G.R. No.
89252 May 24, 1993 April 6, 1981
RAUL SESBREÑO, Petitioner, vs. HON. COURT OF APPEALS, DELTA MOTORS
CORPORATION AND PILIPINAS BANK, Respondents.
Salva, Villanueva & Associates for Delta Motors Corporation.chanrobles virtual
law library
Reyes, Salazar & Associates for Pilipinas Bank.
FELICIANO, J.:
On 9 February 1981, petitioner Raul Sesbreño made a money market placement
in the amount of P300,000.00 with the Philippine Underwriters Finance Corporation
("Philfinance"), Cebu Branch; the placement, with a term of thirty-two (32) days,
would mature on 13 March 1981, Philfinance, also on 9 February 1981, issued the
following documents to petitioner:
(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one
(1) Delta Motors Corporation Promissory Note ("DMC PN") No. 2731 for a term of
32 days at 17.0% per annum;
(b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of
DMC PN No. 2731 to petitioner, with the notation that the said security was in
custodianship of Pilipinas Bank, as per Denominated Custodian Receipt ("DCR")
No. 10805 dated 9 February 1981; and
(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of
petitioner's investment), with petitioner as payee, Philfinance as drawer, and
Insular Bank of Asia and America as drawee, in the total amount of P304,533.33.
On 13 March 1981, petitioner sought to encash the postdated checks issued by
Philfinance. However, the checks were dishonored for having been drawn
against insufficient funds.
On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued
by private respondent Pilipinas Bank ("Pilipinas"). It reads as follows:
PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila
February 9, 1981
-------
VALUE DATE
TO Raul Sesbreño
Page 1 of 44
--------
MATURITY DATE
NO. 10805
DENOMINATED CUSTODIAN RECEIPTchanrobles virtual law library
This confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE
UNDERWRITES FINANCE CORPORATION, we have in our custody the following
securities to you [sic] the extent herein indicated.
SERIAL MAT. FACE ISSUED REGISTERED AMOUNT
NUMBER DATE VALUE BY HOLDER PAYEE
2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33
UNDERWRITERS
FINANCE CORP.
We further certify that these securities may be inspected by you or your duly
authorized representative at any time during regular banking hours.
Upon your written instructions we shall undertake physical delivery of the above
securities fully assigned to you should this Denominated Custodianship Receipt
remain outstanding in your favor thirty (30) days after its maturity.
PILIPINAS BANK
(By Elizabeth De Villa
Illegible Signature)1
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private
respondent Pilipinas, Makati Branch, and handed her a demand letter informing
the bank that his placement with Philfinance in the amount reflected in the DCR
No. 10805 had remained unpaid and outstanding, and that he in effect was
asking for the physical delivery of the underlying promissory note. Petitioner then
examined the original of the DMC PN No. 2731 and found: that the security had
been issued on 10 April 1980; that it would mature on 6 April 1981; that it had a
face value of P2,300,833.33, with the Philfinance as "payee" and private
respondent Delta Motors Corporation ("Delta") as "maker;" and that on face of
the promissory note was stamped "NON NEGOTIABLE." Pilipinas did not deliver the
Note, nor any certificate of participation in respect thereof, to petitioner.
Petitioner later made similar demand letters, dated 3 July 1981 and 3 August
1981, 2again asking private respondent Pilipinas for physical delivery of the
original of DMC PN No. 2731. Pilipinas allegedly referred all of petitioner's demand
letters to Philfinance for written instructions, as has been supposedly agreed upon
in "Securities Custodianship Agreement" between Pilipinas and Philfinance.
Philfinance did not provide the appropriate instructions; Pilipinas never released
DMC PN No. 2731, nor any other instrument in respect thereof, to petitioner.
Petitioner also made a written demand on 14 July 1981 3 upon private respondent
Delta for the partial satisfaction of DMC PN No. 2731, explaining that Philfinance,
as payee thereof, had assigned to him said Note to the extent of P307,933.33.
Delta, however, denied any liability to petitioner on the promissory note, and
explained in turn that it had previously agreed with Philfinance to offset its DMC
PN No. 2731 (along with DMC PN No. 2730) against Philfinance PN No. 143-A
issued in favor of Delta.chanroblesvirtualawlibrarychanrobles virtual law library
In the meantime, Philfinance, on 18 June 1981, was placed under the joint
management of the Securities and exchange commission ("SEC") and the
Central Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to date
apparently remains in the custody of the SEC. 4chanrobles virtual law library
As petitioner had failed to collect his investment and interest thereon, he filed on
28 September 1982 an action for damages with the Regional Trial Court ("RTC") of
Cebu City, Branch 21, against private respondents Delta and Pilipinas. 5 The trial
court, in a decision dated 5 August 1987, dismissed the complaint and
counterclaims for lack of merit and for lack of cause of action, with costs against
petitioner.chanroblesvirtualawlibrarychanrobles virtual law library
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In
a Decision dated 21 March 1989, the Court of Appeals denied the appeal and
held: 6
Be that as it may, from the evidence on record, if there is anyone that appears
liable for the travails of plaintiff-appellant, it is Philfinance. As correctly observed
by the trial court:
This act of Philfinance in accepting the investment of plaintiff and charging it
against DMC PN No. 2731 when its entire face value was already obligated or
earmarked for set-off or compensation is difficult to comprehend and may have
been motivated with bad faith. Philfinance, therefore, is solely and legally
obligated to return the investment of plaintiff, together with its earnings, and to
answer all the damages plaintiff has suffered incident thereto. Unfortunately for
plaintiff, Philfinance was not impleaded as one of the defendants in this case at
bar; hence, this Court is without jurisdiction to pronounce judgement against it.
(p. 11, Decision)
WHEREFORE, finding no reversible error in the decision appealed from, the same is
hereby affirmed in toto. Cost against plaintiff-appellant.
Petitioner moved for reconsideration of the above Decision, without
success.chanroblesvirtualawlibrarychanrobles virtual law library
Page 2 of 44
Hence, this Petition for Review on Certiorari.chanroblesvirtualawlibrarychanrobles
virtual law library
After consideration of the allegations contained and issues raised in the
pleadings, the Court resolved to give due course to the petition and required the
parties to file their respective memoranda. 7chanrobles virtual law library
Petitioner reiterates the assignment of errors he directed at the trial court
decision, and contends that respondent court of Appeals gravely erred: (i) in
concluding that he cannot recover from private respondent Delta his assigned
portion of DMC PN No. 2731; (ii) in failing to hold private respondent Pilipinas
solidarily liable on the DMC PN No. 2731 in view of the provisions stipulated in DCR
No. 10805 issued in favor r of petitioner, and (iii) in refusing to pierce the veil of
corporate entity between Philfinance, and private respondents Delta and
Pilipinas, considering that the three (3) entities belong to the "Silverio Group of
Companies" under the leadership of Mr. Ricardo Silverio, Sr. 8chanrobles virtual
law library
There are at least two (2) sets of relationships which we need to address: firstly,
the relationship of petitioner vis-a-vis Delta; secondly, the relationship of petitioner
in respect of Pilipinas. Actually, of course, there is a third relationship that is of
critical importance: the relationship of petitioner and Philfinance. However, since
Philfinance has not been impleaded in this case, neither the trial court nor the
Court of Appeals acquired jurisdiction over the person of Philfinance. It is,
consequently, not necessary for present purposes to deal with this third
relationship, except to the extent it necessarily impinges upon or intersects the
first and second relationships.
I.
