to the alleged sale, the said
property, together with several other parcels of land Petitioner argues that respondent Court of Appeals
likewise owned by Angela M. Butte, had been erred in concluding that alleged sale of the subject
mortgaged by her to the Associated Banking property had been consummated. He contends that
Corporation. After the alleged sale, but before the such a conclusion is based on the erroneous
title to the subject property had been released, presumption that the check (in the amount of
Angela M. Butte passed away. Despite P40,000) had been cashed, citing Art. 1249 of the Civil
representations made by herein respondents to the Code, which provides, in part, that payment by checks
bank to release the title to the property sold to shall produce the effect of payment only when they
respondent Peñarroyo, the bank refused to release it have been cashed or when through the fault of the
unless and until all the mortgaged properties of the creditor they have been impaired. Petitioner insists
late Angela M. Butte were also redeemed. In order to that he never cashed said check; and, such being the
protect his rights and interests over the property, case, its delivery never produced the effect of
respondent Peñarroyo caused the annotation on the payment. Petitioner, while admitting that he had
title of an adverse claim. issued receipts for the payments, asserts that said
receipts, particularly the receipt of PCIB Check No.
The complaint further alleged that it was only upon 761025 in the amount of P40,000, do not prove
the release of the title to the property that payment. He avers that there must be a showing that
respondents Valencia and Peñarroyo discovered that said check had been encashed.
the mortgage rights of the bank had been assigned to
one Tomas L. Parpana (now deceased), as special It is an undisputed fact that respondents Valencia and
administrator of the Estate of Ramon Papa, Jr. Since Peñarroyo had given petitioner Myron C. Papa the
then, herein petitioner had been collecting monthly amounts of Five Thousand Pesos (P5,000.00) in cash
rentals in the amount of P800.00 from the tenants of on 24 May 1973, and Forty Thousand Pesos
the property, knowing that said property had already (P40,000.00) in check on 15 June 1973, in payment of
been sold to private respondents. Despite repeated the purchase price of the subject lot. Petitioner
demands from said respondents, petitioner refused himself admits having received said amounts, and
and failed to deliver the title to the property. having issued receipts therefor. Petitioner's assertion
Thereupon, respondents Valencia and Peñarroyo that he never encashed the aforesaid check is not
filed a complaint for specific performance, praying substantiated and is at odds with his statement in his
that petitioner be ordered to deliver to respondent answer that "he can no longer recall the transaction
Peñarroyo the title to the subject property and to turn which is supposed to have happened 10 years ago."
over to the latter the sum of P72,000 as accrued After more than ten (10) years from the payment in
rentals. party by cash and in part by check, the presumption
is that the check had been encashed. As already
Trial court ruled in favor of private respondents. On stated, he even waived the presentation of oral
appeal, petitioner argued that the sale was never evidence.
"consummated" as he did not encash the check (in
the amount of P40,000) given by respondents Granting that petitioner had never encashed the
Valencia and Peñarroyo in payment of the full check, his failure to do so for more than ten (10) years


Chapter 5 – Liabilities of Parties

undoubtedly resulted in the impairment of the check

through his unreasonable and unexplained delay.

While it is true that the delivery of a check produces

the effect of payment only when it is cashed,
pursuant to Art. 1249 of the Civil Code, the rule is
otherwise if the debtor is prejudiced by the creditor's
unreasonable delay in presentment. The acceptance
of a check implies an undertaking of due diligence in
presenting it for payment, and if he from whom it is
received sustains loss by want of such diligence, it will
be held to operate as actual payment of the debt or
obligation for which it was given. It has, likewise, been
held that if no presentment is made at all, the drawer
cannot be held liable irrespective of loss or injury
unless presentment is otherwise excused. This is in
harmony with Article 1249 of the Civil Code under
which payment by way of check or other negotiable
instrument is conditioned on its being cashed, except
when through the fault of the creditor, the
instrument is impaired. The payee of a check would
be a creditor under this provision and if its no-
payment is caused by his negligence, payment will be
deemed effected and the obligation for which the
check was given as conditional payment will be

Considering that respondents Valencia and Peñarroyo

had fulfilled their part of the contract of sale by
delivering the payment of the purchase price, said
respondents, therefore, had the right to compel
petitioner to deliver to them the owner's duplicate of
Angela M. Butte and the peaceful possession and
enjoyment of the lot in question.


Chapter 6 – Presentment for Payment

Westmont Bank (formerly to have authorized Tanlimco to receive the same, he

Associated Banking Corp.) never acquired ownership of these checks. Thus, he
had no legal personality to sue as he is not a real party
vs. in interest. The bank then filed a demurrer to
evidence which was denied.
Eugene Ong
RTC ruled in favor of Ong. Petitioner was ordered to
(G.R. No. 132560. January 30, 2002)
pay the value of the checks.

CA affirmed in toto the RTC decision.

Respondent Eugene Ong maintained a current
account with petitioner, formerly the Associated 1. Whether respondent Ong has a cause of action
Banking Corporation, but now known as Westmont against petitioner Westmont Bank.
Bank. Sometime in May 1976, he sold certain shares 2. Whether Ong is barred to recover the money from
of stocks through Island Securities Corporation. To Westmont Bank due to laches.
pay Ong, Island Securities purchased two (2) Pacific
Banking Corporation managers checks, both dated Held:
May 4, 1976, issued in the name of Eugene Ong as
1. Yes.
payee. Before Ong could get hold of the checks, his
friend Paciano Tanlimco got hold of them, forged Petitioners claim that respondent has no cause of
Ong’s signature and deposited these with petitioner, action against the bank is clearly misplaced. As
where Tanlimco was also a depositor. Even though defined, a cause of action is the act or omission by
Ong’s specimen signature was on file, petitioner which a party violates a right of another. The essential
accepted and credited both checks to the account of elements of a cause of action are: (a) a legal right or
Tanlimco, without verifying the signature rights of the plaintiff, (b) a correlative obligation of
indorsements appearing at the back thereof. the defendant, and (c) an act or omission of the
Tanlimco then immediately withdrew the money and defendant in violation of said legal right.
The complaint filed before the trial court expressly
Instead of going straight to the bank to stop or alleged respondents right as payee of the managers
question the payment, Ong first sought the help of checks to receive the amount involved, petitioners
Tanlimco’s family to recover the amount. Later, he correlative duty as collecting bank to ensure that the
reported the incident to the Central Bank, which like amount gets to the rightful payee or his order, and a
the first effort, unfortunately proved futile. breach of that duty because of a blatant act of
negligence on the part of petitioner which violated
It was only on October 7, 1977, about five (5) months
respondents rights.
from discovery of the fraud, did Ong cry foul and
demanded in his complaint that petitioner pay the Under Section 23 of the Negotiable Instruments Law:
value of the two checks from the bank on whose gross
When a signature is forged or made without the
negligence he imputed his loss. In his suit, he insisted
authority of the person whose signature it purports to
that he did not deliver, negotiate, endorse or transfer be, it is wholly inoperative, and no right to retain the
to any person or entity the subject checks issued to instrument, or to give a discharge therefor, or to
him and asserted that the signatures on the back enforce payment thereof against any party thereto, can
be acquired through or under such signature, unless the
were spurious.
party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of
The bank did not present evidence to the contrary,
but simply contended that since plaintiff Ong claimed
to have never received the originals of the two (2) Since the signature of the payee, in the case at bar,
checks in question from Island Securities, much less was forged to make it appear that he had made an


Chapter 6 – Presentment for Payment

indorsement in favor of the forger, such signature of whether the check was delivered to the payee or
should be deemed as inoperative and ineffectual. not.
Petitioner, as the collecting bank, grossly erred in
making payment by virtue of said forged signature. 2. No.
The payee, herein respondent, should therefore be Petitioner avers that respondent Ong is barred by
allowed to recover from the collecting bank. laches for failing to assert his right for recovery from
the bank as soon as he discovered the scam. The lapse
The collecting bank is liable to the payee and must
of five months before he went to seek relief from the
bear the loss because it is its legal duty to ascertain
that the payees endorsement was genuine before bank, according to petitioner, constitutes laches.
cashing the check. As a general rule, a bank or Laches may be defined as the failure or neglect for an
corporation who has obtained possession of a check unreasonable and unexplained length of time, to do
upon an unauthorized or forged indorsement of the that which, by exercising due diligence, could or
payees signature and who collects the amount of the should have been done earlier. It is negligence or
check from the drawee, is liable for the proceeds omission to assert a right within a reasonable time,
thereof to the payee or other owner, notwithstanding warranting a presumption that the party entitled
that the amount has been paid to the person from thereto has either abandoned or declined to assert it.
whom the check was obtained. It concerns itself with whether or not by reason of
long inaction or inexcusable neglect, a person
The theory of the rule is that the possession of the
claiming a right should be barred from asserting the
check on the forged or unauthorized indorsement is
same, because to allow him to do so would be unjust
wrongful, and when the money had been collected on
the check, the bank or other person or corporation to the person against whom such right is sought to be
can be held as for moneys had and received, and the enforced.
proceeds are held for the rightful owners who may In the case at bar, it cannot be said that respondent
recover them. The position of the bank taking the sat on his rights. He immediately acted after knowing
check on the forged or unauthorized indorsement is of the forgery by proceeding to seek help from the
the same as if it had taken the check and collected the Tanlimco family and later the Central Bank, to remedy
money without indorsement at all and the act of the the situation and recover his money from the forger,
bank amounts to conversion of the check. Paciano Tanlimco. Only after he had exhausted
possibilities of settling the matter amicably with the
Petitioners claim that since there was no delivery yet
family of Tanlimco and through the CB, about five
and respondent has never acquired possession of the
months after the unlawful transaction took place, did
checks, respondents remedy is with the drawer and
he resort to making the demand upon the petitioner
not with petitioner bank. Petitioner relies on the view
to the effect that where there is no delivery to the and eventually before the court for recovery of the
payee and no title vests in him, he ought not to be money value of the two checks. These acts cannot be
allowed to recover on the ground that he lost nothing construed as undue delay in or abandonment of the
because he never became the owner of the check and assertion of his rights.
still retained his claim of debt against the drawer.
However, another view in certain cases holds that
even if the absence of delivery is considered, such Maria Tuazon, Alejandro
consideration is not material. The rationale for this Tuazon, Melecio Tuazon,
view is that in said cases the plaintiff uses one action Spouses Anastacio and Mary
to reach, by a desirable short cut, the person who Buenaventura
ought in any event to be ultimately liable as among
the innocent persons involved in the transaction. In vs.
other words, the payee ought to be allowed to
Heirs of Bartolome Ramos
recover directly from the collecting bank, regardless
(G.R. No. 156262. July 14, 2005)


Chapter 6 – Presentment for Payment

Presentment for payment to persons secondarily liable were fictitious or simulated, spouses Tuazon
contended that these were sold because they were
then meeting financial difficulties but the disposals
Respondents alleged that between the period of May were made for value and in good faith and done
2, 1988 and June 5, 1988, spouses Leonilo and Maria before the filing of the instant suit. To dispute the
Tuazon purchased a total of 8,326 cavans of rice from contention of plaintiffs that they were the buyers of
the deceased Bartolome Ramos predecessor-in- the rice, they argued that there was no sales invoice,
interest of respondents. Only 4,437 cavans have been official receipts or like evidence to prove this. They
paid for so far, leaving unpaid 3,889 cavans valued at assert that they were merely agents and should not
P1,211,919. In payment therefor, the spouses Tuazon be held answerable.
issued several Traders Royal Bank checks.
The corresponding civil and criminal cases were filed
But when these checks were encashed, all of the by respondents against Spouses Tuazon.
checks bounced due to insufficiency of funds.
Contending that Evangeline Santos was an
Respondents advanced that before issuing said
indispensable party in the case, petitioners moved to
checks, spouses Tuazon already knew that they had
file a third-party complaint against her. Allegedly, she
no available fund to support the checks, and they
was primarily liable to respondents, because she was
failed to provide for the payment of these despite
the one who had purchased the merchandise from
repeated demands made on them.
their predecessor, as evidenced by the fact that the
Respondents averred that because spouses Tuazon checks had been drawn in her name. The RTC,
anticipated that they would be sued, they conspired however, denied petitioners Motion.
with the other defendants to defraud them as
Trial court acquitted petitioners in all three of the
creditors by executing fictitious sales of their
consolidated criminal cases, they appealed only its
properties. They executed simulated sales of three
decision finding them civilly liable to respondents.
lots in favor of the spouses Buenaventura, as well as
other properties. As a result of the said sales, the On appeal, CA affirmed the trial court decision. CA
titles of these properties issued in the names of held that petitioners had failed to prove the existence
spouses Tuazon were cancelled and new ones were of an agency between respondents and Spouses
issued in favor of the co-defendants. Resultantly, by Tuazon.
the said ante-dated and simulated sales and the
corresponding transfers, there was no more property Issue:
left registered in the names of spouses Tuazon
Whether CA erred in rendering judgment against the
answerable to creditors, to the damage and prejudice
petitioners despite the failure of the respondents to
of respondents.
include in their action Evangeline Santos, an
For their part, defendants denied having purchased indispensable party to the suit.
rice from Bartolome Ramos. They alleged that it was
Magdalena Ramos, wife of said deceased, who owned
and traded the merchandise and Maria Tuazon was No.
merely her agent. They argued that it was Evangeline
Petitioners argue that the lower courts erred in not
Santos who was the buyer of the rice and issued the
checks to Maria Tuazon as payments therefor. In allowing Evangeline Santos to be impleaded as an
good faith, the checks were received by petitioner indispensable party. They insist that respondents
from Evangeline Santos and turned over to Ramos Complaint against them is based on the bouncing
without knowing that these were not funded. And it checks she issued; hence, they point to her as the
is for this reason that petitioners have been insisting person primarily liable for the obligation.
on the inclusion of Evangeline Santos as an We hold that respondents’ cause of action is clearly
indispensable party, and her non-inclusion was a fatal founded on petitioners failure to pay the purchase
error. Refuting that the sale of several properties price of the rice. The trial court held that Petitioner


Chapter 6 – Presentment for Payment

Maria Tuazon had indorsed the questioned checks in The Spouses defaulted in payment of installments.
favor of respondents, in accordance with Sections 31 Consequently, the Bank filed a civil action for Sum of
and 63 of the Negotiable Instruments Law. That Money with Prayer for a Writ of Replevin before the
Santos was the drawer of the checks is thus MTC of Pasay City. Dr. Francis Gueco was served
immaterial to the respondents cause of action. summons and was fetched by the sheriff and
representative of the bank for a meeting in the bank
As indorser, Petitioner Maria Tuazon warranted that
premises. Desi Tomas, the Bank’s Assistant Vice
upon due presentment, the checks were to be
President demanded payment of the amount of
accepted or paid, or both, according to their tenor;
P184,000 which represents the unpaid balance for
and that in case they were dishonored, she would pay
the car loan. After some negotiations and
the corresponding amount. After an instrument is
computation, the amount was lowered to P154,000.
dishonored by nonpayment, indorsers cease to be
However, as a result of the non-payment of the
merely secondarily liable; they become principal
reduced amount on that date, the car was detained
debtors whose liability becomes identical to that of
inside the banks compound.
the original obligor. The holder of a negotiable
instrument need not even proceed against the maker Dr. Gueco went to the bank and negotiations resulted
before suing the indorser. Clearly, Evangeline Santos in the further reduction of the outstanding loan to
-- as the drawer of the checks -- is not an P150,000.
indispensable party in an action against Maria
Dr. Gueco delivered a manager’s check in the amount
Tuazon, the indorser of the checks.
of P150,000 but the car was not released because of
Indispensable parties are defined as parties in his refusal to sign the Joint Motion to Dismiss. It is the
interest without whom no final determination can be contention of the Gueco spouses and their counsel
had. The instant case was originally one for the that Dr. Gueco need not sign the motion for joint
collection of the purchase price of the rice bought by dismissal considering that they had not yet filed their
Maria Tuazon from respondents’ predecessor. In this Answer. Petitioner, however, insisted that the joint
case, it is clear that there is no privity of contract motion to dismiss is standard operating procedure in
between respondents and Santos. Hence, a final their bank to effect a compromise and to preclude
determination of the rights and interest of the parties future filing of claims, counterclaims or suits for
may be made without any need to implead her. damages.

After several demand letters and meetings with bank

representatives, the respondents Gueco spouses
The International Corporate initiated a civil action for damages before the MTC of
Bank (now Union Bank of the Quezon City. The MTC dismissed the complaint for
Philippines) lack of merit.
vs. On appeal to the RTC of Quezon City, the decision of
the MTC was reversed. In its decision, the RTC held
Sps. Francis S. Gueco and Ma. that there was a meeting of the minds between the
Luz E. Gueco parties as to the reduction of the amount of
(G.R. No. 141968. February 12, 2001) indebtedness and the release of the car but said
Presentment where instrument payable on demand agreement did not include the signing of the joint
Facts: motion to dismiss as a condition sine qua non for the
effectivity of the compromise.
The respondents Gueco Spouses obtained a loan from
petitioner Bank to purchase a car. In consideration On appeal, CA affirmed the RTC decision. In the
thereof, the Spouses executed promissory notes meantime, the manager’s check has become stale.
which were payable in monthly installments and
chattel mortgage over the car to serve as security for Issue:
the notes.


Chapter 6 – Presentment for Payment

Whether CA erred in holding that the petitioner and theory behind the use of a check points to its
return the subject car to the respondents, without immediate use and payability. In a case, a check
making any provision for the issuance of the new payable on demand which was long overdue by about
managers/cashier’s check by the respondents in favor two and a half (2-1/2) years was considered a stale
of the petitioner in lieu of the original cashier’s check check. Failure of a payee to encash a check for more
that already became stale. than ten (10) years undoubtedly resulted in the check
becoming stale. Thus, even a delay of one (1) week or
Held: two (2) days, under the specific circumstances of the
No. cited cases constituted unreasonable time as a matter
of law.
The decision of the Regional Trial Court, which was
affirmed in toto by the Court of Appeals, orders the In the case at bar, however, the check involved is not
petitioner: an ordinary bill of exchange but a manager’s check. A
manager’s check is one drawn by the bank’s manager
1. to return immediately the subject car to the
upon the bank itself. It is similar to a cashier’s check
appellants in good working condition. Appellee may
deposit the Managers Check the proceeds of which both as to effect and use. A cashier’s check is a check
have long been under the control of the issuing bank in of the bank’s cashier on his own or another check. In
favor of the appellee since its issuance, whereas the effect, it is a bill of exchange drawn by the cashier of
funds have long been paid by appellants to secure said
a bank upon the bank itself, and accepted in advance
Managers Check over which appellants have no control.
by the act of its issuance. It is really the banks own
Respondents would make us hold that petitioner check and may be treated as a promissory note with
should return the car or its value and that the latter, the bank as a maker. The check becomes the primary
because of its own negligence, should suffer the loss obligation of the bank which issues it and constitutes
occasioned by the fact that the check had become its written promise to pay upon demand. The mere
stale. It is their position that delivery of the manager’s issuance of it is considered an acceptance thereof. If
check produced the effect of payment and, thus, treated as promissory note, the drawer would be the
petitioner was negligent in opting not to deposit or maker and in which case the holder need not prove
use said check. Rudimentary sense of justice and fair presentment for payment or present the bill to the
play would not countenance respondents’ position. drawee for acceptance.

A stale check is one which has not been presented for Even assuming that presentment is needed, failure to
payment within a reasonable time after its issue. It is present for payment within a reasonable time will
valueless and, therefore, should not be paid. Under result to the discharge of the drawer only to the
the negotiable instruments law, an instrument not extent of the loss caused by the delay. Failure to
payable on demand must be presented for payment present on time, thus, does not totally wipe out all
on the day it falls due. When the instrument is liability. In fact, the legal situation amounts to an
payable on demand, presentment must be made acknowledgment of liability in the sum stated in the
within a reasonable time after its issue. In the case of check. In this case, the Gueco spouses have not
a bill of exchange, presentment is sufficient if made alleged, much less shown that they or the bank which
within a reasonable time after the last negotiation issued the managers check has suffered damage or
thereof. loss caused by the delay or non-presentment.
Definitely, the original obligation to pay certainly has
A check must be presented for payment within a not been erased.
reasonable time after its issue, and in determining
what is a reasonable time, regard is to be had to the It has been held that, if the check had become stale,
nature of the instrument, the usage of trade or it becomes imperative that the circumstances that
business with respect to such instruments, and the caused its non-presentment be determined. In the
facts of the particular case. The test is whether the case at bar, there is no doubt that the petitioner bank
payee employed such diligence as a prudent man held on the check and refused to encash the same
exercises in his own affairs. This is because the nature because of the controversy surrounding the signing of


Chapter 6 – Presentment for Payment

the joint motion to dismiss. We see no bad faith or respondent to submit the controversy for resolution
negligence in this position taken by the Bank. thru the PCHC Arbitration Mechanism.

Petitioner who filed a complaint before the

Arbitration Committee, asserting that respondent
Allied Banking Corp. should solely bear the entire face value of the check
due to its negligence in failing to return the check to
petitioner within the 24-hour reglementary period as
Bank of the Philippine Islands provided in Section 20.1 of the Clearing House Rules
and Regulations (CHRR) 2000. Petitioner prayed that
(GR. 188363 February 27, 2013) respondent be ordered to reimburse the sum of
Doctrine of last clear chance P500,000 with 12% interest per annum, and to pay
attorney’s fees and other arbitration expenses.
In its Answer with Counterclaims, respondent
On October 10, 2002, a check in the amount of charged petitioner with gross negligence for
P1,000,000 payable to "Mateo Mgt. Group accepting the post-dated check in the first place. It
International" (MMGI) was presented for deposit and contended that petitioner’s admitted negligence was
accepted at petitioner’s Kawit Branch. The check, the sole and proximate cause of the loss.
post-dated “Oct. 9, 2003” was drawn against the
account of Marcia no Silva, Jr. (Silva) with respondent On December 8, 2004, the Arbitration Committee
BPI Bel-Air Branch. Upon receipt, petitioner sent the rendered its Decision in favor of petitioner and
check for clearing to respondent through the against the respondent. First, it ruled that the
Philippine Clearing House Corporation (PCHC). situation of the parties does not involve a “Ping-Pong”
controversy since the subject check was neither
The check was cleared by respondent and petitioner returned within the reglementary time or through the
credited the account of MMGI with P1,000,000. On PCHC return window, nor coursed through the
October 22, 2002, MMGI’s account was closed and all clearing facilities of the PCHC.
the funds therein were withdrawn. A month later,
Silva discovered the debit of P1,000,000 from his As to respondent’s direct presentation of a
account. In response to Silva’s complaint, respondent photocopy of the subject check, it was declared to be
credited his account with the aforesaid sum. without legal basis because Section 21.1 of the CHRR
2000 does not apply to post-dated checks. The
On March 21, 2003, respondent returned a Arbitration Committee further noted that respondent
photocopy of the check to petitioner for the reason: not only failed to return the check within the 24-hour
“Postdated.” Petitioner, however, refused to accept reglementary period, it also failed to institute any
and sent back to respondent a photocopy of the formal complaint within the contemplation of Section
check. Thereafter, the check, or more accurately, the 20.3 and it appears that respondent was already
Charge Slip, was tossed several times from petitioner contented with the 50-50 split initially implemented
to respondent, and back to petitioner, until on May 6, by the PCHC. Finding both parties negligent in the
2003, respondent requested the PCHC to take performance of their duties, the Committee applied
custody of the check. Acting on the request, PCHC the doctrine of “Last Clear Chance” and ruled that the
directed the respondent to deliver the original check loss should be shouldered by respondent alone.
and informed it of PCHC’s authority under Clearing
House Operating Memo (CHOM) No. 279 dated 06 On appeal, RTC affirmed the previous decision.
September 1996 to split 50/50 the amount of the However, on appeal to the CA, CA set aside the RTC
check subject of a “Ping-Pong” controversy which judgment and ruled for a 60-40 sharing of the loss as
shall be implemented thru the issuance of Debit it found petitioner guilty of contributory negligence in
Adjustment Tickets against the outward demands of accepting what is clearly a post-dated check. The CA
the banks involved. PCHC likewise encouraged found that petitioner’s failure to notice the
irregularity on the face of the check was a breach of


Chapter 6 – Presentment for Payment

its duty to the public and a telling sign of its lack of could have easily noticed the glaring defect upon
due diligence in handling checks coursed through it. seeing the date written on the face of the check “Oct.
While the CA conceded that the drawee bank has a 9, 2003”. Respondent could have then promptly
bigger responsibility in the clearing of checks, it returned the check and with the check thus
declared that the presenting bank cannot take lightly dishonored, petitioner would have not credited the
its obligation to make sure that only valid checks are amount thereof to the payee’s account. Thus,
introduced into the clearing system. notwithstanding the antecedent negligence of the
petitioner in accepting the post-dated check for
Issues: deposit, it can seek reimbursement from respondent
Whether the doctrine of last clear chance applies in the amount credited to the payee’s account covering
this case. the check.