We consider first the relationship between petitioner and
Delta.chanroblesvirtualawlibrarychanrobles virtual law library
The Court of appeals in effect held that petitioner acquired no rights vis-a-
vis Delta in respect of the Delta promissory note (DMC PN No. 2731) which
Philfinance sold "without recourse" to petitioner, to the extent of P304,533.33. The
Court of Appeals said on this point:
Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as
the same is "non-negotiable" as stamped on its face (Exhibit "6"), negotiation
being defined as the transfer of an instrument from one person to another so as
to constitute the transferee the holder of the instrument (Sec. 30, Negotiable
Instruments Law). A person not a holder cannot sue on the instrument in his own
name and cannot demand or receive payment (Section 51, id.) 9chanrobles
virtual law library
Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that
the Note had been validly transferred, in part to him by assignment and that as a
result of such transfer, Delta as debtor-maker of the Note, was obligated to pay
petitioner the portion of that Note assigned to him by the payee
Philfinance.chanroblesvirtualawlibrarychanrobles virtual law library
Delta, however, disputes petitioner's contention and argues:
(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise
transferred by Philfinance as manifested by the word "non-negotiable" stamp
across the face of the Note 10 and because maker Delta and payee Philfinance
intended that this Note would be offset against the outstanding obligation of
Philfinance represented by Philfinance PN No. 143-A issued to Delta as
payee;chanrobles virtual law library
(2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's
consent, if not against its instructions; andchanrobles virtual law library
(3) assuming (arguendo only) that the partial assignment in favor of petitioner
was valid, petitioner took the Note subject to the defenses available to Delta, in
particular, the offsetting of DMC PN No. 2731 against Philfinance PN No. 143-
A. 11chanrobles virtual law library
We consider Delta's arguments seriatim.chanroblesvirtualawlibrarychanrobles
virtual law library
Firstly, it is important to bear in mind that the negotiation of a negotiable
instrument must be distinguished from the assignment or transfer of an instrument
whether that be negotiable or non-negotiable. Only an instrument qualifying as a
negotiable instrument under the relevant statute may be negotiated either by
indorsement thereof coupled with delivery, or by delivery alone where the
negotiable instrument is in bearer form. A negotiable instrument may, however,
instead of being negotiated, also be assigned ortransferred. The legal
consequences of negotiation as distinguished from assignment of a negotiable
instrument are, of course, different. A non-negotiable instrument may, obviously,
not be negotiated; but it may be assigned or transferred, absent an express
prohibition against assignment or transfer written in the face of the instrument:
The words "not negotiable," stamped on the face of the bill of lading, did not
destroy its assignability, but the sole effect was to exempt the bill from the
statutory provisions relative thereto, and a bill, though not negotiable, may be
transferred by assignment; the assignee taking subject to the equities between
the original parties. 12 (Emphasis added)
DMC PN No. 2731, while marked "non-negotiable," was not at the same time
stamped "non-transferable" or "non-assignable." It contained no stipulation which
Page 3 of 44
prohibited Philfinance from assigning or transferring, in whole or in part, that
Note.chanroblesvirtualawlibrarychanrobles virtual law library
Delta adduced the "Letter of Agreement" which it had entered into with
Philfinance and which should be quoted in full:
April 10, 1980
Philippine Underwriters Finance Corp.
Benavidez St., Makati,
Metro Manila.
Attention: Mr. Alfredo O. Banaria
SVP-Treasurer
GENTLEMEN:chanrobles virtual law library
This refers to our outstanding placement of P4,601,666.67 as evidenced by your
Promissory Note No. 143-A, dated April 10, 1980, to mature on April 6,
1981.chanroblesvirtualawlibrarychanrobles virtual law library
As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and
2731 for P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic] against
your PN No. 143-A upon co-terminal
maturity.chanroblesvirtualawlibrarychanrobles virtual law library
Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.
Very Truly Yours,
(Sgd.)
Florencio B. Biagan
Senior Vice President 13
We find nothing in his "Letter of Agreement" which can be reasonably construed
as a prohibition upon Philfinance assigning or transferring all or part of DMC PN
No. 2731, before the maturity thereof. It is scarcely necessary to add that, even
had this "Letter of Agreement" set forth an explicit prohibition of transfer upon
Philfinance, such a prohibition cannot be invoked against an assignee or
transferee of the Note who parted with valuable consideration in good faith and
without notice of such prohibition. It is not disputed that petitioner was such an
assignee or transferee. Our conclusion on this point is reinforced by the fact that
what Philfinance and Delta were doing by their exchange of their promissory
notes was this: Delta invested, by making a money market placement with
Philfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on the
same day, borrowed back the bulk of that placement, i.e., P4,000,000.00, by
issuing its two (2) promissory notes: DMC PN No. 2730 and DMC PN No. 2731, both
also dated 10 April 1980. Thus, Philfinance was left with not P4,600,000.00 but only
P600,000.00 in cash and the two (2) Delta promissory notes.
Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN
No. 2731 had been effected without the consent of Delta, we note that such
consent was not necessary for the validity and enforceability of the assignment in
favor of petitioner. 14Delta's argument that Philfinance's sale or assignment of part
of its rights to DMC PN No. 2731 constituted conventional subrogation, which
required its (Delta's) consent, is quite mistaken. Conventional subrogation, which
in the first place is never lightly inferred, 15must be clearly established by the
unequivocal terms of the substituting obligation or by the evident incompatibility
of the new and old obligations on every point. 16 Nothing of the sort is present in
the instant case.chanroblesvirtualawlibrarychanrobles virtual law library
It is in fact difficult to be impressed with Delta's complaint, since it released its
DMC PN No. 2731 to Philfinance, an entity engaged in the business of buying and
selling debt instruments and other securities, and more generally, in money
market transactions. In Perez v. Court of Appeals, 17 the Court, speaking through
Mme. Justice Herrera, made the following important statement:
There is another aspect to this case. What is involved here is a money market
transaction. As defined by Lawrence Smith "the money market is a market
dealing in standardized short-term credit instruments (involving large amounts)
where lenders and borrowers do not deal directly with each other but through a
middle manor a dealer in the open market." It involves "commercial papers"
which are instruments "evidencing indebtness of any person or entity. . ., which
are issued, endorsed, sold or transferred or in any manner conveyed to another
person or entity, with or without recourse". The fundamental function of the
money market device in its operation is to match and bring together in a most
impersonal manner both the "fund users" and the "fund suppliers." The money
market is an "impersonal market", free from personal considerations. "The market
mechanism is intended to provide quick mobility of money and securities."
The impersonal character of the money market device overlooks the individuals
or entities concerned. The issuer of a commercial paper in the money market
necessarily knows in advance that it would be expenditiously transacted and
transferred to any investor/lender without need of notice to said issuer. In
practice, no notification is given to the borrower or issuer of commercial paper of
the sale or transfer to the investor.