Held: What petitioner omitted to mention is that in the

cited case of Philippine Bank of Commerce v. Court
Yes. of Appeals, while the Court found petitioner bank as
the culpable party under the doctrine of last clear
As well established by the records, both petitioner
chance since it had, thru its teller, the last
and respondent were admittedly negligent in the
opportunity to avert the injury incurred by its client
encashment of a check post-dated one year from its
simply by faithfully observing its own validation
procedure, it nevertheless ruled that the plaintiff
The doctrine of last clear chance, stated broadly, is depositor (private respondent) must share in the loss
that the negligence of the plaintiff does not preclude on account of its contributory negligence.
a recovery for the negligence of the defendant where
it appears that the defendant, by exercising
reasonable care and prudence, might have avoided
injurious consequences to the plaintiff
notwithstanding the plaintiff’s negligence. The
doctrine necessarily assumes negligence on the part
of the defendant and contributory negligence on the
part of the plaintiff, and does not apply except upon
that assumption. Stated differently, the antecedent
negligence of the plaintiff does not preclude him from
recovering damages caused by the supervening
negligence of the defendant, who had the last fair
chance to prevent the impending harm by the
exercise of due diligence. Moreover, in situations
where the doctrine has been applied, it was
defendant’s failure to exercise such ordinary care,
having the last clear chance to avoid loss or injury,
which was the proximate cause of the occurrence of
such loss or injury.

In this case, the evidence clearly shows that the

proximate cause of the unwarranted encashment of
the subject check was the negligence of respondent
who cleared a post-dated check sent to it thru the
PCHC clearing facility without observing its own
verification procedure. As correctly found by the
PCHC and upheld by the RTC, if only respondent
exercised ordinary care in the clearing process, it


Chapter 7 – Notice of Dishonor

Jaime Dico Further, he argues that he does not understand why

his total obligation to the complainant has already
vs. reached P1,035,589.28 when his credit line is only
CA and People of the Philippines P499,000.00; hence, he approached the
complainants manager to reconcile his accounts and
(G.R. No. 141669. February 28, 2005) find out where the complainant was mistaken; that
even if his accounts were reconciled, he cannot admit
Once issuer receives notice of dishonor and fail to
that his obligation to the complainant has already
pay within 5 days from receipt shall be prima facie
reached millions; and that the problem with the
evidence of knowledge of insufficiency
complainant is that it did not return to him the checks
Facts: which he sent to the complainant together with his
proposal to reconcile his accounts.
Accused Jaime Dico, now petitioner, was charged
with three (3) counts of violation of BP 22 before the MTCC find the accused Dico guilty of violation of BP
MTCC, Cebu City. 22. RTC affirmed in toto the MTCC decision. On
appeal, CA acquitted the accused on the issuance of 1
Accused is a credit card holder of Equitable Card check on the ground that there was no such prima
Network, Inc. The complaint was filed because the facie evidence of knowledge of insufficiency of funds
three (3) checks which the accused issued in its favor, or credit exists. However, he was convicted on the
and in payment of his obligation to the complainant other 2 checks.
card network all bounced, for reason Account Closed.
The complainant sent a letter to the accused to
redeem or pay the amounts of the checks but the Whether CA erred in convicting petitioner to 2 out of
accused refused to comply. the 3 counts of violation of BP 22.

The credit line of the accused with the complainant Held:

was P499,000. The accused had a good record with
the complainant until he issued the bouncing checks
above-mentioned. The outstanding obligation of the The essential elements of the offense penalized
accused to the complainant including interests and under Section 1, B.P. Blg. 22 are as follows: (1) the
charges thereon is P1,035,590.28. The obligation of making, drawing and issuance of any check to apply
the accused to the complainant rose to a million to account or for value; (2) the knowledge of the
because the accused abused his credit card. In maker, drawer or issuer that at the time of issue he
January 1993, the accused applied with the does not have sufficient funds or credit with the
complainant for an increase of his credit line to drawee bank for the payment of such check in full
P699,000 but this was rejected by the complainant, upon its presentment; and (3) subsequent dishonor
because the amount of P499,000.00 is the highest of the check by the drawee bank for insufficiency of
credit line that the complainant can give the accused, funds or credit or dishonor for the same reason had
and besides, the current obligation of the accused has not the drawer, without any valid cause, ordered the
not yet been settled. bank to stop payment. The prosecution has the
burden to prove all the elements of the crime beyond
For his defense, accused admits that he issued the
reasonable doubt. Failure to do so will necessarily
subject checks. Due to the conflicts and
result in exoneration.
inconsistencies in the billings made upon him by the
complainant with regards to amounts reflected in his In the cases at bar, petitioner argues that the first and
accounts, he advised the Branch Manager not to second elements of the crime are not present.
present to the bank the checks that he has issued until
all the said conflicts and inconsistencies in his Based on the records, there was variance of the
accounts shall have been reconciled. subject checks. The variance in the identity of the
check nullifies petitioner’s conviction. The identity of


Chapter 7 – Notice of Dishonor

the check enters into the first element of the offense presumption or prima facie evidence as provided in
under Section 1 of B.P. Blg. 22 that a person draws or this section cannot arise, if such notice of
issues a check on account or for value. There being a nonpayment by the drawee bank is not sent to the
discrepancy in the identity of the checks described in maker or drawer, or if there is no proof as to when
the information and that presented in court, such notice was received by the drawer, since there
petitioners constitutional right to be informed of the would simply be no way of reckoning the crucial 5-day
nature of the offense charged will be violated if his period.
conviction is upheld.
A notice of dishonor received by the maker or drawer
To hold a person liable under B.P. Blg. 22, the of the check is thus indispensable before a conviction
prosecution must not only establish that a check was can ensue. The notice of dishonor may be sent by the
issued and that the same was subsequently offended party or the drawee bank. The notice must
dishonored, it must further be shown that accused be in writing. A mere oral notice to pay a dishonored
knew at the time of the issuance of the check that he check will not suffice. The lack of a written notice is
did not have sufficient funds or credit with the fatal for the prosecution.
drawee bank for the payment of such check in full
In this case, the only notice received by petitioner for
upon its presentment.
the three checks involved in these cases was that
This knowledge of insufficiency of funds or credit at dated 08 June 1993. There is no dispute that there
the time of the issuance of the check is the second was indeed a demand letter from the counsel of
element of the offense. Inasmuch as this element Equitable Card Network, Inc., but the same was
involves a state of mind of the person making, received by petitioner before the checks maturity or
drawing or issuing the check which is difficult to due date on 12 June 1993. As testified to by
prove, Section 2 of B.P. Blg. 22 creates a prima facie prosecution witness Lily Canlas, the demand letter
presumption of such knowledge. Said section reads: was sent to petitioner on 08 June 1993 and the check
was deposited on 14 June 1993. The demand letter
SEC. 2. Evidence of knowledge of insufficient funds. The making,
drawing and issuance of a check payment of which is refused by the was sent four days before the date of the check and
drawee because of insufficient funds in or credit with such bank, six days before said check was deposited.
when presented within ninety (90) days from the date of the check,
shall be prima facie evidence of knowledge of such insufficiency of SC held petitioner did not receive the notice of
funds or credit unless such maker or drawer pays the holder dishonor contemplated by the law. There was no valid
thereof the amount due thereon, or makes arrangements for
notice of dishonor to speak of. The term notice of
payment in full by the drawee of such check within five (5) banking
days after receiving notice that such check has not been paid by the dishonor denotes that a check has been presented for
drawee. payment and was subsequently dishonored by the
drawee bank. This means that the check must
For this presumption to arise, the prosecution must necessarily be due and demandable because only a
prove the following: (a) the check is presented within check that has become due can be presented for
ninety (90) days from the date of the check; (b) the payment and subsequently be dishonored. A
drawer or maker of the check receives notice that postdated check cannot be dishonored if presented
such check has not been paid by the drawee; and (c)
for payment before its due date.
the drawer or maker of the check fails to pay the
holder of the check the amount due thereon, or make The failure of Equitable Card Network, Inc., to send
arrangements for payment in full within five (5) another letter demanding that FEBTC Check No.
banking days after receiving notice that such check 369404 be paid within five days after it has been
has not been paid by the drawee. In other words, the dishonored prevents the disputable presumption -
presumption is brought into existence only after it is that petitioner had knowledge of the insufficiency of
proved that the issuer had received a notice of his funds at the time he issued the check - from
dishonor and that within five days from receipt arising. Absent such presumption, the burden of
thereof, he failed to pay the amount of the check or evidence shifts to the prosecution to prove such
to make arrangements for its payment. The knowledge.


Chapter 7 – Notice of Dishonor

There being no evidence presented by the of demand. Subsequently, Premiere was placed
prosecution to show that petitioner had knowledge of under receivership.
the insufficiency of his funds at the time he issued the
Thereafter, Father Palijo filed an affidavit-complaint
check, the second element of the offense was not
against Petitioner Lina Lim Lao and Teodulo Asprec
satisfied. Accordingly, having failed to prove all the
for violation of B.P. 22. After preliminary
elements of B.P. Blg. 22, petitioner must, perforce, be
investigation, three Informations charging Lao and
acquitted in Criminal Case No. 38255-R. The decisions
Asprec with the offense defined in the first paragraph
convicting petitioner of violation of B.P. Blg. 22 before
the CA, the RTC and the MTCC are reversed and set of Section 1, B.P. 22.
aside. For her defense, in the regular course of her duties as
a junior officer, petitioner was required to co-sign
checks drawn against the account of the corporation.
Lina Lim Lao The other co-signor was her head of office, Mr.
Teodulo Asprec. Since part of her duties required her
vs. to be mostly in the field and out of the office, it was
CA and People of the Philippines normal procedure for her to sign the checks in blank,
that is, without the names of the payees, the amounts
(G.R. No. 119178. June 20, 1997) and the dates of maturity.
Mere employee who signs blank corporate checks In signing the checks as part of her duties as junior
does so without actual knowledge of whether such officer of the corporation, petitioner had no
checks are funded and thus cannot be held criminally knowledge of the actual funds available in the
liable for BP 22 corporate account.
Facts: RTC found petitioner guilty. The decision was
affirmed by CA.
Petitioner Lina Lim Lao was a junior officer of
Premiere Investment House (Premiere). As such Issue:
officer, she was authorized to sign checks for and in
behalf of the corporation. In the course of the Whether CA erred in finding petitioner guilty of
business, she met complainant Father Artelijo Pelijo, violation of BP 22 despite the lack of actual
the provincial treasurer of the Society of the Divine knowledge of insufficiency of funds on her part.
Word through Mrs. Rosemarie Lachenal, a trader for
Premiere. Father Palijo was authorized to invest
donations to the society and had been investing the Yes.
society’s money with Premiere. Father Palijo had
invested a total of P514,484.04. Father Palijo was also Petitioner argues that the notice of dishonor sent to
the main office of the corporation, and not to
issued 3 Traders Royal Bank (TRB) checks in payment
petitioner herself who holds office in that
of interest.
corporation’s branch office, does not constitute the
All the checks were issued in favor of Artelijo A. Palijo notice mandated in Section 2 of BP 22. Thus, there
and signed by appellant (herein petitioner) and can be no prima facie presumption that she had
Teodulo Asprec, who was the head of operations. knowledge of the insufficiency of funds.

When Father Palijo presented the checks for SC listed the elements of the offense penalized under
encashment, the same were dishonored for the B.P. 22, as follows: (1) the making, drawing and
reason Drawn Against Insufficient Funds (DAIF). issuance of any check to apply to account or for value;
Father Palijo immediately made demands on (2) the knowledge of the maker, drawer or issuer that
Premiere to pay him the necessary amounts. For his at the time of issue he does not have sufficient funds
efforts, he was paid P5,000. Since no other payments in or credit with the drawee bank for the payment of
followed, Father Palijo wrote Premiere a formal letter such check in full upon its presentment; and (3)


Chapter 7 – Notice of Dishonor

subsequent dishonor of the check by the drawee bank After a thorough review of the case at bar, SC finds
for insufficiency of funds or credit or dishonor for the that petitioner did not have actual knowledge of the
same reason had not the drawer, without any valid insufficiency of funds in the corporate accounts at the
cause, ordered the bank to stop payment. time she affixed her signature to the checks involved
in this case, at the time the same were issued, and
Justice Luis B. Reyes, an eminent authority in criminal
even at the time the checks were subsequently
law, also enumerated the elements of the offense
dishonored by the drawee bank.
defined in the first paragraph of Section 1 of B.P. 22,
thus: The scope of petitioner’s duties and responsibilities
did not encompass the funding of the corporations
1. That a person makes or draws and issues any check.
checks; her duties were limited to the marketing
2. That the check is made or drawn and issued to apply on account department of the Binondo branch.
or for value.
Moreover, there can be no prima facie evidence of
3. That the person who makes or draws and issues the check knows
at the time of issue that he does not have sufficient funds in or knowledge of insufficiency of funds in the instant case
credit with the drawee bank for the payment of such check in full because no notice of dishonor was actually sent to or
upon its presentment. received by the petitioner.
4. That the check is subsequently dishonored by the drawee bank
The notice of dishonor may be sent by the offended
for insufficiency of funds or credit, or would have been dishonored
for the same reason had not the drawer, without any valid reason, party or the drawee bank. The trial court itself found
ordered the bank to stop payment. absent a personal notice of dishonor to petitioner by
the drawee bank based on the unrebutted testimony
Knowledge of insufficiency of funds or credit in the
of Veronilyn Ocampo, head of the Treasury Dept. at
drawee bank for the payment of a check upon its
the main office, that the checks bounced when
presentment is an essential element of the offense.
presented with the drawee bank but she did not
There is a prima facie presumption of the existence of
inform anymore petitioner as there was no need to
this element from the fact of drawing, issuing or
inform them as the corporation was in distress.
making a check, the payment of which was
subsequently refused for insufficiency of funds. It is
important to stress, however, that this is not a
conclusive presumption that forecloses or precludes Ofelia Marigomen
the presentation of evidence to the contrary. vs.
In the present case, the fact alone that petitioner was People of the Philippines
a signatory to the checks that were subsequently
dishonored merely engenders the prima facie (G.R. No. 153451 May 26, 2005)
presumption that she knew of the insufficiency of
funds, but it does not render her automatically guilty
under B.P. 22. The prosecution has a duty to prove all Facts:
the elements of the crime, including the acts that give
rise to the prima facie presumption; petitioner, on the Caltex Philippines, Inc. (Caltex) is engaged in the sale
other hand, has a right to rebut the prima facie of gasoline and oil products to its customers, one of
presumption. Therefore, if such knowledge of which was the Industrial Sugar Resources, Inc.
insufficiency of funds is proven to be actually absent (INSURECO). Caltex had granted a credit line to
or non-existent, the accused should not be held liable INSURECO, and the latter purchased gasoline and
for the offense defined under the first paragraph of lubricants from Caltex through its sales
Section 1 of B.P. 22. Although the offense charged is representative. The finance officer of INSURECO was
Ofelia Marigomen, while John V. Dalao was the
a malum prohibitum, the prosecution is not thereby
excused from its responsibility of proving beyond assistant to the general manager. They were
reasonable doubt all the elements of the offense, one authorized to draw and sign checks against the
account of INSURECO at the Far East Bank and Trust
of which is knowledge of the insufficiency of funds.


Chapter 7 – Notice of Dishonor

Company. Caltex had agreed for INSURECO to pay its Marigomen and Dalao pay fines, with subsidiary
purchases via postdated checks, which were imprisonment in case of insolvency, in lieu of
delivered to Caltex upon the release of the purchased imprisonment.
oil products.
As evidenced by separate delivery receipts,
INSURECO bought and took delivery of oil products Whether petitioner is guilty of violation of BP22.
from Caltex. In payment thereof, postdated checks, Held:
drawn and signed by Marigomen and Dalao, were
issued in favor of Caltex. No.

On due dates, Caltex presented the said checks for The ruling of Lao v. Court of Appeals36 is applicable in
payment. However, the checks were dishonored by this case. In acquitting the petitioner therein, SC
the drawee bank, for the reasons that they were explained:
"drawn against insufficient funds" and "account It has been observed that the State, under this statute, actually
closed." Hence, Caltex made verbal demands to offers the violator "a compromise by allowing him to perform some
INSURECO for the replacement of the dishonored act which operates to preempt the criminal action, and if he opts
to perform it the action is abated." This was also compared to
checks with either manager’s checks or cash, to no
certain laws allowing illegal possessors of firearms a certain period
avail. of time to surrender the illegally possessed firearms to the
Government, without incurring any criminal liability. In this light,
Thus, Caltex filed criminal complaints for violation of the full payment of the amount appearing in the check within five
B.P. Blg. 22 against Marigomen and Dalao with the banking days from notice of dishonor is a "complete defense." The
Office of the City Prosecutor of Bacolod City. They absence of a notice of dishonor necessarily deprives an accused an
opportunity to preclude a criminal prosecution. Accordingly,
were, thereafter, charged with three counts of
procedural due process clearly enjoins that a notice of dishonor be
violation of B.P. Blg. 22 in three separate Informations actually served on petitioner. Petitioner has a right to demand –
filed with the RTC of Bacolod City. and the basic postulates of fairness require - that the notice of
dishonor be actually sent to and received by her to afford her the
When she testified, Marigomen admitted to having opportunity to avert prosecution under B.P. Blg. 22.
drawn and signed the postdated checks subject
Moreover, the notice of dishonor must be in writing;
matter of the cases, along with Dalao, and that these
were issued in payment for the gasoline and oil a verbal notice is not enough.
products purchased by INSURECO. She declared that Further, if the drawer or maker is an officer of a
she was employed by INSURECO as finance officer on, corporation, the notice of dishonor to the said
and that she subsequently resigned. She claimed that corporation is not notice to the employee or officer
she had no participation whatsoever in the purchase who drew or issued the check for and in its behalf. The
of Caltex oil products by INSURECO. She had no Court explained in Lao v. Court of Appeals, to wit:
knowledge that Caltex had sent confirmation
In this light, the postulate of CA that "demand on the Corporation
telegrams demanding payment from INSURECO,
constitutes demand on appellant (herein petitioner)," is
because by then she was no longer employed therein. erroneous. Premiere has no obligation to forward the notice
Moreover, she never received any written notice or addressed to it to the employee concerned, especially because the
telegram from Caltex demanding payment of the corporation itself incurs no criminal liability under B.P. Blg. 22 for
the issuance of a bouncing check. Responsibility under B.P. Blg. 22
amounts of the dishonored checks. It was only when
is personal to the accused; hence, personal knowledge of the
she received a subpoena from the Office of the City notice of dishonor is necessary. Consequently, constructive notice
Prosecutor of Bacolod City that she discovered that to the corporation is not enough to satisfy due process. Moreover,
the checks had been dishonored, and that she had it is petitioner, as an officer of the corporation, who is the latter’s
agent for purposes of receiving notices and other documents, and
been charged in connection therewith.
not the other way around. It is but axiomatic that notice to the
corporation, which has a personality distinct and separate from the
After trial, the trial court rendered judgment
petitioner, does not constitute notice to the latter.
convicting Marigomen and Dalao of the crimes
charged. On appeal, CA rendered judgment affirming In this case, the prosecution failed to present any
the decision of the RTC, with the modification that employee of the PT&T to prove that the telegrams


Chapter 7 – Notice of Dishonor

from the offended party were in fact transmitted to were payable to Great Asian, three were payable to
INSURECO and that the latter received the same. "New Asian Emp.", and the last three were payable to
Furthermore, there is no evidence on record that the cash. Various customers of Great Asian issued these
petitioner ever received the said telegrams from postdated checks in payment for appliances and
INSURECO, or that separate copies thereof were other merchandise.
transmitted to and received by the petitioner.
Arsenio endorsed all the fifteen dishonored checks by
In fine, the respondent failed to prove the second signing his name at the back of the checks. Eight of
element of the crime. Hence, the petitioner should be the dishonored checks bore the endorsement of
acquitted of the crimes charged. Arsenio below the stamped name of "Great Asian
Sales Center", while the rest of the dishonored checks
just bore the signature of Arsenio. The drawee banks
dishonored the fifteen checks on maturity when
deposited for collection by Bancasia, with any of the
Great Asian Sales Center Corporation and Tan following as reason for the dishonor: "account
Chong Lin closed", "payment stopped", "account under
garnishment", and "insufficiency of funds".
Bancasia sent by personal delivery a letter to Tan
CA and Bancasia Finance and Investment
Chong Lin, notifying him of the dishonor of the fifteen
checks and demanding payment from him. Neither
(G.R. No. 105774 April 25, 2002) Great Asian nor Tan Chong Lin paid Bancasia the
With recourse stipulation
dishonored checks.
Bancasia filed a complaint for collection of a sum of
Great Asian is engaged in the business of buying and money against Great Asian and Tan Chong Lin.
selling general merchandise, in particular household Bancasia impleaded Tan Chong Lin because of the
appliances. The board of directors of Great Asian
Surety Agreements he signed in favor of Bancasia.
approved a resolution authorizing its Treasurer and
General Manager, Arsenio Lim Piat, Jr. to secure a Trial court ruled in favor of Bancasia. Defendants
loan from Bancasia in an amount not to exceed P1 were ordered to pay jointly and solidarily to plaintiff.
million. Thereafter, the board of directors of Great CA affirmed the trial court ruling.
Asian approved a second resolution authorizing Great
Asian to secure a discounting line with Bancasia in an
amount not exceeding P2 million. On both occasions, Whether Great Asian is liable to Bancasia under the
the board resolution designated Arsenio as the Deeds of Assignment for breach of contract pursuant
authorized signatory to sign all instruments, to the Civil Code, independent of the Negotiable
documents and checks necessary to secure the Instruments Law.
discounting line.
Tan Chong Lin signed a Surety Agreement in favor of
Bancasia to guarantee, solidarily, the debts of Great Yes.
Asian to Bancasia. In addition, he signed a
Bancasia’s complaint against Great Asian is founded
Comprehensive and Continuing Surety Agreement in
on the latter’s breach of contract under the Deeds of
favor of Bancasia to guarantee, solidarily, the debts of
Assignment. The Deeds of Assignment uniformly
Great Asian to Bancasia.
Great Asian, through its Treasurer and General "xxx Likewise, it is hereby understood that the warranties which the
Manager Arsenio, signed four (4) Deeds of ASSIGNOR hereby made are deemed part of the consideration for
Assignment of Receivables, assigning to Bancasia this transaction, such that any violation of any one, some, or all of
said warranties shall be deemed as deliberate misrepresentation
fifteen (15) postdated checks. Nine of the checks
on the part of the ASSIGNOR. In such event, the monetary


Chapter 7 – Notice of Dishonor

obligation herein conveyed unto the ASSIGNEE shall be The exercise by Bancasia of its option to sue for
conclusively deemed defaulted, giving rise to the immediate
breach of contract under the Civil Code will not leave
responsibility on the part of the ASSIGNOR to make good said
obligation, and making the ASSIGNOR liable to pay the penalty Great Asian holding an empty bag. Great Asian, after
stipulated hereinabove as if the original obligor/s of the receivables paying Bancasia, is subrogated back as creditor of the
actually defaulted. xxx" receivables. Great Asian can then proceed against the
drawers who issued the checks. Even if Bancasia
Obviously, there is one vital suspensive condition in
failed to give timely notice of dishonor, still there
the Deeds of Assignment. That is, in case the drawers
would be no prejudice whatever to Great Asian.
fail to pay the checks on maturity, Great Asian
Under the Negotiable Instruments Law, notice of
obligated itself to pay Bancasia the full face value of
dishonor is not required if the drawer has no right to
the dishonored checks, including penalty and
expect or require the bank to honor the check, or if
attorney’s fees. The failure of the drawers to pay the
the drawer has countermanded payment. In the
checks is a suspensive condition, the happening of
instant case, all the checks were dishonored for any
which gives rise to Bancasia’s right to demand
of the following reasons: "account closed", "account
payment from Great Asian.
under garnishment", insufficiency of funds", or
By express provision in the Deeds of Assignment, "payment stopped". In the first three instances, the
Great Asian unconditionally obligated itself to pay drawers had no right to expect or require the bank to
Bancasia the full value of the dishonored checks. In honor the checks, and in the last instance, the
short, Great Asian sold the postdated checks on with drawers had countermanded payment.
recourse basis against itself.

Great Asian and Bancasia agreed on this specific with

Eliza Tan
recourse stipulation, despite the fact that the
receivables were negotiable instruments with the vs.
endorsement of Arsenio. The contracting parties had
the right to adopt the with recourse stipulation which People of the Philippines
is separate and distinct from the warranties of an
(G.R. No. 141466 January 19, 2001)
endorser under the Negotiable Instruments Law.

The explicit with recourse stipulation against Great

Asian effectively enlarges, by agreement of the Facts:
parties, the liability of Great Asian beyond that of a
mere endorser of a negotiable instrument. Thus, Eliza Tan is the VP of Hometown Development, Inc.
whether or not Bancasia gives notice of dishonor to (HDI). Fidel Francisco, Jr. is the president of the
Great Asian, the latter remains liable to Bancasia construction firm F. M. Francisco & Associates (FMF).
because of the with recourse stipulation which is Eliza, representing HDI, and Fidel, for FMF, entered
independent of the warranties of an endorser under into a Construction Agreement whereby the FMF was
the Negotiable Instruments Law. hired by Eliza to undertake land development
As endorsee of Great Asian, Bancasia had the option (construction of roads, railings, curbs, and gutters) at
to proceed against Great Asian under the Negotiable the South Garden Homes. Among others, the
Construction Agreement set forth that the manner of
Instruments Law. Had it so proceeded, the Negotiable
Instruments Law would have governed Bancasia’s payment would be on a monthly progress billing
cause of action. Bancasia, however, did not choose based on accomplishment reports to be submitted by
this route. Instead, Bancasia decided to sue Great the FMF.
Asian for breach of contract under the Civil Code, a Based on the testimony of Fidel, it appears that when
right that Bancasia had under the express with Eliza failed to pay, both parties terminated the
recourse stipulation in the Deeds of Assignment. contract. For its accomplishment for the month of
November 1992, FMF was paid P23,739.09 by Eliza
with a check.