xxx xxx xxxchanrobles virtual law library
There is need to individuate a money market transaction, a relatively novel
institution in the Philippine commercial scene. It has been intended to facilitate
the flow and acquisition of capital on an impersonal basis. And as specifically
Page 4 of 44
required by Presidential Decree No. 678, the investing public must be given
adequate and effective protection in availing of the credit of a borrower in the
commercial paper market. 18 (Citations omitted; emphasis supplied)
We turn to Delta's arguments concerning alleged compensation or offsetting
between DMC PN No. 2731 and Philfinance PN No. 143-A. It is important to note
that at the time Philfinance sold part of its rights under DMC PN No. 2731 to
petitioner on 9 February 1981, no compensation had as yet taken place and
indeed none could have taken place.The essential requirements of
compensation are listed in the Civil Code as follows:
Art. 1279. In order that compensation may be proper, it is necessary:chanrobles
virtual law library
(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) That both debts consists in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the latter
has been stated;chanrobles virtual law library
(3) That the two debts are due;
(4) That they be liquidated and demandable;chanrobles virtual law library
(5) That over neither of them there be any retention or controversy, commenced
by third persons and communicated in due time to the debtor. (Emphasis
supplied)
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was
due. This was explicitly recognized by Delta in its 10 April 1980 "Letter of
Agreement" with Philfinance, where Delta acknowledged that the relevant
promissory notes were "to be offsetted (sic) against [Philfinance] PN No. 143-
A upon co-terminal maturity."chanrobles virtual law library
As noted, the assignment to petitioner was made on 9 February 1981 or from
forty-nine (49) days before the "co-terminal maturity" date, that is to say, before
any compensation had taken place. Further, the assignment to petitioner would
have prevented compensation had taken place between Philfinance and Delta,
to the extent of P304,533.33, because upon execution of the assignment in favor
of petitioner, Philfinance and Delta would have ceased to be creditors and
debtors of each other in their own right to the extent of the amount assigned by
Philfinance to petitioner. Thus, we conclude that the assignment effected by
Philfinance in favor of petitioner was a valid one and that petitioner accordingly
became owner of DMC PN No. 2731 to the extent of the portion thereof assigned
to him.chanroblesvirtualawlibrarychanrobles virtual law library
The record shows, however, that petitioner notified Delta of the fact of the
assignment to him only on 14 July 1981, 19 that is, after the maturity not only of the
money market placement made by petitioner but also of both DMC PN No. 2731
and Philfinance PN No. 143-A. In other words, petitioner notified Delta of his rights
as assignee after compensation had taken place by operation of law because
the offsetting instruments had both reached maturity. It is a firmly settled doctrine
that the rights of an assignee are not any greater that the rights of the assignor,
since the assignee is merely substituted in the place of the assignor 20 and that
the assignee acquires his rights subject to the equities - i.e., the defenses - which
the debtor could have set up against the original assignor before notice of the
assignment was given to the debtor. Article 1285 of the Civil Code provides that:
Art. 1285. The debtor who has consented to the assignment of rights made by a
creditor in favor of a third person, cannot set up against the assignee the
compensation which would pertain to him against the assignor, unless the
assignor was notified by the debtor at the time he gave his consent, that he
reserved his right to the compensation.chanroblesvirtualawlibrarychanrobles
virtual law library
If the creditor communicated the cession to him but the debtor did not
consent thereto, the latter may set up the compensation of debts previous to the
cession, but not of subsequent ones.chanroblesvirtualawlibrarychanrobles virtual
law library
If the assignment is made without the knowledge of the debtor, he may set up
the compensation of all credits prior to the same and also later ones until he
had knowledge of the assignment. (Emphasis supplied)
Article 1626 of the same code states that: "the debtor who, before having
knowledge of the assignment, pays his creditor shall be released from the
obligation." In Sison v. Yap-Tico, 21 the Court explained that:
[n]o man is bound to remain a debtor; he may pay to him with whom he
contacted to pay; and if he pay before notice that his debt has been assigned,
the law holds him exonerated, for the reason that it is the duty of the person who
has acquired a title by transfer to demand payment of the debt, to give his debt
or notice. 22chanrobles virtual law library
At the time that Delta was first put to notice of the assignment in petitioner's favor
on 14 July 1981, DMC PN No. 2731 had already been discharged by
compensation. Since the assignor Philfinance could not have then compelled
payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of
Philfinance, is similarly disabled from collecting from Delta the portion of the Note
assigned to him.chanroblesvirtualawlibrarychanrobles virtual law library
Page 5 of 44
It bears some emphasis that petitioner could have notified Delta of the
assignment or sale was effected on 9 February 1981. He could have notified
Delta as soon as his money market placement matured on 13 March 1981
without payment thereof being made by Philfinance; at that time, compensation
had yet to set in and discharge DMC PN No. 2731. Again petitioner could have
notified Delta on 26 March 1981 when petitioner received from Philfinance the
Denominated Custodianship Receipt ("DCR") No. 10805 issued by private
respondent Pilipinas in favor of petitioner. Petitioner could, in fine, have notified
Delta at any time before the maturity date of DMC PN No. 2731. Because
petitioner failed to do so, and because the record is bare of any indication that
Philfinance had itself notified Delta of the assignment to petitioner, the Court is
compelled to uphold the defense of compensation raised by private respondent
Delta. Of course, Philfinance remains liable to petitioner under the terms of the
assignment made by Philfinance to petitioner.
II.
We turn now to the relationship between petitioner and private respondent
Pilipinas. Petitioner contends that Pilipinas became solidarily liable with
Philfinance and Delta when Pilipinas issued DCR No. 10805 with the following
words:
Upon your written instruction, we [Pilipinas] shall undertake physical delivery of
the above securities fully assigned to you -. 23chanrobles virtual law library
The Court is not persuaded. We find nothing in the DCR that establishes an
obligation on the part of Pilipinas to pay petitioner the amount of P307,933.33 nor
any assumption of liability in solidum with Philfinance and Delta under DMC PN
No. 2731. We read the DCR as a confirmation on the part of Pilipinas that:
(1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a
certain face value, to mature on 6 April 1981 and payable to the order of
Philfinance;chanrobles virtual law library
(2) Pilipinas was, from and after said date of the assignment by Philfinance to
petitioner (9 February 1981), holding that Note on behalf and for the benefit of
petitioner, at least to the extent it had been assigned to petitioner by payee
Philfinance; 24
(3) petitioner may inspect the Note either "personally or by authorized
representative", at any time during regular bank hours; andchanrobles virtual law
library
(4) upon written instructions of petitioner, Pilipinas would physically deliver the
DMC PN No. 2731 (or a participation therein to the extent of P307,933.33)"should
this Denominated Custodianship receipt remain outstanding in [petitioner's] favor
thirty (30) days after its maturity."
Thus, we find nothing written in printers ink on the DCR which could reasonably be
read as converting Pilipinas into an obligor under the terms of DMC PN No. 2731
assigned to petitioner, either upon maturity thereof or any other time. We note
that both in his complaint and in his testimony before the trial court, petitioner
referred merely to the obligation of private respondent Pilipinas to effect the
physical delivery to him of DMC PN No. 2731. 25 Accordingly, petitioner's theory
that Pilipinas had assumed a solidary obligation to pay the amount represented
by a portion of the Note assigned to him by Philfinance, appears to be a new
theory constructed only after the trial court had ruled against him. The solidary
liability that petitioner seeks to impute Pilipinas cannot, however, be lightly
inferred. Under article 1207 of the Civil Code, "there is a solidary liability only when
the law or the nature of the obligation requires solidarity," The record here exhibits
no express assumption of solidary liability vis-a-vis petitioner, on the part of
Pilipinas. Petitioner has not pointed to us to any law which imposed such liability
upon Pilipinas nor has petitioner argued that the very nature of the custodianship
assumed by private respondent Pilipinas necessarily implies solidary liability under
the securities, custody of which was taken by Pilipinas. Accordingly, we are
unable to hold Pilipinas solidarily liable with Philfinance and private respondent
Delta under DMC PN No. 2731.chanroblesvirtualawlibrarychanrobles virtual law
library
We do not, however, mean to suggest that Pilipinas has no responsibility and
liability in respect of petitioner under the terms of the DCR. To the contrary, we
find, after prolonged analysis and deliberation, that private respondent Pilipinas
had breached its undertaking under the DCR to petitioner
Sesbreño.chanroblesvirtualawlibrarychanrobles virtual law library
We believe and so hold that a contract of deposit was constituted by the act of
Philfinance in designating Pilipinas as custodian or depositary bank. The depositor
was initially Philfinance; the obligation of the depository was owed, however, to
petitioner Sesbreño as beneficiary of the custodianship or depository agreement.
We do not consider that this is a simple case of a stipulation pour autri. The
custodianship or depositary agreement was established as an integral part of the
money market transaction entered into by petitioner with Philfinance. Petitioner
bought a portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited
that Note with Pilipinas in order that the thing sold would be placed outside the
control of the vendor. Indeed, the constituting of the depositary or custodianship
agreement was equivalent to constructive delivery of the Note (to the extent it
had been sold or assigned to petitioner) to petitioner. It will be seen that
Page 6 of 44
custodianship agreements are designed to facilitate transactions in the money
market by providing a basis for confidence on the part of the investors or placers
that the instruments bought by them are effectively taken out of the pocket, as it
were, of the vendors and placed safely beyond their reach, that those
instruments will be there available to the placers of funds should they have need
of them. The depositary in a contract of deposit is obliged to return the security or
the thing deposited upon demand of the depositor (or, in the presented case, of
the beneficiary) of the contract, even though a term for such return may have
been established in the said contract. 26 Accordingly, any stipulation in the
contract of deposit or custodianship that runs counter to the fundamental
purpose of that agreement or which was not brought to the notice of and
accepted by the placer-beneficiary, cannot be enforced as against such
beneficiary-placer.chanroblesvirtualawlibrarychanrobles virtual law library
We believe that the position taken above is supported by considerations of
public policy. If there is any party that needs the equalizing protection of the law
in money market transactions, it is the members of the general public whom
place their savings in such market for the purpose of generating interest
revenues. 27 The custodian bank, if it is not related either in terms of equity
ownership or management control to the borrower of the funds, or the
commercial paper dealer, is normally a preferred or traditional banker of such
borrower or dealer (here, Philfinance). The custodian bank would have every
incentive to protect the interest of its client the borrower or dealer as against the
placer of funds. The providers of such funds must be safeguarded from the
impact of stipulations privately made between the borrowers or dealers and the
custodian banks, and disclosed to fund-providers only after trouble has
erupted.chanroblesvirtualawlibrarychanrobles virtual law library
In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the
security deposited with it when petitioner first demanded physical delivery
thereof on 2 April 1981. We must again note, in this connection, that on 2 April
1981, DMC PN No. 2731 had not yet matured and therefore, compensation or
offsetting against Philfinance PN No. 143-A had not yet taken place. Instead of
complying with the demand of the petitioner, Pilipinas purported to require and
await the instructions of Philfinance, in obvious contravention of its undertaking
under the DCR to effect physical delivery of the Note upon receipt of "written
instructions" from petitioner Sesbreño. The ostensible term written into the DCR
(i.e., "should this [DCR] remain outstanding in your favor thirty [30] days after its
maturity") was not a defense against petitioner's demand for physical surrender
of the Note on at least three grounds: firstly, such term was never brought to the
attention of petitioner Sesbreño at the time the money market placement with
Philfinance was made; secondly, such term runs counter to the very purpose of
the custodianship or depositary agreement as an integral part of a money
market transaction; and thirdly, it is inconsistent with the provisions of Article 1988
of the Civil Code noted above. Indeed, in principle, petitioner became entitled
to demand physical delivery of the Note held by Pilipinas as soon as petitioner's
money market placement matured on 13 March 1981 without payment from
Philfinance.chanroblesvirtualawlibrarychanrobles virtual law library
We conclude, therefore, that private respondent Pilipinas must respond to
petitioner for damages sustained by arising out of its breach of duty. By failing to
deliver the Note to the petitioner as depositor-beneficiary of the thing deposited,
Pilipinas effectively and unlawfully deprived petitioner of the Note deposited with
it. Whether or not Pilipinas itself benefitted from such conversion or unlawful
deprivation inflicted upon petitioner, is of no moment for present purposes. Prima
facie, the damages suffered by petitioner consisted of P304,533.33, the portion of
the DMC PN No. 2731 assigned to petitioner but lost by him by reason of
discharge of the Note by compensation, plus legal interest of six percent (6%) per
annum containing from 14 March 1981.chanroblesvirtualawlibrarychanrobles
virtual law library
The conclusion we have reached is, of course, without prejudice to such right of
reimbursement as Pilipinas may have vis-a-vis Philfinance.
III.
The third principal contention of petitioner - that Philfinance and private
respondents Delta and Pilipinas should be treated as one corporate entity - need
not detain us for long.chanroblesvirtualawlibrarychanrobles virtual law library
In the first place, as already noted, jurisdiction over the person of Philfinance was
never acquired either by the trial court nor by the respondent Court of Appeals.
Petitioner similarly did not seek to implead Philfinance in the Petition before
us.chanroblesvirtualawlibrarychanrobles virtual law library
Secondly, it is not disputed that Philfinance and private respondents Delta and
Pilipinas have been organized as separate corporate entities. Petitioner asks us to
pierce their separate corporate entities, but has been able only to cite the
presence of a common Director - Mr. Ricardo Silverio, Sr., sitting on the Board of
Directors of all three (3) companies. Petitioner has neither alleged nor proved
that one or another of the three (3) concededly related companies used the
other two (2) as mere alter egos or that the corporate affairs of the other two (2)
were administered and managed for the benefit of one. There is simply not
enough evidence of record to justify disregarding the separate corporate
personalities of delta and Pilipinas and to hold them liable for any assumed or
undetermined liability of Philfinance to petitioner. 28chanrobles virtual law library
Page 7 of 44
WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of
Appeals in C.A.-G.R. CV No. 15195 dated 21 march 1989 and 17 July 1989,
respectively, are hereby MODIFIED and SET ASIDE, to the extent that such
Decision and Resolution had dismissed petitioner's complaint against Pilipinas
Bank. Private respondent Pilipinas bank is hereby ORDERED to indemnify
petitioner for damages in the amount of P304,533.33, plus legal interest thereon
at the rate of six percent (6%) per annum counted from 2 April 1981. As so
modified, the Decision and Resolution of the Court of Appeals are hereby
AFFIRMED. No pronouncement as to costs.chanroblesvirtualawlibrarychanrobles
virtual law library
SO ORDERED.
Sesbreno vs. Court of Appeals
GR 89252, 24 May 1993
FACTS:
Petitioner Sesbreno made a money market placement in the amount of P300,000
with the Philippine Underwriters Finance Corporation (PhilFinance), with a term of
32 days. PhilFinance issued to Sesbreno the Certificate of Confirmation of Sale of
a Delta Motor Corporation Promissory Note, the Certificate of Securities Delivery
Receipt indicating the sale of the note with notation that said security was in the
custody of Pilipinas Bank, and postdated checks drawn against the Insular Bank
of Asia and America for P304,533.33 payable on March 13, 1981. The checks
were dishonored for having been drawn against insufficient funds. Pilipinas Bank
never released the note, nor any instrument related thereto, to Sesbreno; but
Sesbreno learned that the security which was issued on April 10, 1980, maturing
on 6 April 1981, has a face value of P2,300,833.33 with PhilFinance as payee and
Delta Motors as maker; and was stamped “non-negotiable” on its face. As
Sesbreno was unable to collect his investment and interest thereon, he filed an
action for damages against Delta Motors and Pilipinas Bank. Delta Motors
contents that said promissory note was not intended to be negotiated or
otherwise transferred by Philfinance as manifested by the word "non-negotiable"
stamped across the face of the Note.
ISSUE:
Whether the non-negotiability of a promissory note prevents its assignment.
RULING:
A negotiable instrument, instead of being negotiated, may also be assigned or
transferred. The legal consequences of negotiation and assignment of the
instrument are different. A non-negotiable instrument may not be negotiated but
may be assigned or transferred, absent an express prohibition against assignment
or transfer written in the face of the instrument. The subject promissory note, while
marked "non-negotiable," was not at the same time stamped "non-transferable"
or "non-assignable." It contained no stipulation which prohibited Philfinance from
assigning or transferring such note, in whole or in part.
**A non-negotiable instrument may not be negotiated but may be assigned or
transferred, absent an express prohibition against assignment or transfer written
on the face of the instrument.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 88866 February 18, 1991
METROPOLITAN BANK & TRUST COMPANY, petitioner,
vs.
COURT OF APPEALS, GOLDEN SAVINGS & LOAN ASSOCIATION, INC., LUCIA
CASTILLO, MAGNO CASTILLO and GLORIA CASTILLO, respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioner.
Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson for Magno and Lucia
Castillo.