Chapter 7 – Notice of Dishonor

Upon presentment for payment, however, subject The elements of the offense defined and penalized in
check was dishonored. After receipt of the notice of Section 1 of Batas Pambansa Blg. 22 are:
dishonor, Fidel verbally notified Eliza and the latter
1. That a person makes or draws and issues any check;
promised to pay. Later on, when Eliza still did not pay,
Fidel sent her a demand letter by registered mail. 2. That the check is made or drawn and issued to apply on account
or for value;
Failing to heed his demand letter, Eliza was charged
in court. 3. That the person who makes or draws and issues the check knows
at the time of issue that he does not have sufficient funds in or
Meanwhile, Eliza presented a different version of the credit with the drawee bank for the payment of such check in full
case altogether. According to her, she initially issued upon its presentment, and
for (4) checks with P50,000 each to FMF as advance 4. That the check is subsequently dishonored by the drawee bank
partial payment. for insufficiency of funds or credit, or would have been dishonored
for the same reason had not the drawer, without any valid reason,
When FMF failed to accomplish land development in ordered the bank to stop payment.
Cavite, the Construction Agreement was terminated
In this case, the third and fourth elements of the
and Eliza asked for the return of the four (4) above-
mentioned checks. With the excuse, however, one of offense charged were not established or proved.
the checks got lost, Fidel gave back only 3 of the 4 In the first place, the bank's representative testified
checks. that petitioner's account at the time of the
presentment of the check she issued was funded, as
As their accounting records reflected that HDI still had
she had a credit line to the extent of P25 million,
an account of P46,000 with FMF, and at the behest of
Fidel, Eliza issued to the latter, 2 checks, each for much more than the amount of the check issued.
P23,739.09, as replacement checks for the one that In the second place, even without relying on the
got lost. credit line, petitioner's bank account covered the
Subsequently, it was realized by HDI's accounting check she issued because even though there were
some deposits that were still uncollected the deposits
department that the 2 checks had already been
became "good" and the bank certified that the check
replaced with cash and so a request to stop payment
of these two (2) checks were made by Eliza to the was "funded."
bank. Actually, the check in question was not issued without
Eliza maintains that the check was dishonored not sufficient funds and was not dishonored due to
because it was drawn against insufficient funds but insufficiency of funds. What was stamped on the
precisely because of her order to stop payment check in question was "Payment Stopped-Funded" at
therefor. She stressed that although that bank had the same time "DAUD" meaning drawn against
stamped "DAUD" in subject check upon its uncollected deposits. Even with uncollected deposits,
presentment, she had sufficient funds to cover the the bank may honor the check at its discretion in favor
check because at that time, she had a credit limit of of favored clients, in which case there would be no
violation of B.P. 22.
P25 million with Philtrust Bank.
In fact, petitioner requested the bank to stop
Trial court found accused guilty. It was affirmed by
payment of the check for a valid reason, namely, that
the account has been paid in cash.

Whether petitioner-accused is guilty of violation of BP





Chapter 7 – Notice of Dishonor

James Svendsen No.

vs. For petitioner to be validly convicted of the crime

under B.P. Blg. 22, the following requisites must thus
People of the Philippines concur: (1) the making, drawing and issuance of any
(G.R. No. 175381 February 26, 2008)
check to apply for account or for value; (2) the
Mere registered receipt insufficient to establish proof of receipt of knowledge of the maker, drawer, or issuer that at the
written notice of dishonor time of issue he does not have sufficient funds in or
Facts: credit with the drawee bank for the payment of the
check in full upon its presentment; and (3) the
In October 1997, Cristina Reyes (Cristina) extended a
subsequent dishonor of the check by the drawee bank
loan to petitioner in the amount of P200,000, to bear
for insufficiency of funds or credit or dishonor for the
interest at 10% a month. After petitioner had partially
same reason had not the drawer, without any valid
paid his obligation, he failed to settle the balance
cause, ordered the bank to stop payment.
thereof which had reached P380,000 inclusive of
interest. Petitioner admits having issued the postdated check
to Cristina. The check, however, was dishonored
Cristina thus filed a collection suit against petitioner,
when deposited for payment in Banco de Oro due to
which was eventually settled when petitioner paid
DAIF. Hence, the first and the third elements obtain
her P200,000 and issued in her favor an International
in the case.
Exchange Bank check postdated February 2, 1999 in
the amount of P160,000 representing interest. The As for the second element, Section 2 of B.P. Blg. 22
check was co-signed by one Wilhelm Bolton. provides that
When the check was presented for payment on [t]he making, drawing and issuance of a check payment of which is
February 9, 1999, it was dishonored for having been refused by the drawee because of insufficient funds in or credit
with such bank, when presented within ninety (90) days from the
Drawn Against Insufficient Funds (DAIF). date of the check, shall be prima facie evidence of knowledge of
such insufficiency of funds or credit unless such maker or drawer
Cristina, through counsel, thus sent a letter to pays the holder thereof the amount due thereon, or makes
petitioner by registered mail informing him that the arrangements for payment in full by the drawee of such check
check was dishonored by the drawee bank, and within five (5) banking days after receiving notice that such check
demanding that he make it good within five (5) days has not been paid by the drawee.

from receipt thereof. In Rico v. People of the Philippines, SC held:

No settlement having been made by petitioner, x x x In recent cases, we had the occasion to emphasize that not
Cristina filed a complaint against him and his co- only must there be a written notice of dishonor or demand letters
signatory to the check, Bolton, for violation of B.P. actually received by the drawer of a dishonored check, but there
must also be proof of receipt thereof that is properly
Blg. 22 before the City Prosecutor’s Office of Manila. authenticated, and not mere registered receipt and/or return
Thereafter, an Information dated for violation of B.P. receipt.
Blg. No. 22 was thus filed before the MeTC of Manila
Thus, as held in Domagsang vs. Court of Appeals, while Section 2 of
against the two. B.P. 22 indeed does not state that the notice of dishonor be in
writing, this must be taken in conjunction with Section 3 of the law,
Bolton having remained at large, the trial court never i.e., "that where there are no sufficient funds in or credit with such
acquired jurisdiction over his person. drawee bank, such fact shall always be explicitly stated in the notice
of dishonor or refusal". A mere oral notice or demand to pay would
Trial court found petitioner guilty. CA and RTC appear to be insufficient for conviction under the law. In our view,
affirmed the trial court decision. both the spirit and letter of the Bouncing Checks Law require for
the act to be punished thereunder not only that the accused
Issue: issued a check that is dishonored, but also that the accused has
actually been notified in writing of the fact of dishonor. This is
Whether petitioner is guilty of violation of BP 22. consistent with the rule that penal statues must be construed
strictly against the state and liberally in favor of the accused. x x x


Chapter 7 – Notice of Dishonor

In fine, the failure of the prosecution to prove the existence and

receipt by petitioner of the requisite written notice of dishonor and
that he was given at least five banking days within which to settle
his account constitutes sufficient ground for his acquittal.

The evidence for the prosecution failed to prove the

second element. While the registry receipt, which is
said to cover the letter-notice of dishonor and of
demand sent to petitioner, was presented, there is no
proof that he or a duly authorized agent received the
same. Receipts for registered letters including return
receipts do not themselves prove receipt; they must
be properly authenticated to serve as proof of receipt
of the letters.

For failure then to prove all the elements of violation

of B.P. Blg. 22, petitioner’s acquittal is in order.

Petitioner is civilly liable, however. For in a criminal

case, the social injury is sought to be repaired through
the imposition of the corresponding penalty, whereas
with respect to the personal injury of the victim, it is
sought to be compensated through indemnity, which
is civil in nature.


Chapter 8 – Discharge of Negotiable Instrument

Cebu International Finance Corporation collect the amount of the check paid to Alegre but
dishonored by BPI.
Thereafter, during the hearing by RTC, Vito Arieta,
CA, Vicente Alegre Bank Manager of BPI, testified that the bank, indeed,
(G.R. No. 123031. October 12, 1999) dishonored the check, retained the original copy and
forwarded only a certified true copy to RCBC. BPI
encashed and deducted the said amount from the
account of CIFC, but the proceeds, as well as the
check remained in BPI’s custody. The bank’s move
CIFC, a quasi-banking institution, is engaged in money was in accordance with the Compromise Agreement
market operations. it entered with CIFC to end the litigation in RTC.

Private respondent, Vicente Alegre, invested with BPI filed a separate collection suit against Vicente
CIFC for P500,000. Petitioner issued a promissory Alegre with the RTC. The complaint alleged that
note for P516,238.67, covering private respondents Vicente Alegre connived with certain Lina Pena and
placement plus interest. Lita Anda and forged several checks of BPIs client,
On maturity date, CIFC issued a check for P514,390.94
in favor of Alegre as proceeds of his matured In the Alegre-CIFC case, RTC rendered judgment in
investment plus interest. The check was drawn from favor of Vicente Alegre. CIFC appealed from the
petitioner’s current account with BPI. adverse decision of the trial court. CA affirmed the
decision of the trial court.
Alegre’s wife deposited the check with RCBC. BPI
dishonored the check with the annotation, that the Issue:
check is subject of an investigation. BPI took custody
1. Whether Article 1249 of the New Civil Code applies
of the check pending an investigation of several
in the present case.
counterfeit checks drawn against CIFC’s checking
account. BPI used the check to trace the perpetrators 2. Whether the subject check was validly discharged.
of the forgery.
Immediately, Alegre notified CIFC of the dishonored
check and demanded, on several occasions, that he 1. No.
be paid in cash. CIFC refused the request, and instead
Petitioner stresses that it had already been
instructed Alegre to wait for its ongoing bank
discharged from the liability of paying the value of the
reconciliation with BPI. Thereafter, Alegre, through
check due to the following circumstances:
counsel, made a formal demand for the payment of
his money market placement. In turn, CIFC promised 1) There was acceptance of the subject check by BPI, the
drawee bank, as defined under the Negotiable
to replace the check but required an impossible
Instruments Law, and therefore, BPI, the drawee bank,
condition that the original must first be surrendered. became primarily liable for the payment of the check,
and consequently, the drawer, herein petitioner, was
Thus, Alegre filed a complaint for recovery of a sum discharged from its liability thereon;
of money against the petitioner with the RTC.
2) Moreover, BPI, the drawee bank, has not validly
CIFC sought to recover its lost funds and formally filed dishonored the subject check; and,
against BPI, a separate civil action for collection of a 3) The act of BPI, the drawee bank of debiting/deducting
sum of money with the RTC. The collection suit the value of the check from petitioners account
alleged that BPI unlawfully deducted from CIFC’s amounted to and/or constituted a discharge of the
drawers (petitioners) liability under the
checking account, counterfeit checks amounting to
instrument/subject check.
P1,724,364.58. The action included the prayer to


Chapter 8 – Discharge of Negotiable Instrument

Petitioner cites Section 137 of the Negotiable legal tender, and therefore cannot constitute valid
Instruments Law, which states: tender of payment.
Liability of drawee retaining or destroying bill - Where a drawee to 2. No.
whom a bill is delivered for acceptance destroys the same, or
refuses within twenty-four hours after such delivery or such other When the bank deducted the amount of the check
period as the holder may allow, to return the bill accepted or non-
from CIFC’s current account, this did not ipso facto
accepted to the Holder, he will be deemed to have accepted the
same. operate as a discharge or payment of the instrument.
Although the value of the check was deducted from
Petitioner asserts that since BPI accepted the the funds of CIFC, it was not delivered to the payee,
instrument, the bank became primarily liable for the Vicente Alegre. Instead, BPI offset the amount against
payment of the check. Consequently, when BPI offset the losses it incurred from forgeries of CIFC checks,
the value of check against the losses from the forged allegedly committed by Alegre.
checks allegedly committed by the private
respondent, the check was deemed paid.

Article 1249 of the New Civil Code deals with a mode

of extinction of an obligation and expressly provides
Anamer Salazar
for the medium in the payment of debts. It provides
that: vs.
The payment of debts in money shall be made in the currency J.Y. Brothers Marketing Corporation
stipulated, and if it is not possible to deliver such currency, then in
the currency, which is legal tender in the Philippines. (G.R. No. 171998 October 20, 2010)
The delivery of promissory notes payable to order, or bills of
exchange or other mercantile documents shall produce the effect
of payment only when they have been cashed, or when through
the fault of the creditor they have been impaired.

As held in Perez vs. Court of Appeals, a money market J.Y. Bros. is a corporation engaged in the business of
is a market dealing in standardized short-term credit selling sugar, rice and other commodities. Petitioner
instruments (involving large amounts) where lenders Anamer Salazar, a freelance sales agent, was
and borrowers do not deal directly with each other approached by Isagani Calleja and Jess Kallos, if she
but through a middle man or dealer in open market. knew a supplier of rice. Answering in the positive,
In a money market transaction, the investor is a Salazar accompanied the two to J.Y. Bros. As a
lender who loans his money to a borrower through a consequence, Salazar with Calleja and Kallos
middleman or dealer. procured from J. Y. Bros. 300 cavans of rice worth
P214,000. As payment, Salazar negotiated and
In the case at bar, the money market transaction indorsed to J.Y. Bros. a check issued by Nena Jaucian
between the petitioner and the private respondent is Timario in the amount of P214,000 with the
in the nature of a loan. The private respondent assurance that the check is good as cash. On that
accepted the check, instead of requiring payment in assurance, J.Y. Bros. parted with 300 cavans of rice to
money. Yet, when he presented it to RCBC for Salazar. However, upon presentment, the check was
encashment, the same was dishonored by non- dishonored due to "closed account."
acceptance. Under these circumstances, and after the
notice of dishonor, the holder has an immediate right Informed of the dishonor of the check, Calleja, Kallos
of recourse against the drawer, and consequently and Salazar delivered to J.Y. Bros. a replacement cross
could immediately file an action for the recovery of check again issued by Nena Jaucian Timario in the
the value of the check. amount of P214,000 but which, just the same,
bounced due to insufficient funds. When despite the
In a loan transaction, the obligation to pay a sum demand letter, Salazar failed to settle the amount due
certain in money may be paid in money, which is the
legal tender or, by the use of a check. A check is not a


Chapter 8 – Discharge of Negotiable Instrument

J.Y. Bros., the latter charged Salazar and Timario with under Article 315 of the Revised Penal Code, the
the crime of estafa before the RTC of Legaspi City. drawer or indorser of the Prudential Bank check
would have incurred in the issuance thereof in the
Salazar filed a demurrer to evidence. Salazar was
amount of P214,000; and that a check is a contract
acquitted with the criminal charged, but she was held
which is susceptible to a novation just like any other
liable for the value of the 300 bags of rice. contract.
Aggrieved, accused attempted a reconsideration on
Section 119 of the Negotiable Instrument Law
the civil aspect of the order and to allow her to
provides, thus:
present evidence thereon. The motion was denied.
Accused went up to the SC on a petition for review. SECTION 119. Instrument; how discharged. – A negotiable
instrument is discharged:
SC granted the petition and remanded the case to the
trial court for reception of evidence petitioner on the (a) By payment in due course by or on behalf of the principal
civil aspect. debtor;

(b) By payment in due course by the party accommodated, where

RTC proceeded with the trial. After hearing, it
the instrument is made or accepted for his accommodation;
dismissed the case.
(c) By the intentional cancellation thereof by the holder;
On appeal, CA found petitioner liable. In so ruling, the
(d) By any other act which will discharge a simple contract for the
CA found that petitioner indorsed the first check,
payment of money;
which was later replaced by a Solid Bank check issued
by Timario, also indorsed by petitioner as payment for (e) When the principal debtor becomes the holder of the
the 300 cavans of rice bought from respondent. The instrument at or after maturity in his own right.

CA, applying Sections 63, 66 and 29 of the Negotiable And, under Article 1231 of the Civil Code, obligations
Instruments Law, found that petitioner was are extinguished:
considered an indorser of the checks paid to
respondent and considered her as an accommodation xxxx

indorser, who was liable on the instrument to a (6) By novation.

holder for value, notwithstanding that such holder at
the time of the taking of the instrument knew her only Contention of petitioner has no merit.
to be an accommodation party. Petitioner's claim that respondent's acceptance of
Issue: the Solid Bank check which replaced the dishonored
Prudential bank check (first check) resulted to
Whether CA erred in ignoring the ramifications of the novation which discharged the latter check is
issuance of the Solidbank check in replacement of the unmeritorious.
initial check which would have resulted to the
novation of the obligation arising from the issuance of Novation may either be extinctive or modificatory,
the latter check. much being dependent on the nature of the change
and the intention of the parties. Extinctive novation is
Held: never presumed; there must be an express intention
to novate; in cases where it is implied, the acts of the
parties must clearly demonstrate their intent to
Petitioner contends that the issuance of the Solid dissolve the old obligation as the moving
Bank check and the acceptance thereof by the consideration for the emergence of the new one.
respondent, in replacement of the dishonored Implied novation necessitates that the
Prudential Bank check, amounted to novation that incompatibility between the old and new obligation
discharged the latter check; that respondent's be total on every point such that the old obligation is
acceptance of the Solid Bank check, notwithstanding completely superceded by the new one. The test of
its eventual dishonor by the drawee bank, had the incompatibility is whether they can stand together,
effect of erasing whatever criminal responsibility, each one having an independent existence; if they


Chapter 8 – Discharge of Negotiable Instrument

cannot and are irreconcilable, the subsequent

obligation would also extinguish the first.

The obligation to pay a sum of money is not novated

by an instrument that expressly recognizes the old,
changes only the terms of payment, adds other
obligations not incompatible with the old ones or the
new contract merely supplements the old one.

In this case, respondent’s acceptance of the Solid

Bank check, which replaced the dishonored
Prudential Bank check, did not result to novation as
there was no express agreement to establish that
petitioner was already discharged from his liability to
pay respondent the amount of P214,000 as payment
for the 300 bags of rice. As aforementioned, novation
is never presumed, there must be an express
intention to novate. In fact, when the Solid Bank
check was delivered to respondent, the same was
also indorsed by petitioner which shows petitioner’s
recognition of the existing obligation to respondent
to pay P214,000 subject of the replaced Prudential
Bank check.

Moreover, respondent’s acceptance of the Solid Bank

check did not result to any incompatibility, since the
two checks − Prudential and Solid Bank checks − were
precisely for the purpose of paying the amount of
P214,000, i.e., the credit obtained from the purchase
of the 300 bags of rice from respondent. Indeed,
there was no substantial change in the object or
principal condition of the obligation of petitioner as
the indorser of the check to pay the amount of
P214,000. It would appear that respondent accepted
the Solid Bank check to give petitioner the chance to
pay her obligation.


Chapter 9 – Material Alteration

The International Corporate Bank (d) The number or the relations of the parties;

(e) The medium or currency in which payment is to be made;

Or which adds a place of payment where no place of payment is
CA and Philippine National Bank specified, or any other change or addition which alters the effect of
the instrument in any respect is a material alteration.
(G.R. No. 129910 September 5, 2006)
Alteration of the serial number of a check is not a material
The question on whether an alteration of the serial
number of a check is a material alteration under the
Negotiable Instruments Law is already a settled
The Ministry of Education and Culture issued 15 matter. In Philippine National Bank v. Court of
checks drawn against PNB which International Corp. Appeals, this Court ruled that the alteration on the
Bank accepted for deposit on various dates. After 24 serial number of a check is not a material alteration.
hours from submission of the checks to International Thus:
Corp. Bank for clearing, it paid the value of the checks
An alteration is said to be material if it alters the effect of the
and allowed the withdrawals of the deposits. instrument. It means an unauthorized change in an instrument that
However, PNB returned all the checks to International purports to modify in any respect the obligation of a party or an
Corp. Bank without clearing them on the ground that unauthorized addition of words or numbers or other change to an
incomplete instrument relating to the obligation of a party. In other
they were materially altered which led to the
words, a material alteration is one which changes the items which
institution of an action for collection of sums of are required to be stated under Section 1 of the Negotiable
money against PNB to recover the value of the checks. Instruments Law.
RTC dismissed the case but was reversed by the CA
The case at the bench is unique in the sense that what
which applied Section 4(c) of Central Bank Circular
was altered is the serial number of the check in
No. 580, series of 1977. The CA held that checks that
question, an item which, it can readily be observed, is
have been materially altered shall be returned within
not an essential requisite for negotiability under
24 hours after discovery of the alteration
Section 1 of the Negotiable Instruments Law. The
Issue: aforementioned alteration did not change the
relations between the parties. The name of the
Whether the checks were materially altered.
drawer and the drawee were not altered. The
Held: intended payee was the same. The sum of money due
to the payee remained the same.

Sections 124 and 125 of Act No. 2031, otherwise

known as the Negotiable Instruments Law, provide: Metropolitan Bank and Trust Company

SEC. 124. Alteration of instrument; effect of. ― Where a negotiable vs.

instrument is materially altered without the assent of all parties
liable thereon, it is avoided, except as against a party who has Renato Cabilzo
himself made, authorized, or assented to the alteration and
subsequent indorsers. (G.R. No. 154469 December 6, 2006)
But when an instrument has been materially altered and is in the
hands of a holder in due course, not a party to the alteration, he
may enforce payment thereof according to its original tenor. Facts:
SEC. 125. What constitutes a material alteration. ― On Novermber 12, 1994, Renato Cabilzo issued a
Any alteration which changes: Metrobank Check payable to "CASH" and postdated
(a) The date; on November 24, 1994 in the amount of P1,000
drawn against his Metrobank account to Mr.
(b) The sum payable, either for principal or interest;
Marquez, as his sales commission. The check was
(c) The time or place of payment; presented to Westmont Bank for payment who


Chapter 9 – Material Alteration

indorsed it to Metrobank for appropriate clearing. required to be stated under Section 1 of the
After the entries thereon were examined, including Negotiable Instruments Law.
the availability of funds and the authenticity of the
Also pertinent is the following provision in the
signature of the drawer, Metrobank cleared the check
for encashment in accordance with the Philippine Negotiable Instrument Law which states:
Clearing House Corporation (PCHC) Rules. Section 125. What constitutes material alteration. – Any alteration
which changes:
On November 16, 1994, Cabilzo’s representative was
(a) The date;
at Metrobank when he was asked by a bank
personnel if Cabilzo had issued a check in the amount (b) The sum payable, either for principal or interest;
of P91K to which he replied in negative. That
(c) The time or place of payment;
afternoon, Cabilzo called Metrobank to reiterate that
he did not issue the check. He later discovered that (d) The number or the relation of the parties;
the check of P1K was altered to P91K and date was (e) The medium or currency in which payment is to be made;
changed from Nov 24 to Nov 14. Cabilzo demanded
that Metrobank re-credit the amount of P91,000.00 Or which adds a place of payment where no place of payment is
specified, or any other change or addition which alters the effect of
to his account. the instrument in any respect is a material alteration.

Cabilzo, thru counsel, finally sent a letter-demand to In the case at bar, the check was altered so that the
Metrobank for the payment of P90,000, after amount was increased from P1,000 to P91,000 and
deducting the original value of the check in the the date was changed from 24 November 1994 to 14
amount of P1,000. Such written demand November 1994. Apparently, since the entries altered
notwithstanding, Metrobank still failed or refused to were among those enumerated under Section 1 and
comply with its obligation. 125, namely, the sum of money payable and the date
Consequently, Cabilzo instituted a civil action for of the check, the instant controversy therefore
damages against Metrobank before the RTC of squarely falls within the purview of material
Manila. alteration.

RTC ruled in favor respondent. CA affirmed the RTC Now, having laid the premise that the present
decision. petition is a case of material alteration, it is now
necessary for to determine the effect of a materially
Issue: altered instrument, as well as the rights and
obligations of the parties thereunder. The following
Whether CA erred in holding Metrobank, as drawee
provision of the Negotiable Instrument Law will shed
bank, liable for the alterations on the subject check
us some light in threshing out this issue:
bearing the authentic signature of the drawer
thereof. Section 124. Alteration of instrument; effect of. – Where a
negotiable instrument is materially altered without the assent of all
Held: parties liable thereon, it is avoided, except as against a party who
has himself made, authorized, and assented to the alteration and
Yes. subsequent indorsers.

But when the instrument has been materially altered and is in the
An alteration is said to be material if it changes the
hands of a holder in due course not a party to the alteration, he
effect of the instrument. It means that an may enforce the payment thereof according to its original tenor.
unauthorized change in an instrument that purports
to modify in any respect the obligation of a party or Indubitably, Cabilzo was not the one who made nor
an unauthorized addition of words or numbers or authorized the alteration. Neither did he assent to the
other change to an incomplete instrument relating to alteration by his express or implied acts. There is no
the obligation of a party. In other words, a material showing that he failed to exercise such reasonable
alteration is one which changes the items which are degree of diligence required of a prudent man which
could have otherwise prevented the loss. As correctly


Chapter 9 – Material Alteration

ruled by the appellate court, Cabilzo was never remiss

in the preparation and issuance of the check, and
there were no indicia of evidence that would prove
otherwise. Indeed, Cabilzo placed asterisks before
and after the amount in words and figures in order to
forewarn the subsequent holders that nothing
follows before and after the amount indicated other
than the one specified between the asterisks.