Agapito S. Fajardo and Jaime M. Cabiles for respondent Golden Savings & Loan
Association, Inc.
CRUZ, J.:
This case, for all its seeming complexity, turns on a simple question of negligence.
The facts, pruned of all non-essentials, are easily told.
The Metropolitan Bank and Trust Co. is a commercial bank with branches
throughout the Philippines and even abroad. Golden Savings and Loan
Association was, at the time these events happened, operating in Calapan,
Mindoro, with the other private respondents as its principal officers.
Page 8 of 44
In January 1979, a certain Eduardo Gomez opened an account with Golden
Savings and deposited over a period of two months 38 treasury warrants with a
total value of P1,755,228.37. They were all drawn by the Philippine Fish Marketing
Authority and purportedly signed by its General Manager and countersigned by
its Auditor. Six of these were directly payable to Gomez while the others
appeared to have been indorsed by their respective payees, followed by
Gomez as second indorser.1
On various dates between June 25 and July 16, 1979, all these warrants were
subsequently indorsed by Gloria Castillo as Cashier of Golden Savings and
deposited to its Savings Account No. 2498 in the Metrobank branch in Calapan,
Mindoro. They were then sent for clearing by the branch office to the principal
office of Metrobank, which forwarded them to the Bureau of Treasury for special
clearing.2
More than two weeks after the deposits, Gloria Castillo went to the Calapan
branch several times to ask whether the warrants had been cleared. She was
told to wait. Accordingly, Gomez was meanwhile not allowed to withdraw from
his account. Later, however, "exasperated" over Gloria's repeated inquiries and
also as an accommodation for a "valued client," the petitioner says it finally
decided to allow Golden Savings to withdraw from the proceeds of the
warrants.3
The first withdrawal was made on July 9, 1979, in the amount of P508,000.00, the
second on July 13, 1979, in the amount of P310,000.00, and the third on July 16,
1979, in the amount of P150,000.00. The total withdrawal was P968.000.00.4
In turn, Golden Savings subsequently allowed Gomez to make withdrawals from
his own account, eventually collecting the total amount of P1,167,500.00 from the
proceeds of the apparently cleared warrants. The last withdrawal was made on
July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants
had been dishonored by the Bureau of Treasury on July 19, 1979, and demanded
the refund by Golden Savings of the amount it had previously withdrawn, to
make up the deficit in its account.
The demand was rejected. Metrobank then sued Golden Savings in the Regional
Trial Court of Mindoro.5 After trial, judgment was rendered in favor of Golden
Savings, which, however, filed a motion for reconsideration even as Metrobank
filed its notice of appeal. On November 4, 1986, the lower court modified its
decision thus:
ACCORDINGLY, judgment is hereby rendered:
1. Dismissing the complaint with costs against the plaintiff;
 2. Dissolving and lifting the writ of attachment of the properties of
defendant Golden Savings and Loan Association, Inc. and defendant
Spouses Magno Castillo and Lucia Castillo;
3. Directing the plaintiff to reverse its action of debiting Savings Account
No. 2498 of the sum of P1,754,089.00 and to reinstate and credit to such
account such amount existing before the debit was made including the
amount of P812,033.37 in favor of defendant Golden Savings and Loan
Association, Inc. and thereafter, to allow defendant Golden Savings and
Loan Association, Inc. to withdraw the amount outstanding thereon
before the debit;
4. Ordering the plaintiff to pay the defendant Golden Savings and Loan
Association, Inc. attorney's fees and expenses of litigation in the amount
of P200,000.00.
5. Ordering the plaintiff to pay the defendant Spouses Magno Castillo
and Lucia Castillo attorney's fees and expenses of litigation in the
amount of P100,000.00.
SO ORDERED.
On appeal to the respondent court,6 the decision was affirmed, prompting
Metrobank to file this petition for review on the following grounds:
1. Respondent Court of Appeals erred in disregarding and failing to
apply the clear contractual terms and conditions on the deposit slips
allowing Metrobank to charge back any amount erroneously credited.
(a) Metrobank's right to charge back is not limited to instances
where the checks or treasury warrants are forged or
unauthorized.
(b) Until such time as Metrobank is actually paid, its obligation is
that of a mere collecting agent which cannot be held liable for
its failure to collect on the warrants.
2. Under the lower court's decision, affirmed by respondent Court of
Appeals, Metrobank is made to pay for warrants already dishonored,
thereby perpetuating the fraud committed by Eduardo Gomez.
3. Respondent Court of Appeals erred in not finding that as between
Metrobank and Golden Savings, the latter should bear the loss.
4. Respondent Court of Appeals erred in holding that the treasury
warrants involved in this case are not negotiable instruments.
The petition has no merit.
Page 9 of 44
From the above undisputed facts, it would appear to the Court that Metrobank
was indeed negligent in giving Golden Savings the impression that the treasury
warrants had been cleared and that, consequently, it was safe to allow Gomez
to withdraw the proceeds thereof from his account with it. Without such
assurance, Golden Savings would not have allowed the withdrawals; with such
assurance, there was no reason not to allow the withdrawal. Indeed, Golden
Savings might even have incurred liability for its refusal to return the money that
to all appearances belonged to the depositor, who could therefore withdraw it
any time and for any reason he saw fit.
It was, in fact, to secure the clearance of the treasury warrants that Golden
Savings deposited them to its account with Metrobank. Golden Savings had no
clearing facilities of its own. It relied on Metrobank to determine the validity of the
warrants through its own services. The proceeds of the warrants were withheld
from Gomez until Metrobank allowed Golden Savings itself to withdraw them
from its own deposit.7 It was only when Metrobank gave the go-signal that
Gomez was finally allowed by Golden Savings to withdraw them from his own
account.
The argument of Metrobank that Golden Savings should have exercised more
care in checking the personal circumstances of Gomez before accepting his
deposit does not hold water. It was Gomez who was entrusting the warrants, not
Golden Savings that was extending him a loan; and moreover, the treasury
warrants were subject to clearing, pending which the depositor could not
withdraw its proceeds. There was no question of Gomez's identity or of the
genuineness of his signature as checked by Golden Savings. In fact, the treasury
warrants were dishonored allegedly because of the forgery of the signatures of
the drawers, not of Gomez as payee or indorser. Under the circumstances, it is
clear that Golden Savings acted with due care and diligence and cannot be
faulted for the withdrawals it allowed Gomez to make.
By contrast, Metrobank exhibited extraordinary carelessness. The amount
involved was not trifling — more than one and a half million pesos (and this was
1979). There was no reason why it should not have waited until the treasury
warrants had been cleared; it would not have lost a single centavo by waiting.
Yet, despite the lack of such clearance — and notwithstanding that it had not
received a single centavo from the proceeds of the treasury warrants, as it now
repeatedly stresses — it allowed Golden Savings to withdraw — not once, not
twice, but thrice — from the uncleared treasury warrants in the total amount of
P968,000.00
Its reason? It was "exasperated" over the persistent inquiries of Gloria Castillo
about the clearance and it also wanted to "accommodate" a valued client. It
"presumed" that the warrants had been cleared simply because of "the lapse of
one week."8 For a bank with its long experience, this explanation is unbelievably
naive.
And now, to gloss over its carelessness, Metrobank would invoke the conditions
printed on the dorsal side of the deposit slips through which the treasury warrants
were deposited by Golden Savings with its Calapan branch. The conditions read
as follows:
Kindly note that in receiving items on deposit, the bank obligates itself
only as the depositor's collecting agent, assuming no responsibility
beyond care in selecting correspondents, and until such time as actual
payment shall have come into possession of this bank, the right is
reserved to charge back to the depositor's account any amount
previously credited, whether or not such item is returned. This also applies
to checks drawn on local banks and bankers and their branches as well
as on this bank, which are unpaid due to insufficiency of funds, forgery,
unauthorized overdraft or any other reason. (Emphasis supplied.)
According to Metrobank, the said conditions clearly show that it was acting only
as a collecting agent for Golden Savings and give it the right to "charge back to
the depositor's account any amount previously credited, whether or not such
item is returned. This also applies to checks ". . . which are unpaid due to
insufficiency of funds, forgery, unauthorized overdraft of any other reason." It is
claimed that the said conditions are in the nature of contractual stipulations and
became binding on Golden Savings when Gloria Castillo, as its Cashier, signed
the deposit slips.
Doubt may be expressed about the binding force of the conditions, considering
that they have apparently been imposed by the bank unilaterally, without the
consent of the depositor. Indeed, it could be argued that the depositor, in
signing the deposit slip, does so only to identify himself and not to agree to the
conditions set forth in the given permit at the back of the deposit slip. We do not
have to rule on this matter at this time. At any rate, the Court feels that even if the
deposit slip were considered a contract, the petitioner could still not validly
disclaim responsibility thereunder in the light of the circumstances of this case.
In stressing that it was acting only as a collecting agent for Golden Savings,
Metrobank seems to be suggesting that as a mere agent it cannot be liable to
the principal. This is not exactly true. On the contrary, Article 1909 of the Civil
Code clearly provides that —
Art. 1909. — The agent is responsible not only for fraud, but also for
negligence, which shall be judged 'with more or less rigor by the courts,
according to whether the agency was or was not for a compensation.
Page 10 of 44
The negligence of Metrobank has been sufficiently established. To repeat for
emphasis, it was the clearance given by it that assured Golden Savings it was
already safe to allow Gomez to withdraw the proceeds of the treasury warrants
he had deposited Metrobank misled Golden Savings. There may have been no
express clearance, as Metrobank insists (although this is refuted by Golden
Savings) but in any case that clearance could be implied from its allowing
Golden Savings to withdraw from its account not only once or even twice
but three times. The total withdrawal was in excess of its original balance before
the treasury warrants were deposited, which only added to its belief that the
treasury warrants had indeed been cleared.
Metrobank's argument that it may recover the disputed amount if the warrants
are not paid for any reason is not acceptable. Any reason does not mean no
reason at all. Otherwise, there would have been no need at all for Golden
Savings to deposit the treasury warrants with it for clearance. There would have
been no need for it to wait until the warrants had been cleared before paying
the proceeds thereof to Gomez. Such a condition, if interpreted in the way the
petitioner suggests, is not binding for being arbitrary and unconscionable. And it
becomes more so in the case at bar when it is considered that the supposed
dishonor of the warrants was not communicated to Golden Savings before it
made its own payment to Gomez.
The belated notification aggravated the petitioner's earlier negligence in giving
express or at least implied clearance to the treasury warrants and allowing
payments therefrom to Golden Savings. But that is not all. On top of this, the
supposed reason for the dishonor, to wit, the forgery of the signatures of the
general manager and the auditor of the drawer corporation, has not been
established.9 This was the finding of the lower courts which we see no reason to
disturb. And as we said in MWSS v. Court of Appeals:10
Forgery cannot be presumed (Siasat, et al. v. IAC, et al., 139 SCRA 238). It
must be established by clear, positive and convincing evidence. This was
not done in the present case.
A no less important consideration is the circumstance that the treasury warrants in
question are not negotiable instruments. Clearly stamped on their face is the
word "non-negotiable." Moreover, and this is of equal significance, it is indicated
that they are payable from a particular fund, to wit, Fund 501.
The following sections of the Negotiable Instruments Law, especially the
underscored parts, are pertinent:
Sec. 1. — Form of negotiable instruments. — An instrument to be
negotiable must conform to the following requirements:
 (a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain
in money;
(c) Must be payable on demand, or at a fixed or determinable future
time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named
or otherwise indicated therein with reasonable certainty.
xxx xxx xxx
Sec. 3. When promise is unconditional. — An unqualified order or promise
to pay is unconditional within the meaning of this Act though coupled
with —
(a) An indication of a particular fund out of which reimbursement is to be
made or a particular account to be debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument
judgment.
But an order or promise to pay out of a particular fund is not
unconditional.
The indication of Fund 501 as the source of the payment to be made on the
treasury warrants makes the order or promise to pay "not unconditional" and the
warrants themselves non-negotiable. There should be no question that the
exception on Section 3 of the Negotiable Instruments Law is applicable in the
case at bar. This conclusion conforms to Abubakar vs. Auditor General11 where
the Court held:
The petitioner argues that he is a holder in good faith and for value of a
negotiable instrument and is entitled to the rights and privileges of a
holder in due course, free from defenses. But this treasury warrant is not
within the scope of the negotiable instrument law. For one thing, the
document bearing on its face the words "payable from the
appropriation for food administration, is actually an Order for payment
out of "a particular fund," and is not unconditional and does not fulfill one
of the essential requirements of a negotiable instrument (Sec. 3 last
sentence and section [1(b)] of the Negotiable Instruments Law).
Metrobank cannot contend that by indorsing the warrants in general, Golden
Savings assumed that they were "genuine and in all respects what they purport to
be," in accordance with Section 66 of the Negotiable Instruments Law. The simple
reason is that this law is not applicable to the non-negotiable treasury warrants.
Page 11 of 44
The indorsement was made by Gloria Castillo not for the purpose of
guaranteeing the genuineness of the warrants but merely to deposit them with
Metrobank for clearing. It was in fact Metrobank that made the guarantee when
it stamped on the back of the warrants: "All prior indorsement and/or lack of
endorsements guaranteed, Metropolitan Bank & Trust Co., Calapan Branch."
The petitioner lays heavy stress on Jai Alai Corporation v. Bank of the Philippine
Islands,12 but we feel this case is inapplicable to the present
controversy.1âwphi1 That case involved checks whereas this case involves
treasury warrants. Golden Savings never represented that the warrants were
negotiable but signed them only for the purpose of depositing them for
clearance. Also, the fact of forgery was proved in that case but not in the case
before us. Finally, the Court found the Jai Alai Corporation negligent in accepting
the checks without question from one Antonio Ramirez notwithstanding that the
payee was the Inter-Island Gas Services, Inc. and it did not appear that he was
authorized to indorse it. No similar negligence can be imputed to Golden
Savings.
We find the challenged decision to be basically correct. However, we will have
to amend it insofar as it directs the petitioner to credit Golden Savings with the full
amount of the treasury checks deposited to its account.
The total value of the 32 treasury warrants dishonored was P1,754,089.00, from
which Gomez was allowed to withdraw P1,167,500.00 before Golden Savings was
notified of the dishonor. The amount he has withdrawn must be charged not to
Golden Savings but to Metrobank, which must bear the consequences of its own
negligence. But the balance of P586,589.00 should be debited to Golden
Savings, as obviously Gomez can no longer be permitted to withdraw this
amount from his deposit because of the dishonor of the warrants. Gomez has in
fact disappeared. To also credit the balance to Golden Savings would unduly
enrich it at the expense of Metrobank, let alone the fact that it has already been
informed of the dishonor of the treasury warrants.
WHEREFORE, the challenged decision is AFFIRMED, with the modification that
Paragraph 3 of the dispositive portion of the judgment of the lower court shall be
reworded as follows:
3. Debiting Savings Account No. 2498 in the sum of P586,589.00 only and
thereafter allowing defendant Golden Savings & Loan Association, Inc.
to withdraw the amount outstanding thereon, if any, after the debit.
SO ORDERED.
 METROPOLITAN BANK V. CA
194 SCRA 169
FACTS:
Gomez opened an account with Golden Savings bank and deposited 38
treasury warrants. All these warrants were indorsed by the cashier of
Golden Savings, and deposited it to the savings account in a Metrobank
branch. They were sent later on for clearing by the branch office to the
principal office of Metrobank, which forwarded them to the Bureau of
Treasury for special clearing. On persistent inquiries on whether the
warrants have been cleared, the branch manager allowed withdrawal of the
warrants, only to find out later on that the treasury warrants have been
dishonored.