When the drawee bank pays a materially altered

check, it violates the terms of the check, as well as its
duty to charge its client’s account only for bona fide
disbursements he had made. Since the drawee bank,
in the instant case, did not pay according to the
original tenor of the instrument, as directed by the
drawer, then it has no right to claim reimbursement
from the drawer, much less, the right to deduct the
erroneous payment it made from the drawer’s
account which it was expected to treat with utmost


Chapter 10 – Acceptance

Prudential Bank In the case at bar, the drawee was necessarily the
herein petitioner. It was to the latter that the drafts
vs. were presented for payment. There was in fact no
IAC, Philippine Rayon Mills, Inc. and Anacleto R. Chi need for acceptance as the issued drafts are sight
drafts. Presentment for acceptance is necessary only
(G.R. No. 74886 December 8, 1992) in the cases expressly provided for in Section 143 of
the Negotiable Instruments Law (NIL). The said
section provides that presentment for acceptance
Facts: must be made:

Philippine Rayon Mills, Inc. entered into a contract (a) Where the bill is payable after sight, or in any other case,
where presentment for acceptance is necessary in order to fix the
with Nissho Co., Ltd. of Japan for the importation of
maturity of the instrument; or
textile machineries under a five-year deferred
payment plan. To effect payment for said (b) Where the bill expressly stipulates that it shall be
presented for acceptance; or
machineries, Philippine Rayon Mills opened a
commercial letter of credit with the Prudential Bank (c) Where the bill is drawn payable elsewhere than at the
and Trust Company in favor of Nissho. Against this residence or place of business of the drawee.
letter of credit, drafts were drawn and issued by In no other case is presentment for acceptance necessary in order
Nissho, which were all paid by the Prudential Bank to render any party to the bill liable.
through its correspondent in Japan. Two of these
Obviously then, sight drafts do not require
drafts were accepted by Philippine Rayon Mills while
presentment for acceptance.
the others were not. Petitioner instituted an action
for the recovery of the sum of money it paid to Nissho The parties herein agree, and the trial court explicitly
as Philippine Rayon Mills was not able to pay its ruled, that the subject, drafts are sight drafts. Said the
obligations arising from the letter of credit. latter:
Respondent court ruled that with regard to the ten . . . In the instant case the drafts being at sight, they are supposed
drafts which were not presented and accepted, no to be payable upon acceptance unless plaintiff bank has given the
Philippine Rayon Mills Inc. time within which to pay the same. The
valid demand for payment can be made. Petitioner
first two drafts were duly accepted as indicated on their face, and
however claims that the drafts were sight drafts upon such acceptance should have been paid forthwith. These two
which did not require presentment for acceptance to drafts were not paid and although Philippine Rayon Mills ought to
Philippine Rayon. have paid the same, the fact remains that until now they are still

Whether presentment for acceptance of the drafts

was indispensable to make Philippine Rayon liable Philippine National Bank
thereon. vs.
Held: CA and Philippine Commercial and Industrial Bank
A letter of credit is defined as an engagement by a (G.R. No. L-26001 October 29, 1968)
bank or other person made at the request of a
customer that the issuer will honor drafts or other
demands for payment upon compliance with the
conditions specified in the credit. Through a letter of
credit, the bank merely substitutes its own promise to Augusto Lim deposited in his current account with the
pay for one of its customers who in return promises PCIB a GSIS Check in the sum of P57,415, drawn
to pay the bank the amount of funds mentioned in the against the PNB. The check was, on the same date,
letter of credit plus credit or commitment fees forwarded, for clearing, through the Central Bank, to
mutually agreed upon. the PNB, which did not return said check the next day,


Chapter 10 – Acceptance

or at any other time, but retained it and paid its honored the check and paid its amount to the PCIB;
amount to the PCIB, as well as debited it against the and that only then did the PCIB allow Augusto Lim to
account of the GSIS in the PNB. Subsequently, upon draw said amount from his aforementioned current
demand from the GSIS, said sum was re-credited to account.
the latter's account, for the reason that the signatures
Thus, by not returning the check to the PCIB, by
of its officers on the check were forged. PNB
thereby indicating that the PNB had found nothing
demanded from the PCIB the refund of said sum,
wrong with the check and would honor the same, and
which the PCIB refused to do. Hence, the present
by actually paying its amount to the PCIB, the PNB
action against the PCIB, which was dismissed by the
induced the latter, not only to believe that the check
CFI of Manila, whose decision was, in turn, affirmed
was genuine and good in every respect, but, also, to
by the CA.
pay its amount to Augusto Lim. In other words, the
Issue: PNB was the primary or proximate cause of the loss,
and, hence, may not recover from the PCIB.
Whether CA erred in not holding that "clearing" is not
"acceptance", in contemplation of the Negotiable
Instruments law, and since the check had not been
accepted by the PNB, the latter is entitled to
reimbursement therefor.



In general, "acceptance", in the sense in which this

term is used in the Negotiable Instruments Law is not
required for checks, for the same are payable on
demand. Indeed, "acceptance" and "payment" are,
within the purview of said Law, essentially different
things, for the former is "a promise to perform an
act," whereas the latter is the "actual performance"
thereof. In the words of the Law, "the acceptance of
a bill is the signification by the drawee of his assent to
the order of the drawer," which, in the case of checks,
is the payment, on demand, of a given sum of money.
Upon the other hand, actual payment of the amount
of a check implies not only an assent to said order of
the drawer and a recognition of the drawer's
obligation to pay the aforementioned sum, but, also,
a compliance with such obligation.

It will be recalled that the PCIB did not cash the check
upon its presentation by Augusto Lim; that the latter
had merely deposited it in his current account with
the PCIB; that, on the same day, the PCIB sent it,
through the Central Bank, to the PNB, for clearing;
that the PNB did not return the check to the PCIB the
next day or at any other time; that said failure to
return the check to the PCIB implied, under the
current banking practice, that the PNB considered the
check good and would honor it; that, in fact, the PNB



State Investment House holder is deemed prima facie to be a holder in due

This Court has taken cognizance of the practice that a
IAC, Anita Chua and Harris Chua check with two parallel lines in the upper left hand
(G.R. No. 72764 July 13, 1989) corner means that it could only be deposited and may
not be converted into cash. Consequently, such
Cross check
circumstance should put the payee on inquiry and
Facts: upon him devolves the duty to ascertain the holder's
title to the check or the nature of his possession.
New Sikatuna Wood Industries, Inc. requested for a Failing in this respect, the payee is declared guilty of
loan from private respondent; the latter then issued gross negligence amounting to legal absence of good
three (3) crossed checks payable to New Sikatuna faith and as such the consensus of authority is to the
Wood Industries, Inc. all postdated. Subsequently, effect that the holder of the check is not a holder in
New Sikatuna Wood Industries, Inc. entered into an
good faith.
agreement with herein petitioner whereby the
former assigned and discounted with petitioner The three subject checks in the case at bar had been
eleven (11) postdated checks including the crossed generally and issued payable to New Sikatuna
aforementioned three (3) postdated checks issued by Wood Industries, Inc. which could only mean that the
herein private respondent to New Sikatuna Wood drawer had intended the same for deposit only by the
Industries, Inc. rightful person, i.e., the payee named therein.
Apparently, it was not the payee who presented the
When the three checks were allegedly deposited by same for payment and therefore, there was no proper
petitioner, these checks were dishonored by reason presentment, and the liability did not attach to the
of "insufficient funds", "stop payment" and "account
closed", respectively. Petitioner claims that despite
demands on private respondent, the latter failed to Thus, in the absence of due presentment, the drawer
pay the same necessitating the former to file an did not become liable. Consequently, no right of
action for collection. recourse is available to petitioner against the drawer
of the subject checks considering that petitioner is
RTC: The defendants, Harris and Anita Chua, were not the proper party authorized to make
ordered to pay the plaintiff. presentment of the checks in question.
CA: Reversed the lower court’s judgment.

Issue: Far East Bank & Trust Co

Whether petitioner is a holder in due course as to vs.
entitle it to proceed against private respondents for
the amount stated in the dishonored checks. Diaz Realty Inc

Held: (G.R. No. 138588. August 23, 2001)

Checks not valid tender of payment

Section 52(c) of the Negotiable Instruments Law
defines a holder in due course as one who takes the Facts:
instrument "in good faith and for value". On the other
hand, Section 52(d) provides that in order that one Diaz and Company got a loan from the former PaBC
may be a holder in due course, it is necessary that "at [Pacific Banking Corporation]. The loan was secured
the time the instrument was negotiated to him he had by a real estate mortgage. In 1981, Allied Banking
no notice of any x x x defect in the title of the person Corporation rented an office space in the building
negotiating it." However, under Section 59 every constructed on the properties covered by the
mortgage contract, with the conformity of mortgagee



PaBC, whereby the parties agreed that the monthly Facts:

rentals shall be paid directly to the mortgagee for the
Petitioner, in consideration of the amount of
lessors account, either to partly or fully pay off the
P15,487,500.00, agreed to sell to respondent a lot.
aforesaid mortgage indebtedness. Four years after,
Respondent paid petitioner the amount of
the Central Bank closed PaBC, placed it under
P600,000.00 as option/reservation fee and the
receivership, and appointed Renan Santos as its
balance of P14,887,500.00 to be paid within 60 days
liquidator. Sometime in December 1986, appellant
from the execution of the contract, simultaneous
FEBTC purchased the credit of Diaz & Company in
with delivery of various legal documents. The parties
favor of PaBC. Subsequently, Diaz tendered to FEBTC
further agreed that failure on the part of respondent
the amount of P1,450,000 through an Interbank
to pay the balance of the purchase price entitles
check, in order to prevent the imposition of additional
petitioner to forfeit the P600,000 option/reservation
interests, penalties and surcharges on its loan. FEBTC
fee; while non-delivery by the latter of the necessary
did not accept it as payment; instead, Diaz was asked
documents obliges him to return to respondent the
to deposit the amount with PaBC’s Davao City Branch
said option/reservation fee with interest at 18% per
RTC: There was a valid tender of payment made by
Petitioner failed to deliver the required documents. In
Diaz Realty Inc. in favor of Far East Bank and Trust
compliance with their agreement, he returned to
respondent the latter’s option/reservation fee by way
CA: Affirmed RTC’s decision. of Far East Bank & Trust Company check, which was,
however, dishonored.
Petitioner claimed that he twice tendered to
Whether there was a valid tender of payment.
respondent, through his counsel, the amount of
Held: P672,900.00 (representing the P600,000.00
option/reservation fee plus 18% interest per annum)
Yes. Jurisprudence holds that, in general, a check does in the form of Far East Bank & Trust Company
not constitute legal tender, and that a creditor may Manager’s Check but said counsel refused to accept
validly refuse it. It must be emphasized, however, the same. The second tender was in the form of a
that this dictum does not prevent a creditor from manager’s check attached to a letter and was sent via
accepting a check as payment. In other words, the DHL Worldwide Services. Subsequently, petitioner
creditor has the option and the discretion of refusing filed a complaint for consignation.
or accepting it.
RTC: The consignation was invalid for a manager’s
In the present case, petitioner bank did not refuse check does not constitute a legal tender.
respondent’s check. On the contrary, it accepted the
check which, it insisted, was a deposit. As earlier CA: Reversed RTC’s decision.
stated, the check proved to be fully funded and was
in fact honored by the drawee bank.
1. Was there a valid consignation?

2. Can petitioner withdraw the amount consigned as

Teddy G. Pabugais
a matter of right?
Dave P. Sahijwani 1. Yes. While it is true that in general, a manager’s
(G.R. No. 156846. February 23, 2004) check is not legal tender, the creditor has the option
of refusing or accepting it. The petitioner’s tender of
payment in the form of manager’s check is valid.
There being a valid tender of payment in an amount



sufficient to extinguish the obligation, the quashing the Information. Hence, this petition for
consignation is valid. review on certiorari filed by the Solicitor General in
behalf of the government.
Consignation is the act of depositing the thing due
with the court or judicial authorities whenever the Issue:
creditor cannot accept or refuses to accept payment
and it generally requires a prior tender of payment. In Whether respondent’s contention is tenable.
order that consignation may be effective, the debtor Held:
must show that: (1) there was a debt due; (2) the
consignation of the obligation had been made No. A memorandum check is in the form of an
because the creditor to whom tender of payment was ordinary check, with the word "memorandum",
made refused to accept it, or because he was absent "memo" or "mem" written across its face, signifying
or incapacitated, or because several persons claimed that the maker or drawer engages to pay the bona
to be entitled to receive the amount due or because fide holder absolutely, without any condition
the title to the obligation has been lost; (3) previous concerning its presentment. Such a check is an
notice of the consignation had been given to the evidence of debt against the drawer, and although
person interested in the performance of the may not be intended to be presented, has the same
obligation; (4) the amount due was placed at the effect as an ordinary check, and if passed to the third
disposal of the court; and (5) after the consignation person, will be valid in his hands like any other check.
had been made the person interested was notified
From the above definition, it is clear that a
thereof. Failure in any of these requirements is
memorandum check, which is in the form of an
enough ground to render a consignation ineffective.
ordinary check, is still drawn on a bank and should
2. The amount consigned with the trial court can no therefore be distinguished from a promissory note,
longer be withdrawn by petitioner because which is but a mere promise to pay.
respondent’s prayer in his answer that the amount
A memorandum check must therefore fall within the
consigned be awarded to him is equivalent to an
ambit of B.P. 22 which does not distinguish but
acceptance of the consignation, which has the effect
merely provides that "[a]ny person who makes or
of extinguishing petitioner’s obligation.
draws and issues any check knowing at the time of
issue that he does not have sufficient funds in or
credit with the drawee bank . . . which check is
People of the Philippines subsequently dishonored . . . shall be punished by
imprisonment . . ."
A memorandum check, upon presentment, is
Hon. Judge David Nitafan and K.T. Lim alias
generally accepted by the bank. Hence it does not
Mariano Lim
matter whether the check issued is in the nature of a
(G.R. No. 75954 October 22, 1992) memorandum as evidence of indebtedness or
Memorandum check
whether it was issued is partial fulfillment of a pre-
Facts: existing obligation, for what the law punishes is the
Private respondent K.T. Lim was charged before issuance itself of a bouncing check and not the
respondent court with violation of B.P. 22. He moved purpose for which it was issuance.
to quash the Information on the ground that the facts
charged did not constitute a felony as B.P. 22 was
unconstitutional and that the check he issued was a
memorandum check which was in the nature of a
promissory note. The respondent judge ruled that
B.P. 22, on which the Information was based, was
unconstitutional and issued the questioned Order



Ramon Tan use in the commercial world is regarded substantially

to be as good as the money which it represents. In this
vs. case, therefore, PCIB by issuing the check created an
CA and Rizal Commercial Banking Corporation unconditional credit in favor of any collecting bank.
RCBC could surely rely on the solvency of PCIB when
(G.R. No. 108555 December 20, 1994) the latter issued its cashier's check.

Petitioner had maintained an account with

respondent bank's Binondo branch. To avoid carrying
cash while en route to Manila, he secured a Cashier's
Check from the Philippine Commercial Industrial Bank
(PCIB), Puerto Princesa branch, in the amount of
Thirty Thousand (P30,000.00) Pesos, payable to his
order. He deposited the check in his account with
RCBC Binondo. On the same day, RCBC erroneously
sent the same cashier's check for clearing to the
Central Bank which was returned for having been
"missent" or "misrouted." The next day, RCBC debited
the amount covered by the same cashier's check from
the account of the petitioner. Respondent bank at
this time had not informed the petitioner of its action
which the latter claims he learned of only 42 days
after. Relying on his common knowledge that a
cashier’s check was as good as cash, and a month
after depositing the check, he issued two personal
checks which subsequently bounced due to
insufficiency of funds. Petitioner filed a suit against

RTC: The court rendered a decision in favor of the


CA: Reversed the lower court’s judgment.


Whether a cashier’s check is as good as cash, so as to

have funded the two checks subsequently drawn.


Yes. In this case, what was presented for deposit was

not just an ordinary check but a cashier's check
payable to the account of the depositor himself. A
cashier's check is a primary obligation of the issuing
bank and accepted in advance by its mere issuance.
By its very nature, a cashier's check is the bank's order
to pay drawn upon itself, committing in effect its total
resources, integrity and honor behind the check. A
cashier's check by its peculiar character and general


Letters of Credit

Bank of the Philippine Islands forwarded all documents to the Bank of the Philippine
Islands. In the meantime, as each shipment (covered
vs. by the above-mentioned letters of credit) arrived in
De Reny Fabric Industries, Inc., Aurora Tuyo and the Philippines, the De Reny Fabric Industries, Inc.
Aurora Carcereny alias Aurora Gonzales made partial payments to the Bank amounting, in the
aggregate, to P90,000. Further payments were,
(G.R. No. L-24821 October 16, 1970)
however, subsequently discontinued by the
A custom in international banking and financing circles negates
any duty on the part of a bank to verify whether what has been corporation when it became established, as a result
described in letters of credits or drafts or shipping documents of a chemical test conducted by the National Science
actually tallies with what was loaded aboard ship Development Board, that the goods that arrived in
Manila were colored chalks instead of dyestuffs. The
Facts: corporation also refused to take possession of these
On four (4) different occasions in 1961, the De Reny goods, and for this reason, the Bank caused them to
Fabric Industries, Inc., a Philippine corporation, be deposited with a bonded warehouse paying
applied to the Bank for four (4) irrevocable therefor the amount of P12,609.64 up to the filing of
commercial letters of credit to cover the purchase by its complaint with the court below on December 10,
the corporation of goods described in the covering 1962.
L/C applications as "dyestuffs of various colors" from The Lower Court ordered the corporation and its co-
its American supplier, the J.B. Distributing Company. defendants (the herein appellants) to pay BPI the
All the applications of the corporation were amount of the LC agreement.
approved, and the corresponding Commercial L/C The contention of De Reny is that it was the duty of
Agreements were executed pursuant to banking the foreign correspondent banks of the Bank of the
procedures. Pursuant to banking regulations then in
Philippine Islands to take the necessary precautions
force, the corporation delivered to the Bank peso
to insure that the goods shipped under the covering
marginal deposits as each letter of credit was opened. L/Cs conformed with the item appearing therein, and,
By virtue of the foregoing transactions, the Bank that the foreign banks having failed to perform this
issued irrevocable commercial letters of credit duty, no claim for recoupment against the
addressed to its correspondent banks in the United defendants-appellants, arising from the losses
States, with uniform instructions for them to notify incurred for the non-delivery or defective delivery of
the beneficiary thereof, the JB. Distributing Company, the articles ordered, could accrue.
that they have been authorized to negotiate the
latter's sight drafts up to the amounts mentioned Issue:
therein, respectively, if accompanied, upon
Whether De Reny Fabrics is liable under the Letter of
presentation, by a full set of negotiable clean "on
board" ocean bills of lading, covering the Credit.
merchandise appearing in the L/Cs, that is, dyestuffs Held:
of various colors, Consequently, the J.B. Distributing
Company drew upon, presented to and negotiated Yes.
with these banks, its sight drafts covering the
Under the terms of their Commercial Letter of Credit
amounts of the merchandise ostensibly being
Agreements with the Bank, the appellants agreed
exported by it, together with clean bills of lading, and
that the Bank shall not be responsible for the
collected the full value of the drafts up to the
"existence, chancier, quality, quantity, conditions,
amounts appearing in the L/ Cs as above indicated.
packing, value, or delivery of the property purporting
These correspondent banks then debited the account to be represented by documents, for any difference
of the Bank of the Philippine Islands with them up to in character, quality, quantity, condition, or value of
the full value of the drafts presented by the J.B. the property front that expressed in documents," or
Distributing Company, thereafter, endorsed and for "partial or incomplete shipment, or failure or
omission to ship my or all of the property referred to


Letters of Credit

in the Credit," as well as "for any deviation from The existence of a custom in international banking
instructions, delay, default or fraud by the shipper or and financing circles negating any duty on the part of
in anyone else in connection with the property or the a bank to verify whether what has been described in
shipping thereof," and "for any breach of contract letters of credits or drafts or shipping documents
between the shippers or vendors and ourselves, actually tallies with what was loaded aboard ship,
[purchasers] or any of us." Having agreed to these having been positively proven as a fact, the appellants
terms, the appellants have, therefore, no recourse are bound by this established usage. They were, after
but to comply with their covenant to the rules of all, the ones who tapped the facilities afforded by the
evidence. Bank in order to engage in international business.

But even without the stipulation recited above, the

appellants cannot shift the burden of loss to the Bank
on account of the violation by their vendor of its Philippine Virginia Tobacco Administration
prestation. vs.
The Code of Commerce, in its Article 2, likewise Hon. Walfrido de los Angeles, Judge of the CFI of
provides that "Acts of commerce, whether those who Rizal, (Quezon City) and Timoteo Sevilla, doing
execute them be merchants or not, and whether business under the name and style of Philippine
specified in this Code or not, should be governed by Associated Resources and Prudential Bank and
the provisions contained in it, in their absence, b) the Trust Company
usages of commerce generally observed in each
(G.R. No. L-27829 August 19, 1988)
place, and in the absence of both rules, by those of
An irrevocable letter of credit cannot, during its lifetime, be
the civil law" "Those acts contained in this Code and cancelled or modified without the express permission of the
all Others of analogous character, shall be deemed beneficiary
acts of commerce." It must be noted that certain
principles governing the issuance, acceptance and Facts:
payment of letters of credit arc specifically provided
Timoteo Sevilla, proprietor and General Manager of
for in the Code of Commerce. But even without the
the Philippine Associated Resources (PAR) was
stipulation recited above, the appellants cannot shift
awarded in a public bidding the right to import
the burden of loss to the Bank on account of the
Virginia leaf tobacco. Subsequently, the Philippine
violation by their vendor of its prestation. Banks, in
Virginia Tobacco Administration (PVTA) and Sevilla
providing financing in international business
entered into a contract for the importation of 85
transactions such as those entered into by the
million kilos of Virginia leaf tobacco and a counterpart
appellants, do not deal with the property to be
exportation of 2.53 million kilos of tobacco and 5.1
exported or shipped to the importer, but deal only
million kilos of farmer’s and tobacco at P3.00 a kilo.
with documents.
In accordance with their contract Sevilla purchased
The Bank introduced in evidence a provision from PVZTA and exported 2,101.470 kilos of tobacco,
contained in the "Uniform Customs and Practices for paying the PVTA the sum of P2,482,938.50 and
Commercial Documentary Credits Fixed for the leaving a balance of P3,713,908.91. Before
Thirteenth Congress of International Chamber of respondent Sevilla could import the counterpart
Commerce," to which the Philippines is a signatory blending Virginia tobacco, amounting to 525,560
nation. Article 10 thereof provides: kilos, Republic Act No. 4155 was passed and took
effect on June 20, 1 964, authorizing the PVTA to
Its documentary credit operations, all parties concerned deal in
grant import privileges at the ratio of 4 to 1 instead of
documents and not in goods, payment, negotiation or acceptance
against documents in accordance with the terms and conditions of 9 to 1 and to dispose of all its tobacco stock at the
a credit by a Bank authorized to do so binds the party giving the best price available.
authorization to take up the documents and reimbursed the Bank
making the payment, negotiation or acceptance. Because of the prevailing export or world market
price under which Sevilla will be exporting at a loss,
the agreement was further amended to require


Letters of Credit

Sevilla would open an irrevocable letter of credit with obtained two (2) loans from Philippine American Life
the Prudential Bank and Trust Co. (Prudential) in favor Insurance Co. (Philam Life) in the total amount of
of the PVTA to secure the payment of said balance, P600,000 to finance the construction of their
drawable upon the release from the Bureau of residential house at Mandaue City.
Customs of the imported Virginia blending tobacco.
To secure payment, Philam Life required that
While Sevilla was trying to negotiate the reduction of
amortizations be guaranteed by an irrevocable
the procurement cost of the 2,101.479 kilos of PVTA
standby letter of credit of a commercial bank. Thus,
tobacco already exported which attempt was denied
the Mendozas contracted with petitioner Insular Bank
by PVTA and also by the Office of the President. PVTA
of Asia and America (IBAA) for the issuance of two (2)
attempted to collect from the letter of Credit with
irrevocable standby Letters of Credit in favor of
Prudential. Sevilla filed an injunction for the release
Philam Life for the total amount of P600,000. These
of funds with Prudential in the sala of Judge Delos
two (2) irrevocable standby L/Cs were, in turn,
Santos. Judge Delos Santos issued the injunction
secured by a real estate mortgage for the same
order and in a subsequent petition, ordered the funds
amount on the property of Respondent Spouses in
of the letter of credit released to Sevilla.
favor of IBAA.
The Mendozas failed to pay Philam Life the
Whether Judge Sevilla acted with grave abuse of amortization that fell due on 1 June 1978 so that
discretion in releasing the funds to the applicant of Philam Life informed IBAA that it was declaring both
the letter of credit. loans as "entirely due and demandable" and
demanded payment of P492,996.30. However,
Held: because IBAA contested the propriety of calling in the
Yes. entire loan, Philam Life desisted and resumed availing
of the L/Cs by drawing on them for five (5) more
Judge Delos Santos violated the irrevocability of the amortizations.
letter of credit issued by respondent Bank in favor of
petitioner. An irrevocable letter of credit cannot, Because the Mendozas defaulted again on their
during its lifetime, be cancelled or modified without amortization due on, Philam Life again informed IBAA
the express permission of the beneficiary. that it was declaring the entire balance outstanding
Consequently, if the finding of the trial on the merits on both loans, including liquidated damages,
is that respondent Sevilla has alleged unpaid balance "immediately due and payable." Philam Life then
due the petitioner, such unpaid obligation would be demanded the payment of P274,779.56 from IBAA
unsecured. but the latter took the position that, as a mere
guarantor of the Mendozas who are the principal
debtors, its remaining outstanding obligation under
the two(2) standby L/Cs was only P30,100.60. Later,
Insular Bank of Asia & America (now Philippine
IBAA corrected the latter and demanded refund
Commercial International Bank)
because the partial payment by Mendozas have the
vs. effect of reducing its liability as guarantor or surety
under the terms of the standbyL/Cs in question.
IAC, The Philippine American Life Insurance Co.,
Sps. Ben Mendoza & Juanita M. Mendoza The real Estate Mortgage, which secured the two (2)
standby L/Cs, was extrajudicially foreclosed by, and
(G.R. No. 74834 November 17, 1988) sold at public auction to petitioner IBAA as the lone
and highest bidder.