HELD:
The treasury warrants were not negotiable instruments. Clearly, it is
indicated that it was non-negotiable and of equal significance is the
indication that they are payable from a particular fund, Fund 501. This
indication as the source of payment to be made on the treasury warrant
makes the promise to pay conditional and the warrants themselves non-
negotiable.
Metrobank then cannot contend that by indorsing the warrants in general, GS
assumed that they were genuine and in all respects what they purport it to be, in
accordance to Section 66 of the NIL. The simple reason is that
the law isn’t applicable to the non-negotiable treasury warrants. The
indorsement was made for the purpose of merely depositing them with
Metrobank for clearing. It was in fact Metrobank which stamped on the
back of the warrants: “All prior indorsements and/or lack of endorsements
guaranteed…”
Page 12 of 44
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-2516 September 25, 1950
ANG TEK LIAN, petitioner,
vs.
THE COURT OF APPEALS, respondent.
Laurel, Sabido, Almario and Laurel for petitioner.
Office of the Solicitor General Felix Bautista Angelo and Solicitor Manuel
Tomacruz for respondent.
BENGZON, J.:
For having issued a rubber check, Ang Tek Lian was convicted of estafa in the
Court of First Instance of Manila. The Court of Appeals affirmed the verdict.
It appears that, knowing he had no funds therefor, Ang Tek Lian drew on
Saturday, November 16, 1946, the check Exhibits A upon the China Banking
Corporation for the sum of P4,000, payable to the order of "cash". He delivered it
to Lee Hua Hong in exchange for money which the latter handed in act. On
November 18, 1946, the next business day, the check was presented by Lee Hua
Hong to the drawee bank for payment, but it was dishonored for insufficiency of
funds, the balance of the deposit of Ang Tek Lian on both dates being P335 only.
The Court of Appeals believed the version of Lee Huan Hong who testified that
"on November 16, 1946, appellant went to his (complainant's) office, at 1217
Herran, Paco, Manila, and asked him to exchange Exhibit A — which he
(appellant) then brought with him — with cash alleging that he needed badly
the sum of P4,000 represented by the check, but could not withdraw it from the
bank, it being then already closed; that in view of this request and relying upon
appellant's assurance that he had sufficient funds in the blank to meet Exhibit A,
and because they used to borrow money from each other, even before the war,
and appellant owns a hotel and restaurant known as the North Bay Hotel, said
complainant delivered to him, on the same date, the sum of P4,000 in cash; that
despite repeated efforts to notify him that the check had been dishonored by
the bank, appellant could not be located any-where, until he was summoned in
the City Fiscal's Office in view of the complaint for estafa filed in connection
therewith; and that appellant has not paid as yet the amount of the check, or
any part thereof."
Inasmuch as the findings of fact of the Court of Appeals are final, the only
question of law for decision is whether under the facts found, estafa had been
accomplished.
Article 315, paragraph (d), subsection 2 of the Revised Penal Code, punishes
swindling committed "By post dating a check, or issuing such check in payment
of an obligation the offender knowing that at the time he had no funds in the
bank, or the funds deposited by him in the bank were not sufficient to cover the
amount of the check, and without informing the payee of such circumstances".
We believe that under this provision of law Ang Tek Lian was properly held liable.
In this connection, it must be stated that, as explained in People vs.
Fernandez (59 Phil., 615), estafa is committed by issuing either a postdated check
or an ordinary check to accomplish the deceit.
It is argued, however, that as the check had been made payable to "cash" and
had not been endorsed by Ang Tek Lian, the defendant is not guilty of the
offense charged. Based on the proposition that "by uniform practice of all banks
in the Philippines a check so drawn is invariably dishonored," the following line of
reasoning is advanced in support of the argument:
. . . When, therefore, he (the offended party ) accepted the check
(Exhibit A) from the appellant, he did so with full knowledge that it would
be dishonored upon presentment. In that sense, the appellant could not
be said to have acted fraudulently because the complainant, in so
accepting the check as it was drawn, must be considered, by every
rational consideration, to have done so fully aware of the risk he was
running thereby." (Brief for the appellant, p. 11.)
We are not aware of the uniformity of such practice. Instances have
undoubtedly occurred wherein the Bank required the indorsement of the drawer
before honoring a check payable to "cash." But cases there are too, where no
such requirement had been made . It depends upon the circumstances of each
transaction.
Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to the
order of "cash" is a check payable to bearer, and the bank may pay it to the
person presenting it for payment without the drawer's indorsement.
A check payable to the order of cash is a bearer instrument.
Bacal vs. National City Bank of New York (1933), 146 Misc., 732; 262 N. Y.
S., 839; Cleary vs. De Beck Plate Glass Co. (1907), 54 Misc., 537; 104 N. Y.
S., 831; Massachusetts Bonding & Insurance Co. vs. Pittsburgh Pipe &
Supply Co. (Tex. Civ. App., 1939), 135 S. W. (2d), 818. See also H. Cook &
Son vs. Moody (1916), 17 Ga. App., 465; 87 S. E., 713.
Page 13 of 44
Where a check is made payable to the order of "cash", the word cash
"does not purport to be the name of any person", and hence the
instrument is payable to bearer. The drawee bank need not obtain any
indorsement of the check, but may pay it to the person presenting it
without any indorsement. . . . (Zollmann, Banks and Banking, Permanent
Edition, Vol. 6, p. 494.)
Of course, if the bank is not sure of the bearer's identity or financial solvency, it
has the right to demand identification and /or assurance against possible
complications, — for instance, (a) forgery of drawer's signature, (b) loss of the
check by the rightful owner, (c) raising of the amount payable, etc. The bank
may therefore require, for its protection, that the indorsement of the drawer — or
of some other person known to it — be obtained. But where the Bank is satisfied
of the identity and /or the economic standing of the bearer who tenders the
check for collection, it will pay the instrument without further question; and it
would incur no liability to the drawer in thus acting.
A check payable to bearer is authority for payment to holder. Where a
check is in the ordinary form, and is payable to bearer, so that no
indorsement is required, a bank, to which it is presented for payment,
need not have the holder identified, and is not negligent in falling to do
so. . . . (Michie on Banks and Banking, Permanent Edition, Vol. 5, p. 343.)
. . . Consequently, a drawee bank to which a bearer check is presented
for payment need not necessarily have the holder identified and
ordinarily may not be charged with negligence in failing to do so. See
Opinions 6C:2 and 6C:3 If the bank has no reasonable cause for
suspecting any irregularity, it will be protected in paying a bearer check,
"no matter what facts unknown to it may have occurred prior to the
presentment." 1 Morse, Banks and Banking, sec. 393.
Although a bank is entitled to pay the amount of a bearer check without
further inquiry, it is entirely reasonable for the bank to insist that holder
give satisfactory proof of his identity. . . . (Paton's Digest, Vol. I, p. 1089.)
Anyway, it is significant, and conclusive, that the form of the check Exhibit A was
totally unconnected with its dishonor. The Court of Appeals declared that it was
returned unsatisfied because the drawer had insufficient funds— not because
the drawer's indorsement was lacking.
Wherefore, there being no question as to the correctness of the penalty imposed
on the appellant, the writ of certiorari is denied and the decision of the Court of
Appeals is hereby affirmed, with costs.
 Ang Tek Lian vs. Court of Appeals
L-2516 September, 1950
Bengzon, J.:
Facts:
Ang Tek Lian knowing that he had no funds therefor, drew a check upon
China Banking Corporation payable to the order of “cash”. He delivered it toLee
Hua Hong in exchange for money. The check was presented by Lee Hua hong to
the drawee bank for payment, but it w3as dishonored for insufficiency of funds.
With this, Ang Tek Lian was convicted of estafa.