Facts: Philam Life filed suit against Respondent Spouses and

IBAA before the RTC of Manila for the recovery of the
Sometime in 1976 and 1977 spouses Ben S. Mendoza sum of P274,779.56, the amount allegedly still owing
and Juanita M. Mendoza (the Mendozas, for brevity), under the loan.


Letters of Credit

Trial Court took the position that IBAA, "as surety," cannot be added in computing IBAA's liability under
was discharged of its liability to the extent of the its own standby letters of credit. Payments made by
payment made by the Mendozas, as the principal the Mendozas directly to Philam Life are in
debtors, to the creditor, Philam Life. compliance with their own prestation under the loan
The CA reversed the Trial Court and ruled instead that
IBAA's liability was not reduced by virtue of the As to the liability of the Mendozas to IBAA, it bears
payments made by the Mendozas. recalling that the Mendozas, upon their application
for the opening and issuance of the Irrevocable
Issue: Standby Letters of Credit in favor of Philam Life, had
Whether the partial payments made by the principal executed a Real Estate Mortgage as security to IBAA
obligors (respondent MENDOZAS) would have the for any payment that the latter may remit to Philam
corresponding effect of reducing the liability of the Life on the strength of said Letters of Credit; and that
petitioner as guarantor or surety under the terms of IBAA had recovered from the Mendozas the amount
the standby LCs in question. of P432,386.07 when it foreclosed on the mortgaged
property of said spouses in the concept of "principal
Held: (unpaid advances under the 2 standby LCs plus
interest and charges)." In addition, IBAA had
recovered P255,364.95 representing its clean loans to
In construing the terms of a Letter of Credit, as in the Mendozas plus accrued interest besides the fact
other contracts, it is the intention of the parties that that it now has the foreclosed property. As between
must govern. IBAA and the Mendozas, therefore, there has been
full liquidation. The remaining obligation of P222,000
"Letters of credit and contracts for the issuance of on the loan of the Mendozas, therefore, is now IBAA's
such letters are subject to the same rules of sole responsibility to pay to Philam Life by virtue of its
construction as are ordinary commercial contracts. absolute and irrevocable undertaking under the
They are to receive a reasonable and not a technical standby L/Cs. Specially so, since the promissory notes
construction and although usage and custom cannot executed by the Mendozas in favor of IBAA
control express terms in letters of credit, they are to authorized the sale of the mortgaged security "for the
be construed with reference to all the surrounding purpose of applying their proceeds to x x x payments"
facts and circumstances, to the particular and often of their obligations to IBAA.
varying terms in which they may be expressed, the
circumstances and intention of the parties to them,
and the usages of the particular trade of business
Feati Bank & Trust Company
Unequivocally, the subject standby Letters of Credit
secure the payment of any obligation of the vs.
Mendozas to Philam Life including all interests,
surcharges and expenses thereon but not to exceed CA and Bernardo E. Villaluz
P600,000. But while they are a security arrangement, (G.R. No. 94209 April 30, 1991)
they are not converted thereby into contracts of Classification of obligations assumed by a correspondent bank in a
guaranty. That would make them ultra vires rather Letter of Credit
than a letter of credit, which is within the powers of a
bank. The standby L/Cs are, "in effect an absolute Facts:
undertaking to pay the money advanced or the Bernardo E. Villaluz agreed to sell to the then
amount for which credit is given on the faith of the defendant Axel Christiansen 2,000 cubic meters of
instrument." They are primary obligations and not lauan logs at $27.00 per cubic meter FOB. After
accessory contracts. Being separate and independent inspecting the logs, Christiansen issued purchase
agreements, the payments made by the Mendozas order.


Letters of Credit

On the arrangements made and upon the instructions counsel. Hence, Villaluz, filed an amended complaint
of the consignee, Hanmi Trade Development, Ltd., de make the petitioner solidarily liable with Christiansen.
Santa Ana, California, the Security Pacific National
Bank of Los Angeles, California issued Irrevocable Issue:
Letter of Credit available at sight in favor of Villaluz Whether a correspondent bank is to be held liable
for the sum of $54,000, the total purchase price of the under the letter of credit despite non-compliance by
lauan logs. the beneficiary with the terms thereon.
The letter of credit was mailed to the Feati Bank and Held:
Trust Company (now Citytrust) with the instruction to
the latter that it "forward the enclosed letter of credit Commercial transactions involving letter of credits
to the beneficiary.” The letter of credit further are governed by the rule on strict compliance. It is a
provided that the draft to be drawn is on Security settled rule in commercial transactions involving
Pacific National Bank and that it be accompanied by letters of credit that the documents tendered must
the documents specified therein. Also incorporated strictly conform to the terms of the letter of credit.
by reference is the Uniform Customs and Practice for The tender of documents by the beneficiary (seller)
Documentary Credits. must include all documents required by the letter. A
correspondent bank which departs from what has
The logs were thereafter loaded on the vessel "Zenlin been stipulated under the letter of credit, as when it
Glory" which was chartered by Christiansen. Before accepts a faulty tender, acts on its own risks and it
its loading, the logs were inspected by custom may not thereafter be able to recover from the buyer
inspectors, all of whom certified to the good or the issuing bank, as the case may be, the money
condition and exportability of the logs, and the thus paid to the beneficiary, thus the rule of strict
loading was completed. compliance.
However, Christiansen refused to issue the In the United States, commercial transactions
certification as required in paragraph 4 of the letter involving letters of credit are governed by the rule of
of credit, despite several requests made by the strict compliance. In the Philippines, the same holds
private respondent. Because of the absence of the true. The same rule must also be followed.
certification by Christiansen, the Feati Bank and Trust
Company refused to advance the payment on the Although in some American decisions, banks are
letter of credit. Meanwhile, the logs arrived at Inchon, granted a little discretion to accept a faulty tender as
Korea and were received by the consignee, Hanmi when the other documents may be considered
Trade Development Company, to whom Christiansen immaterial or superfluous; this theory could lead to
sold the logs and obtained profit. Hanmi Trade dangerous precedents. Since a bank deals only with
Development Company, on the other hand sold the documents, it is not in a position to determine
logs to Taisung Lumber Company at Inchon, Korea. whether or not the documents required by the letter
of credit are material or superfluous. The mere fact
Since the demands by the private respondent for that the document was specified therein readily
Christiansen to execute the certification proved futile, means that the document is of vital importance to the
Villaluz, instituted an action for mandamus and buyer.
specific performance against Christiansen and the
Feati Bank and Trust Company (now Citytrust).The In commercial transactions involving letters of credit,
petitioner was impleaded as defendant before the the functions assumed by a correspondent bank are
lower court only to afford complete relief should the classified according to the obligations taken up by it.
court a quo order Christiansen to execute the The correspondent bank may be called a notifying
required certification. bank, a negotiating bank, or a confirming bank.

While the case was still pending trial, Christiansen left

the Philippines without informing the Court and his


Letters of Credit

In case of a notifying bank, the correspondent bank Bank of America, NT & SA, Manila, received by
assumes no liability except to notify and/or transmit registered mail an Irrevocable Letter of Credit
to the beneficiary the existence of the letter of credit. purportedly issued by Bank of Ayudhya, Sarnyaek
A negotiating bank, on the other hand, is a Branch, for the account of General Chemicals, Ltd., of
correspondent bank which buys or discounts a draft Thailand in the amount to cover the sale of Plastic
under the letter of credit. Its liability is dependent ropes and "agricultural files," with the Bank of
upon the stage of the negotiation. If before America as advising bank and Inter-Resin Industrial
negotiation, it has no liability with respect to the Corporation as beneficiary.
seller but after negotiation, a contractual relationship
Upon receipt of the letter-advice with the letter of
will then prevail between the negotiating bank and
credit, Inter-Resin sent its lawyer to Bank of America
the seller.
to have the letter of credit confirmed. The bank did
In the case of a confirming bank, the correspondent not. The bank employee in charge of letters of credit,
bank assumes a direct obligation to the seller and its however, explained to that there was no need for
liability is a primary one as if the correspondent bank confirmation because the letter of credit would not
itself had issued the letter of credit. have been transmitted if it were not genuine.

In this case, the letter merely provided that the Inter-Resin sought to make a partial availment under
petitioner "forward the enclosed original credit to the the letter of credit by submitting to Bank of America
beneficiary." Considering the aforesaid instruction to invoices, covering the shipment of 24,000 bales of
the petitioner by the issuing bank, the Security Pacific polyethylene rope to General Chemicals valued at
National Bank, it is indubitable that the petitioner is US$1,320,600.00, the corresponding packing list,
only a notifying bank and not a confirming bank as export declaration and bill of lading. Finally, after
ruled by the courts below. being satisfied that Inter-Resin's documents
conformed with the conditions expressed in the letter
The notifying bank may suggest to the seller its
of credit, Bank of America issued in favor of Inter-
willingness to negotiate, but this fact alone does not
Resin a Cashier's Check for P10,219,093.20 the peso
imply that the notifying bank promises to accept the
equivalent of the draft. Bank of America wrote Bank
draft drawn under the documentary credit. of Ayudhya advising the latter of the availment under
A notifying bank is not a privy to the contract of sale the letter of credit and sought the corresponding
between the buyer and the seller, its relationship is reimbursement therefor.
only with that of the issuing bank and not with the
Meanwhile, Inter-Resin, presented to Bank of
beneficiary to whom he assumes no liability. It follows
America the documents for the second availment
therefore that when the petitioner refused to
under the same letter of credit. Immediately upon
negotiate with the private respondent, the latter has receipt of a telex from Bank of Ayudhya declaring the
no cause of action against the petitioner for the letter of credit fraudulent, Bank of America stopped
enforcement of his rights under the letter. the processing of Inter-Resin's documents and sent a
Prudential Bank v. IAC, 216 SCRA 257 (1992) telex to its branch office in Bangkok, Thailand,
[Same as above, Chapter 8 – Acceptance] requesting assistance in determining the authenticity
of the letter of credit. Bank of America sued Inter-
Resin for the recovery of the peso equivalent of the
Bank of America, NT & SA draft on the partial availment of the now disowned
letter of credit.
Bank of America sued Inter-Resin for the recovery of
CA, Inter-Resin Industrial Corporation, Francisco
P10,219,093.20, the peso equivalent of the draft for
Trajano, John Doe and Jane Doe
US$1,320,600.00 on the partial availment of the now
(G.R. No. 105395 December 10, 1993) disowned letter of credit. On the other hand, Inter-
Resin claimed that not only was it entitled to retain


Letters of Credit

P10,219,093.20 on its first shipment but also to the statement of the bank employee, aforementioned, in
balance US$1,461,400.00 covering the second responding to the inquiry made by Atty. Tanay, Inter-
shipment. Resin's representative, on the authenticity of the
letter of credit certainly did not have the effect of
Trial Court ruled for Inter-Resin, holding that Bank of
novating the letter of credit and Bank of America’s
America cannot recover from Inter-Resin because the
letter of advise, nor can it justify the conclusion that
drawer of the letter of credit is the Bank of Ayudhya
the bank must now assume total liability on the letter
and not Inter-Resin, that Bank of America made
of credit. Indeed, Inter-Resin itself cannot claim to
assurances that enticed Inter-Resin and the
have been all that free from fault. As the seller, the
merchandise to Thailand; CA sustained the Trial
issuance of the letter of credit should have obviously
Court. been a great concern to it. It would have, in fact, been
Issue: strange if it did not, prior to the letter of credit, enter
into a contract, or negotiated at the very least, with
Whether or not the Bank of America acted merely as General Chemicals. In the ordinary course of business,
an advising bank or a confirming bank, corollarily, the perfection of contract precedes the issuance of a
Bank of America can recover from Inter-Resin. letter of credit.

It cannot seriously be disputed, looking at this case, Reliance Commodities, Inc.

that Bank of America has, in fact, only been an
advising, not confirming bank, and this much is vs.
clearly evident, among other things, by the provisions
Daewoo Industrial Co., Ltd.
of the letter of credit itself, the petitioner bank's
letter of advice, its request for payment of advising (G.R. No. L-100831 December 17, 1993)
fee, and the admission of Inter-Resin that it has paid
the same. That Bank of America has asked Inter-Resin
to submit documents required by the letter of credit Facts:
and eventually has paid the proceeds thereof, did not
obviously make it a confirming bank. The fact, too, Reliance Commodities and Daewoo Industrial
that the draft required by the letter of credit is to be entered into a contract of sale of foundry pig iron.
drawn under the account of General Chemicals Pursuant to this, Daewoo shipped from Pohang,
(buyer) only means that the same had to be Republic of Korea, 2,000 metric tons of foundry pig
presented to Bank of Ayudhya (issuing, bank) for iron for delivery to its consignee Reliance. The
payment. It may be significant to recall that the letter shipment was fully paid for. Upon arrival in Manila,
of credit is an engagement of the issuing bank, not the the cargo was found to be short of 135.655 metric
advising bank, to pay the draft. tons.

No less important is that Bank of America's letter of Subsequently, another contract was entered into
11 March 1981 has expressly stated that "[t]he between the same parties for the purchase of
enclosure is solely an advise of credit opened by the another 2,000metric tons of foundry pig iron.
abovementioned correspondent and conveys no Daewoo acknowledged the short shipment, and to
engagement by us." This written reservation by Bank compensate Reliance therefore, bound itself to
of America in limiting its obligation only to being an reduce the price. The agreement was made part of
advising bank is in consonance with the provisions of the subsequent contract, however, that contract was
U.C.P. not consummated and was later superseded by still
another contract.
As an advising or notifying bank, Bank of America did
not incur any obligation more than just notifying Reliance filed with the China Banking Corporation, an
Inter-Resin of the letter of credit issued in its favor, let application for a letter of credit in favor of Daewoo.
alone to confirm the letter of credit. The bare The application was endorsed to the Iron Steel


Letters of Credit

Authority (ISA) for approval, but the application was Whether the failure of an importer (Reliance) to open
denied. Reliance was instead asked to submit a letter of credit on the date agreed upon makes him
purchase orders from end-users to support its liable to the exporter (Daewoo) for damages.
application for a letter of credit. However, Reliance
was not able to raise purchase orders for 2,000 metric Held:
tons. Reliance alleges that it was able to raise Yes.
purchase orders for 1,900 metric tons. Daewoo, upon
the other hand, contends that reliance was only able A letter of credit transaction may thus be seen to be
to raise purchase orders for 900 metric tons. An a composite of at least three (3) distinct but
examination of the exhibits' presented by Reliance in intertwined relationships being concretized in a
the trial court shows that only purchase orders for contract:
900metric tons were stamped "Received" by the ISA. (a) One contract relationship links the party applying for
The other purchase orders for 1,000 metric tons the L/C (the account party or buyer or importer) and the
allegedly sent by prospective end-users to Reliance party for whose benefit the L/C is issued (the beneficiary
or seller or exporter). In this contract, the account party,
were not shown to have been duly sent and exhibited
here Reliance, agrees, among other things and subject
to the ISA. Whatever the exact amount of the to the terms and conditions of the contract, to pay
purchase orders was, Daewoo rejected the proposed money to the beneficiary, here Daewoo.
L/C for the reason that the goods covered fell short of
(b) A second contract relationship is between the
the contracted tonnage. Thus, Reliance withdrew the account party and the issuing bank. Under this contract,
application for the L/C. (sometimes called the "Application and Agreement" or
the "Reimbursement Agreement"), the account party
Subsequently, Daewoo learned that the failure of among other things, applies to the issuing bank for a
Reliance to open the LC was due to the fact that specified L/C and agrees to reimburse the bank for
Reliance had already exceeded its foreign exchange amounts paid by that bank pursuant to the L/C.

allocation. Because of the failure of Reliance to (c) The third contract relationship is established
comply with its undertaking, Daewoo was compelled between the issuing bank and the beneficiary, in order
to support the contract, under (a) above, of the account
to sell the 2,000 metric tons to another buyer at a
party and the beneficiary to, inter alia, pay certain
lower price, to cut losses and expenses Daewoo had monies to the latter.
begun to incur due to its inability to ship the 2000
metric tons to Reliance under their contract. Certain other parties may be added to the foregoing,
but the above three are the indispensable ones.
Reliance, through its counsel, wrote Daewoo
requesting of the amount of P226,370.48, Failure of Reliance to open the appropriate letter of
representing the value of the short delivery of credit did not prevent the birth of the contract and
135.655 metric tons of foundry pig iron under the 1st neither did such failure extinguish that contract.
contract. Not being heeded, Reliance filed an action
Reliance and Daewoo, having reached "a meeting of
for damages against Daewoo with the trial court.
minds" in respect of the subject matter of the
Daewoo responded, inter alia, with a counterclaim for
contract (2000 metric of foundry pig iron with a
damages, contending that Reliance was guilty of
specified chemical composition), the price thereof
breach of contract when it failed to open and L/C as
(US $380,600), and other principal provisions, "they
required in the 31 July 1980 contract.
had a perfected contract”. The failure of Reliance to
Trial Court ruled that Reliance is in turn liable for open, the appropriate L/C did not prevent the birth of
breach of contract for its failure to open a letter of that contract, and neither did the failure extinguish
credit in favor of Daewoo pursuant to their contract that contract. The opening of the L/C in favor of
and must therefore pay the latter actual damages Daewoo was an obligation of Reliance and the
with legal interest plus attorney's fees. CA: affirmed performance of that obligation by Reliance was a
Trial Court. condition for enforcement of the reciprocal
obligation of Daewoo to ship the subject matter of
Issue: the contract-the foundry pig iron-to Reliance. But the


Letters of Credit

contract itself between Reliance and Daewoo had Held:

already sprung into legal existence and was
1. No.
The subject Letter of Credit had become invalid upon
Failure of a buyer seasonably to furnish an agreed
the lapse of the period fixed therein. Thus, FBTC
letter of credit is a breach of the contract between
should not have paid Ekman; it was not obliged to do
buyer and seller. Where the buyer fails to open a
so. In the same vein, of no moment was Ekman’s
letter of credit as stipulated, the seller or exporter is
presentation, within the prescribed period, of all the
entitled to claim damages for such breach. Damages
documents necessary for collection, as the Letter of
for failure to open a commercial credit may, in
appropriate cases, include the loss of profit which the Credit had already expired and had in fact been
seller would reasonably have made had the cancelled.
transaction been carried out. 2. Yes.

Be that as it may, SC agree with the CA that Rodzssen

should pay FBTC the amount the latter expended for
Rodzssen Supply Company, Inc.
the equipment belatedly delivered by Ekman and
vs. voluntarily received and kept by petitioner. FBTC’s
right to seek recovery from petitioner is anchored,
Far East Bank and Trust Company not upon the inefficacious Letter of Credit, but on
(G.R. No. 109087. May 9, 2001) Article 2142 of the Civil Code which reads as follows:
Letter of Credit becomes invalid upon the lapse of the period fixed
therein “Certain lawful, voluntary and unilateral acts give rise to the
juridical relation of quasi-contract to the end that no one shall be
unjustly enriched or benefited at the expense of another.”
Indeed, equitable considerations behoove us to allow
Rodzssen Supply opened an irrevocable letter 30-day
recovery by FBTC. True, it erred in paying Ekman, but
domestic letter of credit from Far East Bank and Trust
Rodzssen itself was not without fault in the
in favor of Ekman and Company, Inc. for the purchase
transaction. It must be noted that the latter had
of five units of hydraulic loaders; subsequent
voluntarily received and kept the loaders. When both
amendments extended the validity of the said LC for
parties to a transaction are mutually negligent in the
eight months. For the first three hydraulic loaders
performance of their obligations, the fault of one
that were delivered, the Bank paid for the amount
cancels the negligence of the other and, as in this
specified in the letter of credit. The last two hydraulic
case, their rights and obligations may be determined
loaders were delivered late, nevertheless, Rodzssen
equitably under the law proscribing unjust
accepted the same. Upon Ekman’s presentation of
documents, FBTC paid even if it was no longer bound
to do so, because the letter of credit has already
expired five months ago. FBTC demanded payment
from Rodzssen, but the latter refused to pay and Ramon L. Abad
instead offered to return the last two pieces of
CA & The Philippine Commercial and Industrial
Trial Court and CA: Ordered Rodzssen to pay FBTC.
(G.R. No. L-42735 January 22, 1990)
1. Whether it is proper for a banking institution to pay
a letter of credit which has long expired or been
cancelled. Facts:

2. Whether Rodzssen is liable to reimburse FBTC.


Letters of Credit

TOMCO, Inc. applied for, and was granted by the security given by the debtor, and is supposed to be
Philippine Commercial and Industrial Bank (hereafter returned to him upon his compliance with his secured
called "PCIB"), a domestic letter of credit in favor of obligation. Consequently, the bank pays no interest
its supplier, Oregon Industries, Inc., to pay for one on the marginal deposit, unlike an ordinary bank
Skagit Yarder with accessories. PCIB paid to Oregon deposit which earns interest in the bank. As a matter
Industries the cost of the machinery against a bill of of fact, the marginal deposit requirement for letters
exchange. After making the required marginal of credit has been discontinued, except in those cases
deposit, TOMCO, Inc. signed and delivered to the where the applicant for a letter of credit is not known
bank a trust receipt acknowledging receipt of the to the bank or does not maintain a good credit
merchandise in trust for the bank, with the obligation standing therein.
"to hold the same in storage" as property of PCIB,
It is only fair then that the marginal deposit (if one
with a right to sell the same for cash provided that the
was made, as in this case), should be set off against
entire proceeds thereof are turned over to the bank,
his debt, for while the importer earns no interest on
to be applied against acceptance(s) and any other
his marginal deposit, the bank, apart from being able
indebtedness of TOMCO, Inc. In consideration of the
release to TOMCO, Inc. by PCIB of the machinery to use said deposit for its own purposes, also earns
interest on the money it loaned to the importer. It
covered by the trust receipt, Ramon Abad signed an
would be onerous to compute interest and other
undertaking entitled, "Deed of Continuing Guaranty"
charges on the face value of the letter of credit which
appearing on the back of the trust receipt, whereby
the bank issued, without first crediting or setting off
he promised to pay the obligation jointly and
the marginal deposit which the importer paid to the
severally with TOMCO, Inc.
bank. To allow such would be a clear case of unjust
Except for TOMCO’s P28,000 marginal deposit in the enrichment.
bank, no payment has been made to PCIB by either
TOMCO, Inc. or its surety, Abad, on the P80,000 letter
of credit. Consequently, the bank sued TOMCO, Inc. Metropolitan Waterworks and Sewerage System
and Abad, TOMCO did not deny its liability to PCIB
under the letter of credit but it alleged that inasmuch vs.
as it made a marginal deposit the same should have
Hon. Reynaldo B. Daway, in his capacity as
been deducted from its principal obligation, on which
Presiding Judge of the RTC of Quezon City and
the bank should have computed the interest, bank
Maynilad Water Services, Inc.
charges, and attorney's fees.
(G.R. No. 160732. June 21, 2004)
Trial Court ruled in favor of PCIB ordering TOMCO and
ABAD to pay jointly and severally to PCIB with the Facts:
marginal deposit still included in the computation of
the obligation. CA affirmed in toto the decision of MWSS granted Maynilad a 20- year period to manage,
lower court. operate, repair, decommission and refurbish the
existing MWSS water delivery and sewerage services
Issue: in the west zone service area, for which Maynilad
undertook to pay the corresponding concession fees
Whether the marginal deposit paid for should first be
on the date agreed upon in the said agreement which
deducted from its principal before computing
consisted of the payments of MWSS’ foreign loans
interests and other charges.
To secure the concessionaire’s performance of its
obligation under the Concession Agreement,
Yes. Maynilad was required to put up a bond, bank
guarantee or other security acceptable to MWSS. In
The marginal deposit requirement is a Central Bank compliance with this requirement, Maynilad
measure to cut off excess currency liquidity which arranged for a 3 year facility with a number of foreign
would create inflationary pressure. It is a collateral


Letters of Credit

banks, led by Citicorp International Limited for the undertakings to pay the money advanced or the
issuance of an irrevocable Standby Letter of Credit for amount for which credit is given on the faith of the
the full and prompt performance of Maynilad’s instrument. They are primary obligations and not
obligations under MWSS. As a result, of the accessory contracts and while they are security
depreciation of the Philippine Peso against US dollar, arrangements, they are not converted thereby into
Maynilad incurred losses and issued a force majeure contracts of guaranty. What distinguishes letters of
notice and unilaterally suspend payment of the credit from other accessory contracts is the
concession fees. In an effort to salvage the concession engagement of the issuing bank to pay the seller once
agreement, the parties entered into a Memorandum draft and other required shipping documents are
of Agreement wherein Maynilad was allowed to presented to it. They are definite undertakings to pay
recover foreign exchange losses under a formula at sight once the documents stipulated therein are
agreed upon between them. Maynilad filed again presented.
another force majeure notice and since MWSS could
The obligation of the banks issuing letters of credit
not agree with the terms of the notice, the same was
are solidary with that of the person or entity
referred to the Appeals Panel for arbitration. New
requesting for its issuance, the same being a direct,
term was agreed upon.
primary, absolute and definite undertaking to pay the
Prior to that Maynilad had filed a petition for beneficiary upon the presentation of the set of
rehabilitation. RTC issued an order staying the documents required therein. Being a solidary
enforcement of the claims and stopping payment of obligation, the letter of credit is excluded from the
liabilities, because it is under rehabilitation. It jurisdiction of the rehabilitation and therefore in
effectively stopped the commencing process of enjoining MWSS from proceeding against the Standby
payment by the bank to MWSS. When MWSS Letters of Credit to which it had a clear right under the
demanded payment and commenced drawing on the law and the terms of said Standby Letter of credit,
irrevocable standby letter of credit, another order Hon. Daway acted in excess of his jurisdiction.
was issued by the RTC declaring such act of MWSS as
violative of stay order earlier issued. Aggrieved,
MWSS filed this petition for review by way of Transfield Philippines, Inc.
certiorari under rule 65.
Luzon Hydro Corp, Australia and New Zealand
Whether Court has the authority to issue order Banking Group Limited and Security Bank
enjoining MWSS from proceeding against the Stand- Corporation
by Letter of Credit.
(G.R. No. 146717. November 22, 2004)

Letters of credit are in effect absolute undertakings to

pay the money advanced or the amount for which Facts:
credit is given on the faith of the instrument; they are
Transfield and Luzon Hydro Corporation entered into
primary obligations and not accessory contracts and
a Turnkey contract whereby Transfield, as turnkey
while they are security arrangements, they are not
contractor, undertook to construct, on a turnkey
converted into contracts of guaranty. – Letters of
basis, a seventy Megawatt Hydro-Electric power
credit were developed for the purpose of insuring to
station at the Bakun River in the provinces of Benguet
a seller payment of a definite amount upon the
and Ilocos Sur. Transfield was given the sole
presentation of documents and is thus a commitment
responsibility for the design, construction,
by the issuer that the party in whose favor it is issued
commissioning, testing and completion of the
and who can collect upon it will have his credit against
project. The turnkey contract entitled Transfield to
the applicant of the letter, duly paid in the amount
claim extensions of time for reasons enumerated in
specified in the letter. They are in effect absolute


Letters of Credit

the turnkey contract, among which are variations, performance. Letters of credit in non-sale settings are
force majeure and delays caused by LHC itself. known as standby letters of credit. There are three
significant differences between commercial and
To secure performance of Transfield’s obligation on
standby credits.
or before target completion date, Transfield opened
in favor of LHC two stand-by letters of credit. First, commercial credits involve the payment of
money under a contract of sale. Such credits become
In the course of construction of the project, Transfield
payable upon the presentation by the seller-
sought various extension of time to complete the
beneficiary of documents that show he has taken
project. The extensions were requested allegedly due
affirmative steps to comply with the sales agreement.
to several factors which prevented the completion of
the project on the target date, such as force majeure In the standby type, the credit is payable upon
occasioned by typhoon Zeb, barricades and certification of a party's nonperformance of the
demonstration. LHC denied the requests. agreement. The documents that accompany the
beneficiary's draft tend to show that the applicant has
Arbitration proceeding were initiated. Asserting that
not performed. The beneficiary of a commercial
LHC had no right to call on the securities until the
credit must demonstrate by documents that he has
resolution of disputes before the arbitration
performed his contract.
tribunals, Transfield warned the banks that any
transfer, release or disposition of the securities in The beneficiary of the standby credit must certify that
favor of LHC would constrain it to hold them liable for his obligor has not performed the contract. As
damages. Despite warning, however, the banks beneficiary of the letter of credit, LHC is entitled to
informed Transfield that they would pay on the invoke the principle.
securities if and when LHC calls on them.
The so-called “independence principle” assures the
Subsequently, LHC declared Transfield in default and seller or the beneficiary of prompt payment
demanded payment for the delay until actual independent of any breach of the main contract and
completion of the project pursuant to the turnkey precludes the issuing bank from determining whether
contract. Also, LHC served notice that it would call on the main contract is actually accomplished or not.
the securities for payment of liquidated damages for Under this principle, banks assume no liability or
the delay. Hence, Transfield filed a complaint for responsibility for the form, sufficiency, accuracy,
injunction against LHC and the banks. genuineness, falsification or legal effect of any
documents, or for the general and/or particular
Issues: conditions stipulated in the documents or
1. Whether or not it is only the issuing bank that may superimposed thereon, nor do they assume any
invoke the independence principle on letters of liability or responsibility for the description, quantity,
credit. weight, quality, condition, packing, delivery, value or
existence of the goods represented by any
2. Whether or not there is necessity of resolving first documents, or for the good faith or acts and/or
any dispute by the parties before the beneficiary is omissions, solvency, performance or standing of the
entitled to call on the letter of credit. consign or, the carriers, or the insurers of the goods,
or any other person whomsoever.
3. Whether or not injunction is the proper remedy to
restrain wrongful draws on the securities. The independent nature of the letter of credit may
4. Whether the banks were justified in releasing the
amounts due under the securities. (a) Independence in toto where the credit is
independent from the justification aspect and is a
separate obligation from the underlying agreement
Letters of credit are also used in non-sale settings like for instance a typical standby; or
where they serve to reduce the risk of non-


Letters of Credit

(b) Independence may be only as to the justification

aspect like in a commercial letter of credit or
repayment standby, which is identical with the same Facts:
obligations under the underlying agreement. In both Via Moda International, through Serrano, obtained an
cases the payment may be enjoined if in the light of export packing loan from, Bank of Commerce (BOC)
the purpose of the credit the payment of the credit secured by a Deed of Assignment over Irrevocable
would constitute fraudulent abuse of the credit. Transferable Letter of Credit, Serrano executed in
favor of BOC Promissory Note. Via Moda then opened
The “fraud exception principle” is an exception to the
independence principle. The untruthfulness of a a deposit account for the proceeds of the said loan.
certificate accompanying a demand for payment BOC issued to Via Moda, Irrevocable Letter of Credit
under a standby letter of credit may qualify as fraud for the purchase and importation of fabric and textile
sufficient to support an injunction against payment. products from Tiger Ear Fabric Co. Ltd. of Taiwan. To
The remedy for fraudulent abuse is an injunction. secure the release of the goods covered, Serrano, in
However, injunction should not be granted unless:(a) representation of Via Moda, executed Trust Receipt.
there is a clear proof of fraud;(b) the fraud constitutes
fraudulent abuse of the independent purpose of the Under the terms of the trust receipt, Via Moda agreed
letter of credit and not only fraud in the main to hold the goods in trust for BOC as the latter’s
agreement; and (c) irreparable injury might follow if property and to sell the same for the latter’s account.
injunction is not granted or the recovery of damages In case of sale, the proceeds are to be remitted to the
would be seriously damaged. bank as soon as it is received, but not later than the
maturity date. Said proceeds are to be applied to the
Where the applicant entered into a Turnkey contract relative acceptances, with interest and penalty or in
whereby it undertook to construct, on a turnkey the alternative, to return the goods in case of non-
basis, a seventy (70) megawatt hydroelectric power sale.
station, the performance of which is secured by a
standby letter of credit, the resort to arbitration by The goods covered by the trust receipt were shipped
the applicant/ contractor to arbitration to determine by Via Moda to its consignee in New Jersey, USA, who
if the latter is guilty of delay does not preclude the sent an Export Letter of Credit issued by the Bank of
beneficiary to draw on the letter of credit upon the New York, in favor of BOC. The Regional Operations
issuance of certificate of default because whether or Officer of BOC signed the export declarations to show
not the issuance of certification of default amounted consent to the shipment. The proceeds of the
to fraud was not raised in the lower court and the entrusted goods sold were not credited to the trust
parties did not stipulate that all dispute regarding receipt but, were applied by the bank to the principal,
delay should first be settled through arbitration penalties and interest of the export packing loan. The
before the beneficiary would be allowed to call upon excess was applied to the trust receipt, leaving a
the letter of credit. If drawing upon the letter of credit balance.
was wrongful due to the non-existent of the fact of
BOC sent a demand letter to Via Moda to pay the said
default, the right of the applicant to seek
amount plus interest and penalty charges, or to
indemnification for damages it suffered would not
return the goods covered by Trust Receipt within 5
normally be foreclosed pursuant to general principle
days from receipt. The demand was not heeded.
of law.
Serrano was charged with the crime of estafa under
Article 315 (b) of the Revised Penal Code in relation
to Presidential Decree No. 115.
Bank of Commerce
Trial Court ruled Serrano guilty and ordered to pay
vs. civil liability to BOC. CA then reversed the decision of
Teresita Serrano Trial Court.

(G.R. No. 151895. February 16, 2005) Issue:


Letters of Credit

Whether Serrano is jointly and severally liable with Land Bank of the Philippines
Via Moda under the guarantee of the Letter of Credit
secured by the Trust Receipt.
Monet’s Export and Manufacturing Corp., Sps.
Vicente Tagle, Sr. and Ma. Consuelo Tagle
A letter of credit is a separate document from a trust
receipt. While the trust receipt may have been (G.R. No. 161865. March 10, 2005)
executed as a security on the letter of credit, still the
two documents involve different undertakings and
obligations. A letter of credit is an engagement by a Facts:
bank or other person made at the request of a
Land Bank of the Philippines (Land Bank), and
customer that the issuer will honor drafts or other
Monet's Export and Manufacturing Corporation
demands for payment upon compliance with the
(Monet) executed an Export Packing Credit Line
conditions specified in the credit. Through a letter of
Agreement under which Monet was given a credit line
credit, the bank merely substitutes its own promise to
in the amount of P250,000.00, secured by the
pay for the promise to pay of one of its customers
proceeds of its export letters of credit, the continuing
who in return promises to pay the bank the amount
guaranty of the spouses Vicente V. Tagle, Sr. and Ma.
of funds mentioned in the letter of credit plus credit
Consuelo G. Tagle, and the third party mortgage. The
or commitment fees mutually agreed upon. By
credit line agreement was renewed and amended
contrast, a trust receipt transaction is one where the
several times until it was increased to P5,000,000.00.
entruster, who holds an absolute title or security
Owing to the continued failure and refusal of Monet,
interests over certain goods, documents or
notwithstanding repeated demands, to pay its
instruments, released the same to the entrustee, who
indebtedness to Land Bank, which have ballooned to
executes a trust receipt binding himself to hold the
P11,464,246.19 a complaint for collection of sum of
goods, documents or instruments in trust for the
money with prayer for preliminary attachment was
entruster and to sell or otherwise dispose of the
filed by Land Bank.
goods, documents and instruments with the
obligation to turn over to the entruster the proceeds The contention of Monet and Tagle spouses is that
thereof to the extent of the amount owing to the Land Bank failed and refused to collect the
entruster, or as appears in the trust receipt, or return receivables on their export letter of credit against
the goods, documents or instruments themselves if Wishbone Trading Company, while it made
they are unsold, or not otherwise disposed of, in unauthorized payment on their import letter of credit
accordance with the terms and conditions specified in to Beautilike Limited which seriously damaged the
the trust receipt. business interests of Monet.

Serrano cannot be held civilly liable under the trust Lower Court and CA’s ruling is that Land Bank was
receipt since she was not made personally liable nor responsible for the mismanagement of the Wishbone
was she a guarantor therein. The parties stipulated and Beautilike accounts of Monet. That because of
during the pre-trial that respondent Serrano executed the non- collection and unauthorized payment made
the trust receipt in representation of Via Moda, Inc., by Land Bank on behalf of Monet and considering that
which has a separate personality from Serrano, and the latter could no longer draw from its credit line
petitioner BOC failed to show sufficient reason to with Land Bank, it suffered from lack of financial
justify the piercing of the veil of corporate fiction. It resources sufficient to buy the needed materials to fill
thus ruled that this was not Serrano’s personal up the standing orders from its customers.
obligation but that of Via Moda and there was no
basis of finding her solidarily liable with Via Moda. Issue:

Whether fault or acts of mismanagement can be

attributed to Land Bank relative to Monet's import
letter of credit


Letters of Credit


The engagement of the issuing bank is to pay the

seller or beneficiary of the credit once the draft and
the required documents are presented to it. The so-
called 'independence principle assures the seller or
the beneficiary of prompt payment independent of
any breach of the main contract and precludes the
issuing bank from determining whether the main
contract is actually accomplished or not.

Accordingly, we find merit in the contention of Land

Bank that, as the issuing bank in the Beautilike
transaction involving an import letter of credit, it only
deals in documents and it is not involved in the
contract between the parties. The relationship
between the beneficiary and the issuer of a letter of
credit is not strictly contractual, because both privity
and a meeting of the minds are lacking. Thus, upon
receipt by Land Bank of the documents of title which
conform to what the letter of credit requires, it is duty
bound to pay the seller, as it did in this case. Thus, no
fault or acts of mismanagement can be attributed to
Land Bank relative to Monet's import letter of credit.


Trust Receipts

Fernando Ong theory may perhaps apply prior to the filing of the
criminal information in court by the state prosecutors
vs. because up to that time the trust relation may be
CA and Judge P. Purisima converted by the parties into an ordinary creditor-
debtor situation, thereby placing the complainant in
(G.R. No. L-58476. September 2, 1983) in estoppels to insist the original trust. But after the
justice authorities have taken cognizance of the crime
and instituted action in court, the offended party may
Facts: no longer divest the prosecution of its power to exact
criminal liability, as distinguished from civil. The crime
Fernando Ong obtained and received from Tramat being an offense against the State, only the latter can
Merchantile Inc. several units of machineries for the renounce it.
purpose of displaying and selling the machineries for
cash, under the express obligation on the part of Ong Spouses Tirso Vintola and Loreto Vintola
to turn over to Tramat the proceeds from the sale of
the goods, if sold, or to return the said goods if not
sold. Ong allegedly failed to do as covenanted. Insular Bank of Asia and America
Information of estafa was filed against Ong. A few
months after, Tramat Merchantile filed a complaint (G.R. No. 73271 May 29, 1987)
against Ong for sum of money. The parties entered
into a compromise agreement to settle the claim,
which the court approved. Ong moved for the Spouses Vintola, doing business under the name and
dismissal of the criminal charge of estafa against him style Dax Kin International was engaged in the
on the ground of NOVATION by virtue of the manufacture of raw sea shells into finished products.
compromise agreement entered into by him and They applied for and were granted a domestic letter
Tramat. of credit by applied for and were granted a domestic
letter of credit by the Insular Bank of Asia and
Trial Court denied the motion to dismiss the charge of
America (IBAA), Cebu City. The Letter of Credit
estafa. authorized the bank to negotiate for their account
CA: Dismissed petition for certiorari on the ground drafts drawn by their supplier, one Stalin Tan, on Dax
that novation does not extinguish criminal liability if Kin International for the purchase of puka and olive
the crime of estafa had been completed. seashells. VINTOLAS received from Stalin Tan the
puka and olive shells and executed a Trust Receipt
Issue: agreement with IBAA. Under that Agreement, the
VINTOLAS agreed to hold the goods in trust for IBAA
Whether the compromise agreement constitute as
as the "latter's property with liberty to sell the same
novation, thus, extinguish the criminal liability of Ong.
for its account, "and "in case of sale" to turn over the
Contention of Ong was that there being novation, it is proceeds. Having defaulted on their obligation, IBAA
respectfully submitted that even if novation took demanded payment from the VINTOLAS. The
place after the filing of the information in the criminal VINTOLAS, who were unable to dispose of the shells,
case, the transaction had nonetheless been responded by offering to return the goods but IBAA
converted from a criminal violation to civil obligation refused to accept the merchandise and due to the
which would therefore necessitate the consequence continued refusal of the VINTOLAS to make good their
dismissal of the criminal case. undertaking, IBAA charged them with Estafa for
having misappropriated, misapplied and converted
Held: for their own personal use and benefit the aforesaid
After the filing of information for estafa, liability of goods. During the trial of the criminal case the
accused cannot be novated into a civil one anymore VINTOLAS turned over the seashells to the custody of
by the parties’ compromise agreement. The novation the Trial Court.


Trust Receipts

TC: Acquitted the VINTOLAS of the crime charged, case had declared that the facts from which the civil
after finding that the element of misappropriation or action might arise, did not exist, for, it will be recalled
conversion was inexistent. IBAA commenced a that the decision of acquittal expressly declared that
separate civil action to recover the goods. "the remedy of the Bank is civil and not criminal in
nature." The VINTOLAS are liable ex contractu for
CA: Holding that the complaint was barred by the
breach of the Letter of Credit — Trust Receipt,
judgment of acquittal in the criminal case, CA
whether they did or they did not "misappropriate,
dismissed the complaint, however, upon motion by
misapply or convert" the merchandise as charged in
IBAA, CA granted the reconsideration. Sps. Vintola
the criminal case. Their civil liability does not arise ex
appealed alleging that their acquittal in the Estafa
delicto, the action for the recovery of which would
case bars IBAA's filing of the civil action because IBAA
have been deemed instituted with the criminal-action
had not reserved in the criminal case its right to
(unless waived or reserved) and where acquittal
enforce separately their civil liability. They maintain
based on a judicial declaration that the criminal acts
that by intervening actively in the prosecution of the
charged do not exist would have extinguished the civil
criminal case through a private prosecutor, IBAA had
action. Rather, the civil suit instituted by IBAA is based
chosen to file thecivil action impliedly with the ex contractu and as such is distinct and independent
criminal action-The CA certified the case to the
from any criminal proceedings and may proceed
Supreme Court, the issue involved being purely legal. regardless of the result of the latter.

Whether the acquittal of the Sps. Vintola in the

Trinidad Ramos
criminal charge of estafa extinguished their civil
liability vs.

Held: CA and People of the Philippines

A letter of credit-trust receipt arrangement is (G.R. No. L-39922-25 August 21, 1987)
endowed with its own distinctive features and
characteristics. Under that set-up, a bank extends a Facts:
loan covered by the Letter of Credit, with the trust Trinidad Ramos filed with the Philippine National
receipt as a security for the loan. In other words, the Cooperative Bank four applications for letters of
transaction involves a loan feature represented by credit. After the applications were processed and
the letter of credit, and a security feature which is in approved, domestic letters of credit were opened on
the covering trust receipt. A trust receipt, therefore, the same dates of the applications and in the amounts
is a security agreement, pursuant to which a bank applied for. Among the papers filed for the issuance
acquires a "security interest" in the goods. "It secures of the domestic letters of credit were commercial
indebtedness and there can be no such thing as invoices of the different suppliers of the merchandise
security interest that secures no obligation." IBAA did sought to be purchase, also bearing the same dates of
not become the real owner of the goods. It was the applications for letters of credit with which they
merely the holder of a security title for the advances were respectively attached. The different suppliers
it had made to the VINTOLAS. The goods the then drew sight drafts against the applicant payable
VINTOLAS had purchased through IBAA financing to the order of the PNCB, also bearing the same dates
remain their own property and they hold it at their as the respective applications and for the same
own risk. The trust receipt arrangement did not amounts. The PNCB then drew its own drafts against
convert the IBAA into an investor; the latter remained Ramos as the buyer of the merchandise and which
a lender and creditor. The foregoing premises drafts were accepted by the Ramos also on the same
considered, it follows that the acquittal of the dates of the respective applications. After such
VINTOLAS in the Estafa case is no bar to the institution acceptance, the corresponding trust receipts were
of a civil action for collection. It is inaccurate for the signed by the Ramos also on the same dates of the
VINTOLAS to claim that the judgment in the estafa


Trust Receipts

respective applications. When Ramos failed to pay reason nor opportunity for her to question the
despite demands, PNCB charged her with estafa. statement therein of receipt of the goods since it was
evidently assumed that delivery to her of the goods
TC and CA: Found Ramos guilty of four counts of
would shortly come to pass.

Ramos’s Defense:
Allied Banking Corporation
(1) Elements of Estafa are not present.(2) that there
is no adequate proof of her receipt of the goods vs.
subject of the trust receipts in question or of her
having paid anything on account thereof or in Secretary Sedfrey Ordoñez and Alfredo Ching
connection therewith;(3) that complainant Bank had (G.R. No. 82495 December 10, 1990)
suffered no damage whatever, since it had made no
payment at all on account of the commercial invoices Facts:
for which the trust receipts were issued; and(4) that
Philippine Blooming Mills applied for thru its duly
under the laws at the time, transactions involving
authorized officer Alfredo Ching, applied for the
trust receipts could only give rise to purely civil
issuance of commercial letters of credit with Allied
Banking Corporation to finance the purchase of 500
Held: M/T Magtar BranchDolomites and one (1) Lot high
Fired Refractory Sliding Nozzle Bricks. Allied Banking
The assailed factual findings as to the receipt of the Corporation issued an irrevocable letter of credit in
merchandise and the damage sustained by the Bank favor of Nikko Industry Co., Ltd by virtue of which the
cannot stand. The proofs are indeed inadequate on latter drew four (4) drafts which were accepted by
these propositions of fact. It is difficult to accept the PBM and duly honored and paid by the Allied
prosecution's theory that it has furnished sufficient BankingCorp. To secure payment of the amount
proof of delivery by the introduction in evidence of covered by the drafts, and in consideration of the
the commercial invoices attached to the applications transfer by Allied banking of the possession of the
for the letters of credit and of the trust receipts. goods to PBM, PBM, thru Ching, executed four (4)
Trust receipts agreement acknowledging Allied
The invoices are actually nothing more than lists of
Banking’s ownership of the goods and its obligation
the items sought to be purchased and their prices;
to turn over the proceeds of the sale of the goods, if
and it can scarcely be believed that goods worth no
sold, or to return the same, if unsold within the stated
mean sum actually transferred hands without the
period. PBM, despite repeated demands, failed to
unpaid vendor requiring the vendee to acknowledge
comply with its obligation; hence Allied Banking filed
this fact in some way, even by a simple signature on
a criminal complaint against Alfredo Ching for
these documents alone if not in fact by the execution
of some appropriate document, such as a delivery Violation of PD 115. After preliminary investigation,
the Fiscal found a prima facie case for violation of PD
115 on four counts and filed corresponding
The trust receipts do not fare any better as proofs of information in court.
the delivery to Ramos of the goods. Except for the
On appeal to the Department of Justice, DOJ
invoices, and documents relating to each trust receipt
agreement, including the trust receipts themselves, Secretary Neptali A. Gonzales held that the raw
materials for manufactures of goods to be ultimately
appear to be standard Bank forms accomplished by
sold are proper objects of Trust Receipt and the
the Bank personnel, and were all signed by Ramos in
failure to remit the proceeds constitutes violation of
one sitting, no doubt with a view to facilitating the
PD 115. Another Motion of Reconsideration was filed,
pending transactions between the parties. If, as she
and DOJ secretary Ordonez rectified former Sec.
claims, Ramos was made to believe that bank usage
Gonzales’ supposed reversible error, and held that PD
or regulations require the signing of the papers in this
way, i.e., on a single occasion, there was neither 115 covers goods which are ultimately destined for


Trust Receipts

goods, and since the goods covered by the TRs in this equipment. Upon approval of said application and
case, are to be utilized in the operation of the opening of an L/C by PNB in favor of Toyo Menka
equipment and machineries of the corporation, they Kaisha, Ltd. for the account of TCC, the Arroyo
could not have been contemplated as being covered spouses executed a Surety Agreement and a
by PD 115. Covenant to secure the loan accommodation. The
imported cement plant machinery and equipment
Issue: arrived from Japan and were released to TCC under a
Does the penal provision of PD 115 apply when goods Trust Receipt Agreement. Subsequently, Toyo Menka
covered by a Trust receipt do not form part of the Kaisha Ltd. made corresponding drawings against the
finished products which are ultimately sold but are Letters of Credit as scheduled. TCC, however, failed to
instead, utilized/ used up in the operation of the remit and/ or pay the corresponding amount covered
equipment and machineries of the entrustee- by the drawings. Pursuant to the trust receipt
manufacturer? agreement, PNB notified TCC of its intention to
repossess as it did later, the imported machineries
Held: and equipment for failure of TCC to settle obligations
under the Letter of Credit. In the meantime, the
The penal provision of PD115 encompasses any act
personal accounts of the spouses Arroyo had become
violative of an obligation covered by a trust receipt.
due. The spouses Arroyo having failed to satisfy their
The non-payment of the amount covered by a Trust obligations with PNB, the latter decided to foreclose
receipt is an act violative of the entrustee’s obligation the real estate mortgages executed by the spouses
to pay. There is no reason why the law should not Arroyo in its favor. PNB sought to apply the proceeds
apply to all transactions covered by trust receipts, to satisfy not only the amount owed by the Sps.
except those expressly excluded. It is not limited to Arroyo on their personal account, but also the
transactions in goods which are to be sold (retailed), amount owed as sureties of TCC. It was opposed by
reshipped, stored, and processed as a component of the Sps. Arroyo. PNB filed a petition for mandamus to
a product ultimately sold. compel the city sheriff to proceed with the
foreclosure which was granted. Before the decision
could attain finality, TCC a complaint against PNB,
Philippine National Bank Dungca, and the Provincial Sheriff of Negros
Occidental and Ex-Officio Sheriff of Bacolod City
vs. seeking, the issuance of a writ of preliminary
injunction to restrain the foreclosure of the
Hon. Gregorio Pineda, in his capacity as Presiding
mortgages over the La Vista property and Hacienda
Judge of CFI of Rizal and Tayabas Cement Company
Bacon as well as a declaration that its obligation with
(G.R. No. L-46658 May 13, 1991) PNB had been fully paid by reason of the latter's
repossession of the imported machinery and
Facts: equipment.
Spouses Arroyo, obtained a loan Philippine National Issue:
Bank to purchase 60% of the subscribed capital stock,
and thereby acquire the controlling interest of Whether or not, TCC’s liability has been extinguished
Tayabas Cement Company, Inc. (TCC). As security for by the repossession of PNB of the imported cement
said loan, the spouses Arroyo executed a real estate plant machinery and equipment.
mortgage over a parcel of land known as the La Vista
property. Thereafter, TCC filed with PNB an
application and agreement for the establishment of PNB's possession of the subject machinery and
an eight (8) year deferred letter of in favor of Toyo equipment being precisely as a form of security for
Menka Kaisha, Ltd. of Tokyo, Japan, to cover the the advances given to TCC under the Letter of Credit,
importation of a cement plant machinery and said possession by itself cannot be considered


Trust Receipts

payment of the loan secured thereby. Payment would 1. A trust receipt is an evidence of loan being secured,
legally result only after PNB had foreclosed on said so that there is, between the parties to it, a creditor-
securities, sold the same and applied the proceeds debtor relationship;
thereof to TCC's loan obligation. Mere possession
does not amount to foreclosure for foreclosure 2. The violation merely gives rise to a civil obligation;
denotes the procedure adopted by the mortgagee to 3. PD 115 is unconstitutional as it violates
terminate the rights of the mortgagor on the property constitutional prohibition against imprisonment for
and includes the sale itself. Neither can said non-payment of debt.
repossession amount to dacion en pago. Dation in
payment takes place when property is alienated to Issue:
the creditor in satisfaction of a debt in money and the
a. Whether or not an entrustee in a trust receipt
same is governed by sales. Dation in payment is the
agreement who fails to deliver the proceeds of the
delivery and transmission of ownership of a thing by
sale or to return the goods if not sold to the entruster-
the debtor to the creditor as an accepted equivalent
bank is liable for the crime of estafa
of the performance of the obligation. As aforesaid,
the repossession of the machinery and equipment in b. Whether or not PD 115 is unconstitutional.
question was merely to secure the payment of TCC's
loan obligation and not for the purpose of Held:
transferring ownership thereof to PNB in satisfaction A trust receipt arrangement does not involve a simple
of said loan. Thus, no dacion en pago was ever loan transaction between a creditor and debtor-
accomplished. importer.

Apart from a loan feature, the trust receipt

People of the Philippines and Allied Banking Corp. arrangement has a security feature that is covered by
the trust receipt itself. That second feature is what
vs. provides the much needed financial assistance to our
traders in the importation or purchase of goods or
Hon. Judge David Nitafan and Betty Sia Ang
merchandise through the use of those goods or
(G.R. No. 81559-60 April 6, 1992) merchandise as collateral for the advancements
made by a bank. The title of the bank to the security
Facts: is the one sought to be protected and not the loan
Allied banking Corporation (ABC) charged Betty Sia which is a separate and distinct agreement.
Ang, for estafa for willfully, unlawfully and feloniously The Trust Receipts Law punishes the dishonesty and
defrauds ABC. Betty Sia Ang received in trust from abuse of confidence in the handling of money or
ABC Gordon plastics, plastic sheeting and Hook goods to the prejudice of another regardless of
Chromed amounting toP398,000.00 covered by a whether the latter is the owner or not. The law does
domestic letter of credit, under the express obligation not seek to enforce payment of the loan. Thus, there
to sell the same and account for the proceeds of the can be no violation of a right against imprisonment
sale, if sold, or to return the merchandise , if not sold. for non-payment of a debt.
Upon demand, private respondent paid only
P283,115.78. ABC charged Betty Sia Ang with esstafa. Trust receipts are indispensable contracts in
Betty Sia Ang filed a motion to quash the information international and domestic business transactions. The
on the grounds that the facts charged do not prevalent use of trust receipts, the danger of their
constitute an offense. Respondent judge granted the misuse and/or misappropriation of the goods or
motion to quash. Hence, this appeal. proceeds realized from the sale of goods, documents
or instruments held in trust for entruster-banks, and
BETTY SIA ANG’S CONTENTIONS: the need for regulation of trust receipt transactions
to safeguard the rights and enforce the obligations of
the parties involved are the main thrusts of P.D. 115.


Trust Receipts

As correctly observed by the Solicitor General, P.D. properties and that the security title of the bank in a
115, like Batas Pambansa Blg. 22, punishes the act Trust receipt must necessarily of the same or greater
"not as an offense against property, but as an offense extent than the nature of security arising from a real
against public order. . . ." The misuse of trust receipts mortgage. It is a preferred claimant to the proceeds
therefore should be deterred to prevent any possible from the foreclosure to the extent of its security title
havoc in trade circles and the banking community. It in the goods.
is in the context of upholding public interest that the
law now specifically designates a breach of a trust NLRC:
receipt agreement to be an act that "shall" make one Trust Receipt Agreement are mere security
liable for estafa. transaction which do not vest upon Prudential Bank
any title of ownership, and that although the Trust
receipt Agreements described Prudential Bank as
Prudential Bank owner of the goods, there was no showing that it
cancelled the trust receipt and took possession of the
NLRC, Cecilia Orquello,, Zenaida Uchi,
ALU-Interasia Container Industries, Inc. and Raul
Remodo The security interest of the entruster is not merely an
empty or idle title. To a certain extent, such interest
(G.R. No. 112592 December 19, 1995) becomes a "lien" on the goods because the
Facts: entruster's advances will have to be settled first
before the entrustee can consolidate his ownership
Interasia Container Industries, Inc. (INTERASIA) was over the goods. A contrary view would be disastrous.
embroiled in three (3) labor cases which were For to refuse to recognize the title of the banker
eventually resolved against it. Monetary awards under the trust receipt as security for the advance of
consisting of 13th-month pay differentials and other the purchase price would be to strike down a bona
benefits were granted to complainants. Subsequently fide and honest transaction of great commercial
the monetary award was recomputed to include benefit and advantage founded upon a well-
separation pay, occasioned by the closure of recognized custom by which banking credit is
operations of INTERASIA. In another case, the Labor officially mobilized for manufacturers and importers
Arbiter declared the closure or shutdown of of small means.
operations effected by INTERASIA as illegal and
awarded to complainants the wage differentials, The law warrants the validity of petitioner's security
separation pay and other benefits. interest in the goods pursuant to the written terms of
the trust receipt as against all creditors of the trust
The sheriff levied on execution personal properties receipt agreement. The only exception to the rule is
located in the factory of InterAsia. Prudential Bank when the properties are in the hands of an innocent
filed an affidavit of Third Party claim asserting purchaser for value and in good faith. The records
ownership over the sized properties. As a result, the however do not show that the winning bidder is such
sheriff suspended the Public auction Sale. However, purchaser. Neither can private respondents plead
the Labor Arbiter denied the claim of Prudential and preferential claims to the properties as Prudential
directed the sheriff to proceed with the levy of the Bank has the primary right to them until its advances
properties. On appeal, NLRC also disregarded the are fully paid
third party claim of Prudential Bank.


While it may not have absolute ownership over the

properties, still it has right, interest and ownership
consisting of a security title which attaches to the


Trust Receipts

Metropolitan Bank and Trust Company METROBANK then appealed to the Department of
Justice (DOJ), which reversed the findings of the
vs. Provincial Prosecutor of Rizal and ordered the latter
Joaquin Tonda and Ma. Cristina Tonda to file the appropriate information against the
TONDAS as charged in the complaint.
(G.R. No. 134436. August 16, 2000)
The TONDAS immediately sought a reconsideration of
Facts: the DOJ Resolution but their motion was denied by
the then acting Justice Secretary Demetrio G.
Spouses Joaquin Tonda and Maria Cristina U. Tonda,
Demetria. A second motion for reconsideration by
applied for and was granted commercial letters of
the TONDAS was likewise denied by then Justice
credit by Metropolitan Bank and Trust Company, for
Secretary Teofisto Guingona.
a period of eight (8) months, in connection with the
importation of raw textile materials to be used in the Subsequently, the TONDAS filed with the Court of
manufacturing of garments. Appeals a special civil action for certiorari and
prohibition with application for a temporary
The TONDAS acting both in their capacity as officers
restraining order or a writ of preliminary injunction.
of Honey Tree Apparel Corporation (HTAC) and in
They contended therein that the Secretary of Justice
their personal capacities, executed eleven (11) trust
acted without or in excess of jurisdiction in denying
receipts to secure the release of the raw materials to
with finality their motion for reconsideration and,
HTAC. The imported fabrics were withdrawn by HTAC
directing to file the appropriate Information against
under the 11 trust receipts executed by the TONDAS.
When HTAC had some financial reversals making it
The Court of Appeals granted the TONDAS' petition
difficult for them to comply with their loan obligations
and ordered the criminal complaint against them
with Metrobank, they were then constrained to
dismissed. The Court of Appeals held that
propose a loan restructuring agreement with the
METROBANK had failed to show a prima facie case
Metrobank to enable them to finally settle all
that the TONDAS violated the Trust Receipts Law in
outstanding obligations with the latter, wherein they
relation to Art. 315 (1) (b) of the Revised Penal Code
proposed to immediately pay in full their outstanding
in the face of convincing proof that "that the amount
principal charges under the trust receipt and the
of P2.8 Million representing the outstanding
remaining obligations under a separate schedule of
obligation of the TONDAS under the trust receipts
account had already been settled by them in
A sum of money was deposited in a joint account of compliance with the loan restructuring proposal; and
Joaquin Tonda and Wang Tien. However, the parties that in the absence of a loan restructuring agreement,
failed to finalize the restructuring agreement. METROBANK could still validly apply the amount as
METROBANK through counsel sent a letter making its payment thereof."
final demand upon the TONDAS to settle their past
due TR/LC accounts. Despite repeated demands
however, the TONDAS failed to comply with their Whether the sum of money deposited without
obligations. reference to the trust receipt’s obligation of the
Tondas extinguishes the criminal liability of the
Consequently, Metrobank, through its account officer
spouses arising therefrom.
Eligio Labog, Jr. filed a complaint/affidavit against the
TONDAS for violation of P.D. No. 115 (Trust Receipts Held:
Law) in relation to Article 315 (1) (b) of the Revised
Penal Code, which was dismissed on the ground that First, the amount of P2.8 million was not directly paid
the complainants had failed to establish “the to METROBANK to settle the trust receipt accounts,
existence of the essential elements of Estafa as but deposited in a joint account of Joaquin G. Tonda
charged.” and a certain Wang Tien En. In a letter, signed by
HTAC's Vice President for Finance, METROBANK was


Trust Receipts

informed that the amount "may be applied anytime Facts:

to the payment of the trust receipts account upon
Colinares et al., applied for a commercial letter of
implementation of the parties of the terms of the
credit with the Philippine Banking Corporation (PBC)
restructuring." The parties failed to agree on the
in favor of CM builders for the purchased of various
terms of the loan restructuring agreement as the
construction supplies. PBC approved the letter of
offer by the TONDAS to restructure the loan was
credit to cover the full invoice value of the goods and
followed by a series of counter-offers which yielded
subsequently signed a prom-forma trust receipt as
nothing. It is axiomatic that acceptance of an offer
security. PBC wrote a demand letter to petitioner
must be unqualified and absolute to perfect a
demanding the amount be paid within seven days but
contract. The alleged payment of the trust receipts
instance of complying they confessed that they can’t
accounts never became effectual on account of the
pay and requested a grace period to settle the
failure of the parties to finalize a loan restructuring
account. Colinares et al., proposed to modify the
payment of the loan. Colinares et al., were charged
Second, the handwritten note by the METROBANK with estafa. During trial, petitioner Veloso insisted
officer acknowledging receipt of the checks that the transaction was a “clean loan”. He and
amounting to P2.8Million made no reference to the petitioner Colinares signed the documents without
TONDAS' trust receipt obligations, and we cannot reading the fine print, and learning that the trust
presume that it was anything more than an ordinary receipt was merely a formality.
bank deposit. Article 1288 of the Civil Code provides
TC: Rendered a decision convicting the Colinares et al
that "compensation shall not be proper when one of
with estafa. The trial court considered the transaction
the debts consists in civil liability arising from a penal
between PBC and Petitioners as a trust receipt
offense" as in the case at bar. The raison d'etre for
this is that, "if one of the debts consists in civil liability transaction under Section 4, P.D. No. 115.
arising from a penal offense, compensation would be CA: Modified the judgment of the trial court by
improper and inadvisable because the satisfaction of increasing the penalty.
such obligation is imperative."
Third, reliance on the negotiations for the settlement
of the trust receipts obligations between the TONDAS Whether the transaction is a simple loan or a trust
and METROBANK is simply misplaced. The receipt agreement.
negotiations pertain and affect only the civil aspect of
the case but do not preclude prosecution for the
offense already committed. It has been held that A thorough examination of the facts obtaining in the
"[a]ny compromise relating to the civil liability arising case at bar reveals that the transaction intended by
from an offense does not automatically terminate the the parties was a simple loan, not a trust receipt
criminal proceeding against or extinguish the criminal agreement.
liability of the malefactor." All told, the P2.8 Million
deposit could not be considered as having settled the The Trust Receipts Law does not seek to enforce
trust receipts obligations of the TONDAS to the end of payment of the loan, rather it punishes the
extinguishing any incipient criminal culpability arising dishonesty and abuse of confidence in the handling of
therefrom. money or goods to the prejudice of another
regardless of whether the latter is the owner.

Here, it is crystal clear that on the part of Colinares et

Melvin Colinares and Lordino Veloso al there was neither dishonesty nor abuse of
confidence in the handling of money to the prejudice
of PBC. Colinares etal continually endeavored to meet
CA and People of the Philippines their obligations, as shown by several receipts issued
by PBC acknowledging payment of the loan.
(G.R. No. 90828. September 5, 2000)


Trust Receipts

There are two possible situations in a trust receipt Philippine Bank of Communications
transaction. The first is covered by the provision
which refers to money received under the obligation vs.
involving the duty to deliver it (entregarla) to the CA and Filipinas textile Mills Inc.
owner of the merchandise sold. The second is
covered by the provision which refers to merchandise (G.R. No. 119723, February 23, 2001)
received under the obligation to “return” it
(devolvera) to the owner.
Petitioner, on April 8, 1991, of a Complaint against
Failure of the entrustee to turn over the proceeds of
private respondent Bernardino Villanueva, private
the sale of the goods, covered by the trust receipt to
respondent Filipinas Textile Mills and one Sochi
the entruster or to return said goods if they were not
Villanueva (now deceased) before the Regional Trial
disposed of in accordance with the terms of the trust
Court of Manila. In the said Complaint, petitioner
receipt shall be punishable as estafa under Article 315
sought the payment of P2,244,926.30 representing
(1) of the Revised Penal Code, without need of
the proceeds or value of various textile goods, the
proving intent to defraud. Colinares et al received the
purchase of which was covered by irrevocable letters
merchandise from CM Builders Centre on 30 October
of credit and trust receipts executed by petitioner
1979. On that day, ownership over the merchandise
with private respondent Filipinas Textile Mills as
was already transferred to Colinares et al who were
obligor; which, in turn, were covered by surety
to use the materials for their construction project. It
agreements executed by private respondent
was only a day later, 31 October 1979, that they went
Bernardino Villanueva and Sochi Villanueva. In their
to the bank to apply for a loan to pay for the
Answer, private respondents admitted the existence
of the surety agreements and trust receipts but
This situation belies what normally obtains in a pure countered that they had already made payments on
trust receipt transaction where goods are owned by the amount demanded and that the interest and
the bank and only released to the importer in trust other charges imposed by petitioner were onerous.
subsequent to the grant of the loan. The bank
On May 31, 1993, petitioner filed a Motion for
acquires a “security interest” in the goods as holder
Attachment, contending that violation of the trust
of a security title for the advances it had made to the
receipts law constitutes estafa, thus providing ground
entrustee. The ownership of the merchandise
for the issuance of a writ of preliminary attachment.
continues to be vested in the person who had
advanced payment until he has been paid in full, or if Issue:
the merchandise has already been sold, the proceeds
of the sale should be turned over to him by the Whether there was a sufficient basis for the issuance
importer or by his representative or successor in of the writ of preliminary attachment.
interest. To secure that the bank shall be paid, it takes Held:
full title to the goods at the very beginning and
continues to hold that title as his indispensable No.
security until the goods are sold and the vendee is
The Motion for Attachment filed by petitioner and its
called upon to pay for them; hence, the importer has
supporting affidavit did not sufficiently establish the
never owned the goods and is not able to deliver
grounds relied upon in applying for the writ of
possession. In a certain manner, trust receipts
preliminary attachment. While the Motion refers to
partake of the nature of a conditional sale where the
the transaction complained of as involving trust
importer becomes absolute owner of the imported
receipts, the violation of the terms of which is
merchandise as soon as he has paid its price.
qualified by law as constituting estafa, it does not
follow that a writ of attachment can and should
automatically issue. Private respondents claimed that
substantial payments were made on the proceeds of


Trust Receipts

the trust receipts sued upon. They also refuted the Lumber Manufacturing Corporation represented by
allegations of fraud, embezzlement and Joseph L.G. Chua, George D. Tan, Edgar C. Rodrigueza
misappropriation by averring that private respondent and Joselito C. Baltazar, executed in favor of plaintiff-
Filipinas Textile Mills could not have done these as it appellant a Continuing Suretyship Agreement in
had ceased its operations starting in June of 1984 due which, said corporation "jointly and severally
to workers' strike. unconditionally" guaranteed the "full, faithful and
prompt payment and discharge of any and all
The allegation that the entrustee failed to remit the
indebtedness of Fortune Motors Corporation to BA
proceeds of the sale of the entrusted goods or to
Finance Corporation. On the same date, South City
return the same is not sufficient for attachment to
Homes, Inc. represented by Edgar C. Rodrigueza and
issue. To sustain an attachment on this ground, it
Aurelio F. Tablante, likewise executed a Continuing
must be shown that the debtor in contracting the
Suretyship Agreement in which said corporation
debt or incurring the obligation intended to defraud
"jointly and severally unconditionally" guaranteed
the creditor. The fraud must relate to the execution
the "full, faithful and prompt payment and discharge
of the agreement and must have been the reason
of any and all indebtedness" of Fortune Motors
which induced the other party into giving consent
Corporation to BA Finance Corporation.
which he would not have otherwise given. To
constitute a ground for attachment in Section 1 (d), Fortune Motors Corporation thereafter executed
Rule 57 of the Rules of Court, fraud should be trust receipts covering the motor vehicles delivered
committed upon contracting the obligation sued to it by CARCO under which it agreed to remit to the
upon. Entruster (CARCO) the proceeds of any sale and
immediately surrender the remaining unsold
A debt is fraudulently contracted if at the time of
vehicles. ). The drafts and trust receipts were assigned
contracting it the debtor has a preconceived plan or
to plaintiff-appellant, under Deeds of Assignment
intention not to pay, as it is in this case. Fraud is a
executed by CARCO.
state of mind and need not be proved by direct
evidence but may be inferred from the circumstances Upon failure of the defendant-appellant Fortune
attendant in each case. Fraudulent intent not to Motors Corporation to pay the amounts due under
honor the admitted obligation cannot be inferred the drafts and to remit the proceeds of motor vehicles
from the debtor’s inability to pay or to comply with sold or to return those remaining unsold in
the obligations. accordance with the terms of the trust receipt
agreements, BA Finance Corporation sent demand
letter to Edgar C. Rodrigueza, South City Homes, Inc.,
South City Homes Aurelio Tablante, Palawan Lumber Manufacturing
Corporation, Joseph L. G. Chua, George D. Tan and
vs. Joselito C. Baltazar. Since the defendants-appellants
failed to settle their outstanding account with
BA Finance
plaintiff-appellant, the latter filed on December 22,
(G.R. No. 135462 December 7, 2001) 1983 a complaint for a sum of money with prayer for
preliminary attachment, with the Regional Trial Court
Facts: of Manila.
On January 17, 1983, Joseph L. G. Chua, President of Issue:
Fortune Motors Corporation, executed in favor of
plaintiff-appellant a Continuing Suretyship Whether respondent BAFC has a valid cause of action
Agreement, in which he "jointly and severally for a sum of money following the drafts and trust
unconditionally" guaranteed the "full, faithful and receipts transactions.
prompt payment and discharge of any and all
indebtedness" of Fortune Motors Corporation to BA
Finance Corporation. On February 3, 1983, Palawan


Trust Receipts

As an entruster, respondent BAFC must first demand Several applications for domestic as well as foreign
the return of the unsold vehicles from Fortune letters of credit and availments of the credit line were
Motors Corporation, pursuant to the terms of the made by MICO.
trust receipts. Having failed to do so, petitioners had
Upon maturity of all credit availments obtained by
no cause of action whatsoever against Fortune
MICO from PBCom, the latter made a demand for
Motors Corporation and the action for collection of
payment. For failure of petitioner MICO to pay the
sum of money was, therefore, premature.
obligations incurred despite repeated demands,
A trust receipt is a security transaction intended to aid private PBCom extrajudicially foreclosed MICO’s REM
in financing importers and retail dealers who do not and sold the said mortgaged properties in a public
have sufficient funds or resources to finance the auction sale. PBCom then demanded the settlement
importation or purchase of merchandise, and who of the aforesaid obligations from sureties who,
may not be able to acquire credit except through however, refused to acknowledge their obligations to
utilization, as collateral, of the merchandise imported PBCom under the surety agreements.
or purchased. In the event of default by the entrustee
Hence, PBCom filed a complaint with prayer for writ
on his obligations under the trust receipt agreement,
of preliminary attachment before the RTC of Manila
it is not absolutely necessary that the entruster cancel
alleging that MICO was no longer in operation and
the trust and take possession of the goods to be able
had no properties to answer for its obligations.
to enforce his rights thereunder.
Petitioners denied having received the loans, and
that, since no loan was ever released or received by
MICO, the corresponding real estate mortgage and
Charles Lee surety agreements signed concededly by MICO are
vs. null and void.

CA and PBCom TC: Dismissed the case in favor of MICO, ruling that
PBcom failed to adequately prove that the proceeds
(G.R. NO. 117913-117914 February 1, 2002) of the loan were ever delivered to MICO, no proof has
been adduced as to the existence of the goods
covered and paid by the said amounts. Hence,
Charles Lee, as President of MICO, requested for inasmuch as no consideration ever passed from
grant of several discounting loan/ credit line with PBcom to MICO, all the documents involved therein,
PBCom secured by REM which were all granted and such as the promissory notes, real estate mortgage,
availed of and renewed under promissory notes. including the suretyship agreements were all void for
lack of cause or consideration
Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap
and Richard Velasco, in their personal capacities The Court of Appeals reversed the ruling of the trial
executed a two Surety Agreements in favor of PBCom court, saying that the latter committed an erroneous
whereby the petitioners jointly and severally, application and appreciation of the rules governing
guaranteed the prompt payment on due dates or at the burden of proof. Citing Section 24 of the
maturity of overdrafts, promissory notes, discounts, Negotiable Instruments Law which provides that
drafts, letters of credit, bills of exchange, trust “Every negotiable instrument is deemed prima facie
receipts, and other obligations of every kind and to have been issued for valuable consideration and
nature, for which MICO may be held accountable by every person whose signature appears thereon to
PBCom. MICO furnished PBCom with a notarized have become a party thereto for value”, the Court of
certification issued by its corporate secretary, Atty. Appeals said that while the subject promissory notes
P.B.Barrera, that Chua Siok Suy was duly authorized and letters of credit issued by the PBCom made no
by the Board of Directors to negotiate on behalf of mention of delivery of cash, it is presumed that said
MICO for loans and other credit availments from negotiable instruments were issued for valuable
PBCom. consideration.


Trust Receipts

Issue: Rehabilitation Plan of BMC as contained in the MOA

and declaring it in a state of suspension of payments.
Whether there is sufficient consideration with
respect to the drafts issued in connection with the However, BMC and respondent Ong defaulted in the
Letters of Credit. payment of their obligations under the rescheduled
payment scheme provided in the MOA.
CA directed the prosecutors to file the appropriate
Letters of Credit and trust receipts are not negotiable
criminal charges for violation of PD 115, otherwise
instruments. But drafts issued in connection with the
known as The Trust Receipts Law, against Ong,
letters of credit are negotiable instruments. Hence,
while the presumption of consideration under the Issue:
negotiable instruments law may not necessarily be
1. Whether or not the Memorandum of Agreement
applicable to trust receipts and letters of credit, the
entered into extinguished the obligation s of BMC
presumption that the drafts drawn in connection with
the letter of credit have sufficient consideration under the Trust receipt Agreement.
apply. 2. Whether or not the officers of BMC can be held
liable for the violation of the Trust receipts Law.

Pilipinas Bank
Section 4 of PD No. 115 (The Trust Receipts Law)
defines a trust receipt as any transaction by and
Alfredo Ong and Leoncia Lim between a person referred to as the entruster, and
another person referred to as the entrustee, whereby
(G.R. No. 133176. August 8, 2002) the entruster who owns or holds absolute title or
Facts: security interest over certain specified goods,
documents or instruments, releases the same to the
On April 1991, Baliwag Mahogany Corporation (BMC), possession of the entrustee upon the latter's
through its president, respondent Alfredo T. Ong, execution and delivery to the entruster of a signed
applied for a domestic commercial letter of credit document called a "trust receipt" wherein the
with petitioner Pilipinas Bank (hereinafter referred to entrustee binds himself to hold the designated goods,
as the bank) to finance the purchase of about 100,000 documents or instruments with the obligation to turn
board feet of "Air Dried, Dark Red Lauan" sawn over to the entruster the proceeds thereof to the
lumber. The bank approved the application and extent of the amount owing to the entruster or as
issued Letter of Credit in the amount of appears in the trust receipt, or the goods, documents
P3,500,000.00. To secure payment of the amount, or instruments themselves if they are unsold or not
BMC, through respondent Ong, executed two (2) trust otherwise disposed of, in accordance with the terms
receipts providing inter alia that it shall turn over the and conditions specified in the trust receipt.
proceeds of the goods to the bank, if sold, or return
the goods, if unsold, upon maturity on July 28, 1991 Failure of the entrustee to turn over the proceeds of
and August 4, 1991. the sale of the goods covered by a trust receipt to the
entruster or to return the goods, if they were not
On due dates, BMC failed to comply with the trust disposed of, shall constitute the crime of estafa under
receipt agreement. On November 22, 1991, it filed Article 315, par. 1(b) of the Revised Penal Code. If the
with the Securities and Exchange Commission (SEC) a violation or offense is committed by a corporation,
Petition for Rehabilitation and for a Declaration in a the penalty shall be imposed upon the directors,
State of Suspension of Payments under Section 6 (c) officers, employees or other officials or persons
of P.D. No. 902-A, as amended. On November 27, therein responsible for the offense, without prejudice
1992, the SEC rendered a Decision approving the to the civil liabilities arising from the criminal offense.


Trust Receipts

It is on this premise that petitioner bank charged Facts:

respondents with violation of the Trust Receipts Law.
On September 6, 1978, defendant Gregorio Limpin, Jr.
Mere failure to deliver the proceeds of the sale or the and Antonio Apostol, doing business under the name
goods, if not sold, constitutes violation of PD No. and style of ‘Davao Libra Industrial Sales,’ filed an
115.However, what is being punished by the law is application for an Irrevocable Domestic Letter of
the dishonesty and abuse of confidence in the Credit with the plaintiff Bank for the amount of
handling of money or goods to the prejudice of P495,000.00 in favor of LS Parts Hardware and
another regardless of whether the latter is the owner. Machine Shop (herein after referred to as LS Parts) for
the purchase of assorted scrap irons. Said application
In this case, no dishonesty nor abuse of confidence was signed by defendant Limpin and Apostol. The
can be attributed to respondents. Record shows that aforesaid application was approved, and plaintiff
BMC failed to comply with its obligations upon Bank issued Domestic Letter of Credit in favor of LS
maturity of the trust receipts due to serious liquidity
Parts for P495,000.00. Thereafter, a Trust Receipt
problems, prompting it to file a Petition for
dated September 6, 1978, was executed by defendant
Rehabilitation and Declaration in a State of
Limpin and Antonio Apostol. The defendants
Suspension of Payments. It bears emphasis that when
acknowledged to have received in trust from the
petitioner bank made a demand upon BMC on
plaintiff Bank the merchandise covered by the
February 11, 1994 to comply with its obligations
documents and agreed to hold said merchandise in
under the trust receipts, the latter was already under
storage as the property of the Bank.
the control of the Management Committee created
by the SEC in its Order dated January 8, 1992. The The defendants failed to comply with their
Management Committee took custody of all BMC’s undertaking under the Trust Receipt. Hence as early
assets and liabilities, including the red lauan lumber as March, 1980, demands were made for them to
subject of the trust receipts, and authorized their use comply with their undertaking. The defendants claim
in the ordinary course of business operations. Clearly, that they cannot be held liable as the 825 tons of
it was the Management Committee which could assorted scrap iron, subject of the trust receipt
settle BMC’s obligations. Moreover, it has not agreement, were lost when the vessel transporting
escaped this Court’s observation that respondent them sunk, and that said scrap iron were delivered to
Ong paid P21, 000,000.00 in compliance with the ‘Davao Libra Industrial Sales’, a business concern over
equity infusion required by the MOA. The mala which they had no interest whatsoever. Thereafter,
prohibita nature of the offense notwithstanding, the corresponding Information was filed against the
respondents’ intent to misuse or misappropriate the defendants. Defendant Lorenzo Sarmiento, Jr. was,
goods or their proceeds has not been established by however, dropped from the Information while
the records. defendant Gregorio Limpin, Jr. was convicted.

The MOA did not only reschedule BMC’s debts, but Issue:
more importantly, it provided principal conditions
which are incompatible with the trust agreement. Whether private respondents have the right to
institute a separate civil action against Sarmiento for
Hence, the MOA novated and effectively extinguished
civil liability?
BMC's obligations under the trust receipt agreement.

Article 31 of the Civil Code provides that “When the

Lorenzo Sarmiento and Gregorio Limpin
civil action is based on an obligation not arising from
vs. the act or omission complained of as a felony, such
civil action may proceed independently of the
CA and Associated Banking Corp criminal proceedings and regardless of the result of
(G.R. No. 122502. December 27, 2002) the latter.”


Trust Receipts

In the present case, private respondent’s complaint In Criminal Case No. 92-101990, the Information
against petitioners was based on the failure of the likewise charges petitioner of the crime of estafa
latter to comply with their obligation as spelled out in committed as follows:
the Trust Receipt executed by them. This breach of
That on or about July 6, 1990, in the City of Manila,
obligation is separate and distinct from any criminal
Philippines, the said accused, representing ARMAGRI
liability for “misuse and/or misappropriation of goods
International Corporation, defraud the SOLIDBANK
or proceeds realized from the sale of goods,
Corporation represented by its Accountant,
documents or instruments released under trust
DEMETRIO LAZARO. The said accused received in
receipts”, punishable under Section 13 of the Trust
trust from said SOLIDBANK Corporation the following
Receipts Law (P.D. 115) in relation to Article 315(1),
goods, to wit: 125 pcs. Rear diff. assy RNZO 49” 50
(b) of the Revised Penal Code.
pcs. Front & Rear diff assy. Isuzu Elof, 85 units 1-Beam
Being based on an obligation ex contractu and not ex assy. Isuzu Spz all valued at P2,532,500.00 specified in
delicto, the civil action may proceed independently of a Trust Receipt Agreement and covered by a Domestic
the criminal proceedings instituted against Letter of Credit No. DOM GD 90-006 in favor of the
petitioners regardless of the result of the latter. Metropole Industrial Sales with address at P.O. Box
AC 219, Quezon City.

Edward Ong
Whether petitioner was necessarily the one
responsible for the offense, by the mere circumstance
CA and People of the Philippines that petitioner acted as agent and signed for the
entrustee corporation.
(G.R. No. 119858. April 29, 2003)
Section 13 of the Trust Receipts Law which provides:
Assistant City Prosecutor Dina P. Teves of the City of x x x. If the violation is committed by a corporation,
Manila charged petitioner and Benito Ong with two partnership, association or other juridical entities, the
counts of estafa under separate Informations. penalty provided for in this Decree shall be imposed
upon the directors, officers, employees or other
In Criminal Case No. 92-101989, the Information
officials or persons therein responsible for the
indicts petitioner and Benito Ong of the crime of
offense, without prejudice to the civil liabilities arising
estafa committed as follows:
from the offense. We hold that petitioner is a person
That on or about July 23, 1990, in the City of Manila, responsible for violation of the Trust Receipts Law.
Philippines, the said accused, representing ARMAGRI
The Trust Receipts Law is violated whenever the
International Corporation, conspiring and
entrustee fails to: (1) turn over the proceeds of the
confederating together did then and there willfully,
sale of the goods, or (2) return the goods covered by
unlawfully and feloniously defraud the SOLIDBANK
the trust receipts if the goods are not sold. The mere
Corporation represented by its Accountant,
failure to account or return gives rise to the crime
DEMETRIO LAZARO, a corporation duly organized and
which is malum prohibitum. There is no requirement
existing under the laws of the Philippines located at
to prove intent to defraud.
Juan Luna Street, Binondo, this City, in the following
manner, to wit: the said accused received in trust The Trust Receipts Law recognizes the impossibility of
from said SOLIDBANK Corporation the following, to imposing the penalty of imprisonment on a
wit: 10,000 bags of urea valued at P2,050,000.00 corporation. Hence, if the entrustee is a corporation,
specified in a Trust Receipt Agreement and covered the law makes the officers or employees or other
by a Letter of Credit No. DOM GD 90-009 in favor of persons responsible for the offense liable to suffer
the Fertiphil Corporation. the penalty of imprisonment. The reason is obvious:
corporations, partnerships, associations and other


Trust Receipts

juridical entities cannot be put to jail. Hence, the Whether or not in a trust receipt transaction, an
criminal liability falls on the human agent responsible entruster which had taken actual and juridical
for the violation of the Trust Receipts Law. possession of the goods covered by trust receipt may
subsequently avail of the right to demand from the
entrustee the deficiency of the amount covered by
LANDL & Co. Inc. and Percival LLban, and Manueal the trust receipt.
A trust receipt agreement is merely a collateral
Metropolitan Bank & Trust Company agreement, the purpose of which is to serve as
security for a loan.
(G.R. No. 159622. July 30, 2004)
In the event of default or failure of the entrustee to
Facts: comply with the terms of the trust receipt agreement,
the entruster may cancel the trust and take
Landl and Co. is engaged in the business of selling
possession of the goods subject of the trust receipt
imported welding rods and alloys. It opened a
and while in possession cause the sale of the goods
commercial letter of credit with MBTC for the
after at least five (5) day notice to the entrustee, in a
purchase of various welding rods and electrons from
private or public sale. The entruster may at public sale
PERMA ALLOYS Inc., New York, USA. Landl put up a
become a purchaser. If the proceeds of the sale were
marginal deposit of P50, 000.00 from the proceeds of
insufficient to satisfy entirely entrustee’s
a separate clean loan.
indebtedness, the entruster is well within its rights to
As an additional security, and as a condition for the file an action to collect the deficiency.
approval of the application, MBTC required Percival
Llaban and Manuel Lucente to execute a continuing
surety agreement. Lucente also executed a Deed of Rosario Textile Mills Corp. and Edilberto Yujuico
assignment in favor of MBTC to cover the amount of
the corporation’s obligation to the bank. Upon vs.
compliance with these requisites, MBTC opened an
Home Bankers Savings and Trust Company
irrevocable Letter of Credit for Landl.
(G.R. No. 137232. June 29, 2005)
Trust Receipt was executed to secure indebtedness of
Landl. Upon Maturity, Landl defaulted payment of its Facts:
obligation or to return the goods to MBTC. The goods
Rosario Textile Mills Corporation (RTMC) applied
were sold at public auction to MBTC as the highest
from Home Bankers Savings & Trust Co. for an
bidder. However, the proceeds of the auction sale
Omnibus Credit Line for P10 million. The bank
were insufficient to completely satisfy the
approved RTMC’s credit line but for only P8 million.
outstanding obligation of Landl notwithstanding the
The bank notified RTMC of the grant of the said loan
application of the time deposit account of its director
thru a letter which contains terms and conditions
Lucente. Accordingly, MBTC demanded that Landl pay
the remaining balance of their obligation. Landl failed conformed by RTMC thru Edilberto V. Yujuico. Yujuico
signed a Surety Agreement in favor of the bank, in
to do so. MBTC filed a complaint for sum of money
which he bounds himself jointly and severally with
against Landl and its directors for the amount of the
RTMC for the payment of all RTMC’s indebtedness to
the bank. RTMC availed of the credit line by making
TC and CA: Ordered Landl to pay the bank. numerous drawdowns, each drawdown being
covered by a separate promissory note and trust
Issue: receipt. RTMC, represented by Yujuico, executed in
favor of the bank a total of eleven (11) promissory
notes. Despite the lapse of the respective due dates


Trust Receipts

under the promissory notes and notwithstanding the Petitioners theorize that when petitioner RTMC
bank’s demand letters, RTMC failed to pay its loans. imported the raw materials needed for its
Hence, the bank filed a complaint for sum of money manufacture, using the credit line, it was merely
against RTMC and Yujuico. acting on behalf of the bank, the true owner of the
goods by virtue of the trust receipts. Hence, under the
CONTENTION OF RTMC AND YUJUICO: doctrine of res perit domino, the bank took the risk of
They claimed that although the grant of the credit line the loss of said raw materials. RTMC’s role in the
and the execution of the suretyship agreement are transaction was that of end user of the raw materials
admitted, the bank gave assurance that the and when it did not accept those materials as they did
suretyship agreement was merely a formality under not meet the manufacturing requirements, RTMC
which Yujuico will not be personally liable; that the made a valid and effective tender of the goods to the
importation of raw materials under the credit line was bank. Since the bank refused to accept the raw
with a grant of option to them to turn-over to the materials, RTMC stored them in its warehouse. When
bank the imported raw materials should these fail to the warehouse and its contents were gutted by fire,
meet their manufacturing requirements. RTMC petitioners’ obligation to the bank was accordingly
offered to make such turn-over since the imported extinguished.
materials did not conform to the required
Petitioners’ stance, however, conveniently ignores
specifications. However, the bank refused to accept
the true nature of its transaction with the bank. We
the same, until the materials were destroyed by a fire
recall that RTMC filed with the bank an application for
which gutted down RTMC’s premises. For failure of
a credit line in the amount of P10 million, but only P8
the parties to amicably settle the case, trial on the
million was approved. RTMC then made withdrawals
merits proceeded. from this credit line and issued several promissory
TC ruled in favor of the bank and orderd RTMC and notes in favor of the bank. In banking and commerce,
Yujuico to pay. RMTC appealed contending that under a credit line is “that amount of money or merchandise
the trust receipt contracts between the parties, they which a banker, merchant, or supplier agrees to
merely held the goods described therein in trust for supply to a person on credit and generally agreed to
Home Bankers Savings and Trust Company (the bank) in advance.” It is the fixed limit of credit granted by a
which owns the same. Since the ownership of the bank, retailer, or credit card issuer to a customer, to
goods remains with the bank, then it should bear the the full extent of which the latter may avail himself of
loss. With the destruction of the goods by fire, his dealings with the former but which he must not
petitioners should have been relieved of any exceed and is usually intended to cover a series of
obligation to pay transactions in which case, when the customer’s line
of credit is nearly exhausted, he is expected to reduce
CA Affirmed the trial court’s judgment, holding that his indebtedness by payments before making any
the bank is merely the holder of the security for its further drawings.
advance payments to petitioners and that the goods
they purchased, through the credit line extended by It is thus clear that the principal transaction between
the bank, belong to them and hold said goods at their petitioner RTMC and the bank is a contract of loan.
own risk. RTMC used the proceeds of this loan to purchase raw
materials from a supplier abroad. In order to secure
Issue: the payment of the loan, RTMC delivered the raw
materials to the bank as collateral. Trust receipts
Whether RMTC and Yujuico are not relieved of their
were executed by the parties to evidence this security
obligation to pay their loan after they tried to tender
arrangement. Simply stated, the trust receipts were
the goods to the bank which the bank refused to
mere securities.
accept the same, and which goods were subsequently
lost in fire.



Trust Receipts

Jose Tupaz and Petronilla Tupaz payments only. On BPI’s counsel and its
representative respectively sent final demand letters
vs. to El Oro Corporation. El Oro Corporation replied that
CA and Bank of the Philippine Islands it could not fully pay its debt because the Armed
Forces of the Philippines had delayed paying for the
(G.R. No. 145578 November 18, 2005) survival bolos. BPI charged the Tupazs with estafa.
Facts: TC, affirmed by CA: The Tupazs are acquitted but
found solidarily liable with El Oro for the balance of El
Jose C. Tupaz IV and Petronila C. Tupaz were Vice-
Oro Corporations principal debt under the Trust
President for Operations and Vice-
Receipt. Inability to collect with AFP is not a valid
President/Treasurer,respectively, of El Oro Engraver
defense to wipe out their civil liability.
Corporation (“El Oro Corporation”). El Oro
Corporation had a contract with the Philippine Army Issues:
to supply the latter with “survival bolos.”
1. Whether petitioners bound themselves personally
To finance the purchase of the raw materials for the liable for El Oro Corporation’s debts under the trust
survival bolos, the Tupazs, on behalf of El Oro receipts;
Corporation, applied with Bank of the Philippine
Islands (“BPI”) for two commercial letters of credit. 2. If so —(a) whether petitioners’ liability is solidary
The letters of credit were in favor of El Oro with El Oro Corporation; and (b) whether petitioners’
Corporation’s suppliers, Tanchaoco Manufacturing acquittal of estafa under Section 13, PD 115
Incorporated (“Tanchaoco Incorporated”) and extinguished their civil liability.
Maresco Rubber and Retreading Corporation
(“Maresco Corporation”). BPI granted Tupazs
application and issued Letters of Credit to Tanchaoco A corporation, being a juridical entity, may act only
Incorporated to Maresco Corporation. through its directors, officers, and employees. Debts
incurred by these individuals, acting as such
Simultaneous with the issuance of the letters of
corporate agents, are not theirs but the direct liability
credit, the Tupazs signed trust receipts in favor of BPI.
of the corporation they represent. As an exception,
Jose C.Tupaz IV (“petitioner Jose Tupaz”) signed, in his
directors or officers are personally liable for the
personal capacity, a trust receipt corresponding to
corporation’s debts only if they so contractually agree
the letter of credit given to Tanchaoco Incorporated.
or stipulate. Jose Tupaz is liable is Guarantor.
Jose Tupaz bound himself to sell the goods covered
by the letter of credit and to remit the proceeds to Jose Tupaz’s Acquittal did not Extinguish his Civil
respondent bank, if sold, or to return the goods, if not Liability. The rule is that where the civil action is
sold. impliedly instituted with the criminal action, the civil
liability is not extinguished by acquittal —
The Tupazs signed, in their capacities as officers of El
Oro Corporation, a trust receipt corresponding to [w]here the acquittal is based on reasonable doubt xxx as only
preponderance of evidence is required in civil cases; where the
Letter of Credit in favor of Manresco Corporation. The
court expressly declares that the liability of the accused is not
Tupazs bound themselves to sell the goods covered criminal but only civil in nature xxx as, for instance, in the felonies
by that letter of credit and to remit the proceeds to of estafa, theft, and malicious mischief committed by certain
respondent bank, if sold, or to return the goods, if not relatives who thereby incur only civil liability (See Art. 332, Revised
Penal Code); and, where the civil liability does not arise from or is
sold. After Tanchaoco Incorporated and Maresco
not based upon the criminal act of which the accused was acquitted
Corporation delivered the raw materials to El Oro xxx.
Corporation, respondent bank paid the former.
Here, BPI chose not to file a separate civil action to
The Tupazs did not comply with their undertaking recover payment under the trust receipts. Instead,
under the trust receipts. BPI made several demands BPI sought to recover payment in the Criminal cases.
for payments but El Oro Corporation made partial Although the trial court acquitted Jose Tupaz, his


Trust Receipts

acquittal did not extinguish his civil liability. As the Prudential Bank sent again a letter to DBP reasserting
Court of Appeals correctly held, his liability arose not its claim over the items covered by “trust receipts” in
from the criminal act of which he was acquitted (ex its name and advising DBP not to include them in the
delito) but from the trust receipt contract (ex auction. It also demanded the turn-over of the articles
contractu).Jose Tupaz signed the trust receipt of in his or alternatively, the payment of their value.
personal capacity.
There being no concrete action on DBP’s part,
Prudential Bank, in a letter dated, made a final
demand on DBP for the turn-over of the contested
Development Bank of the Philippines articles or the payment of their value. Without the
vs. knowledge of Prudential Bank, however, DBP sold the
Litex textile mill, as well as the machineries and
Prudential Bank equipments therein, to Lyon Textile Mills,Inc. (Lyon)
(G.R. No. 143772 November 22, 2005) Since its demands remained unheeded, Prudential
Bank filed a complaint for a sum of money with
damages against DBP.
Lirag Textile Mills, Inc. (Litex) opened an irrevocable
TC and CA ruled in favor of Prudential Bank. Applying
commercial letter of credit with Prudential Bank. This
the provisions of PD 115 and held that the ownership
was in connection with its importation of 5,000
over the contested articles belonged to Prudential
spindles for spinning machinery with drawing frame,
Bank as entrustor, not to Litex. Consequently, even if
simplex fly frame, ring spinning frame and various
Litex mortgaged the items to DBP and the latter
accessories, spare parts and tool gauge. These were
foreclosed on such mortgage, DBP was duty bound to
released to Litex under covering “trust receipts” it
turn-over the proceeds to Prudential Bank being the
executed in favor of Prudential Bank. Litex installed
party that advanced the payment for them.
and used the items in its textile mill located in
Montalban, Rizal.

On 1980, DBP granted a foreign currency loan in the Held:

amount of US$4,807,551 to Litex. To secure the loan,
Litex executed real estate and chattel mortgages on The articles were owned by Prudential Bank and they
its plant site in Montalban, Rizal, including the were only held by Litex in trust. While it was allowed
buildings and other improvements, machineries and to sell the items, Litex had no authority to dispose of
equipment’s there. Among the machineries and them or any part thereof or their proceeds through
equipments mortgaged in favor of DBP were the conditional sale, pledge or any other means.
articles covered by the “trust receipts.” Article 2085 (2) of the Civil Code requires that, in a
When Prudential Bank learned about DBP’s plan for contract of pledge or mortgage, it is essential that the
the overall rehabilitation of Litex, Prudential Bank pledgor or mortgagor should be the absolute owner
notified DBP of its claim over the various items of the thing pledged or mortgaged. Article 2085 (3)
covered by the “trust receipts” which had been further mandates that the person constituting the
installed and used by Litex in the textile mill. pledge or mortgage must have the free disposal of his
Prudential Bank informed DBP that it was the property, and in the absence thereof, that he be
absolute and juridical owner of the said items and legally authorized for the purpose.
they were thus not part of the mortgaged assets that Litex had neither absolute ownership, free disposal
could be legally ceded to DBP. nor the authority to freely dispose of the articles.
For the failure of Litex to pay its obligation, DBP extra- Litex could not have subjected them to a chattel
judicially foreclosed on the real estate and chattel mortgage. Their inclusion in the mortgage was void
mortgages, including the articles claimed by and had no legal effect. There being no valid
Prudential Bank.


Trust Receipts

mortgage, there could also be no valid foreclosure or Whether Ching can be held criminally liable for
valid auction sale. violation of the Trust Receipts Law, when he signed
the trust receipts merely as a surety and not as the
Alfredo Ching
vs. An officer of a corporation who signed a trust receipt
Sec. of Justice cannot hide behind the cloak of the separate
corporate personality of the corporation and cannot
(G. R. No. 164317 February 6, 2006) avoid criminal prosecution even though he had no
physical possession of the goods nor are benefitted
by the delictual acts.
Though the entrustee is a corporation, nevertheless,
Ching was the Senior Vice President of Philippine the law specifically makes the officers, employees and
Blooming Mills, Inc (PBMI). PBMI, through Ching other officers or persons responsible for the offense,
applied with the Rizal Commercial Banking without prejudice to the civil liabilities of such
Corporation (RCBC) for the issuance of Commercial corporation and/or board of directors, officers, or
Letters of Credit to finance its importation of assorted other officials or employees responsible for the
goods. RCBC approved the application, and offense.
irrevocable Letters of Credit were issued in favor of
The rationale is that such officers or employees are
Ching (PBMI). The goods were purchased and
vested with authority and responsibility to devise
delivered in trust to PBMI. Ching signed 13 trust
means necessary to ensure compliance with the law
receipts as SURETY, acknowledging delivery of the
and, if they fail to do so, are held criminally
goods. When the trust receipt matured, Ching failed
to return the goods to RCBC or to return their value
despite repeated demands. A corporation cannot be arrested and imprisoned;
hence, cannot be penalized for a crime punishable by
Thus, RCBC filed a criminal complaint for estafa
imprisonment. However a corporation may be
against Ching. City Prosecutor found probable cause
charged and prosecuted for a crime if the imposable
for estafa, thus 13 information were filed. Ching
penalty is FINE.
appealed to the Minister of Justice which ordered the
withdrawal of the information.

RCBC refilled the criminal complaint for estafa before

the office of the City Prosecutor. City Prosecutor ruled
that there was no probable cause to charge Ching as
his liability was only civil and not criminal having
signed the trust receipts as surety.

RCBC appealed to the Secretary of Justice which

reversed the resolution of the City prosecutor,
holding that Ching as senior Vice-President of PBMI,
executed the 13 trust receipts and as such, was one
responsible for the offense. The execution of said
receipts is enough to indict Ching as the official
responsible for the violation of PD 115.

CA affirmed the Decision of Secretary of Justice.