Issue:
Whether or not the check issued by Ang Tek Lian that is payable to the
order to “cash” and not have been indorsed by Ang Tek Lian, making him not
guilty for the crime of estafa.
Held:
No.Under Sec. 9 of NIL 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. However, if the bank is not sure of
the bearer’s identity or financial solvency, it has the right to demand
identification or assurance against possible complication, such as forgery of
drawer’s signature, loss of the check by the rightful owner, raising of the amount
payable, etc. But where the bank is satisfied of the identity or economic standing
of the bearer who tenders the check for collection, it will pay the instrument
without further question; and it would incur no liability to the drawer in thus
acting.
Page 14 of 44
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-18103 June 8, 1922
PHILIPPINE NATIONAL BANK, plaintiff-appellee,
vs.
MANILA OIL REFINING & BY-PRODUCTS COMPANY, INC., defendant-appellant.
Antonio Gonzalez for appellant.
Roman J. Lacson for appellee.
Hartigan and Welch; Fisher and De Witt; Perkins and Kincaid; Gibbs, Mc Donough
and Johnson; Julian Wolfson; Ross and Lawrence; Francis B. Mahoney, and Jose
A. Espiritu, amici curiae.
MALCOLM, J.:
The question of first impression raised in this case concerns the validity in this
jurisdiction of a provision in a promissory note whereby in case the same is not
paid at maturity, the maker authorizes any attorney to appear and confess
judgment thereon for the principal amount, with interest, costs, and attorney's
fees, and waives all errors, rights to inquisition, and appeal, and all property
exceptions.
On May 8, 1920, the manager and the treasurer of the Manila Oil Refining & By-
Products Company, Inc., executed and delivered to the Philippine National Bank,
a written instrument reading as follows:
RENEWAL.
P61,000.00
MANILA, P.I., May 8, 1920.
On demand after date we promise to pay to the order of the
Philippine National Bank sixty-one thousand only pesos at
Philippine National Bank, Manila, P.I.
Without defalcation, value received; and to hereby authorize
any attorney in the Philippine Islands, in case this note be not
paid at maturity, to appear in my name and confess judgment
for the above sum with interest, cost of suit and attorney's fees of
ten (10) per cent for collection, a release of all errors and waiver
of all rights to inquisition and appeal, and to the benefit of all
laws exempting property, real or personal, from levy or sale.
Value received. No. ____ Due ____
 MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
(Sgd.) VICENTE SOTELO,
Manager.
MANILA OIL REFINING & BY-PRODUCTS CO., INC.,
(Sgd.) RAFAEL LOPEZ,
Treasurer
The Manila Oil Refining and By-Products Company, Inc. failed to pay the
promissory note on demand. The Philippine National Bank brought action in the
Court of First Instance of Manila, to recover P61,000, the amount of the note,
together with interest and costs. Mr. Elias N. Rector, an attorney associated with
the Philippine National Bank, entered his appearance in representation of the
defendant, and filed a motion confessing judgment. The defendant, however, in
a sworn declaration, objected strongly to the unsolicited representation of
attorney Recto. Later, attorney Antonio Gonzalez appeared for the defendant
and filed a demurrer, and when this was overruled, presented an answer. The trial
judge rendered judgment on the motion of attorney Recto in the terms of the
complaint.
The foregoing facts, and appellant's three assignments of error, raise squarely the
question which was suggested in the beginning of this opinion. In view of the
importance of the subject to the business community, the advice of prominent
attorneys-at-law with banking connections, was solicited. These members of the
bar responded promptly to the request of the court, and their memoranda have
proved highly useful in the solution of the question. It is to the credit of the bar
that although the sanction of judgement notes in the Philippines might prove of
immediate value to clients, every one of the attorneys has looked upon the
matter in a big way, with the result that out of their independent investigations
has come a practically unanimous protest against the recognition in this
jurisdiction of judgment notes.1
Neither the Code of Civil Procedure nor any other remedial statute expressly or
tacitly recognizes a confession of judgment commonly called a judgment note.
On the contrary, the provisions of the Code of Civil Procedure, in relation to
constitutional safeguards relating to the right to take a man's property only after
a day in court and after due process of law, contemplate that all defendants
shall have an opportunity to be heard. Further, the provisions of the Code of Civil
Procedure pertaining to counter claims argue against judgment notes, especially
as the Code provides that in case the defendant or his assignee omits to set up a
counterclaim, he cannot afterwards maintain an action against the plaintiff
therefor. (Secs. 95, 96, 97.) At least one provision of the substantive law, namely,
that the validity and fulfillment of contracts cannot be left to the will of one of the
Page 15 of 44
contracting parties (Civil Code, art. 1356), constitutes another indication of
fundamental legal purposes.
The attorney for the appellee contends that the Negotiable Instruments Law (Act
No. 2031) expressly recognizes judgment notes, and that they are enforcible
under the regular procedure. The Negotiable Instruments Law, in section 5,
provides that "The negotiable character of an instrument otherwise negotiable is
not affected by a provision which ". . . (b) Authorizes a confession of judgment if
the instrument be not paid at maturity." We do not believe, however, that this
provision of law can be taken to sanction judgments by confession, because it is
a portion of a uniform law which merely provides that, in jurisdiction where
judgment notes are recognized, such clauses shall not affect the negotiable
character of the instrument. Moreover, the same section of the Negotiable
Instruments. Law concludes with these words: "But nothing in this section shall
validate any provision or stipulation otherwise illegal."
The court is thus put in the position of having to determine the validity in the
absence of statute of a provision in a note authorizing an attorney to appear
and confess judgment against the maker. This situation, in reality, has its
advantages for it permits us to reach that solution which is best grounded in the
solid principles of the law, and which will best advance the public interest.
The practice of entering judgments in debt on warrants of attorney is of ancient
origin. In the course of time a warrant of attorney to confess judgement became
a familiar common law security. At common law, there were two kinds of
judgments by confession; the one a judgment by cognovit actionem, and the
other by confession relicta verificatione. A number of jurisdictions in the United
States have accepted the common law view of judgments by confession, while
still other jurisdictions have refused to sanction them. In some States, statutes
have been passed which have either expressly authorized confession of
judgment on warrant of attorney, without antecedent process, or have
forbidden judgments of this character. In the absence of statute, there is a
conflict of authority as to the validity of a warrant of attorney for the confession of
judgement. The weight of opinion is that, unless authorized by statute, warrants of
attorney to confess judgment are void, as against public policy.
Possibly the leading case on the subject is First National Bank of Kansas City vs.
White ([1909], 220 Mo., 717; 16 Ann. Cas., 889; 120 S. W., 36; 132 Am. St. Rep., 612).
The record in this case discloses that on October 4, 1990, the defendant
executed and delivered to the plaintiff an obligation in which the defendant
authorized any attorney-at-law to appear for him in an action on the note at any
time after the note became due in any court of record in the State of Missouri, or
elsewhere, to waive the issuing and service of process, and to confess judgement
in favor of the First National Bank of Kansas City for the amount that might then
be due thereon, with interest at the rate therein mentioned and the costs of suit,
together with an attorney's fee of 10 per cent and also to waive and release all
errors in said proceedings and judgment, and all proceedings, appeals, or writs of
error thereon. Plaintiff filed a petition in the Circuit Court to which was attached
the above-mentioned instrument. An attorney named Denham appeared
pursuant to the authority given by the note sued on, entered the appearance of
the defendant, and consented that judgement be rendered in favor of the
plaintiff as prayed in the petition. After the Circuit Court had entered a
judgement, the defendants, through counsel, appeared specially and filed a
motion to set it aside. The Supreme Court of Missouri, speaking through Mr. Justice
Graves, in part said:
But going beyond the mere technical question in our preceding
paragraph discussed, we come to a question urged which goes to the
very root of this case, and whilst new and novel in this state, we do not
feel that the case should be disposed of without discussing and passing
upon that question.
xxx xxx xxx
And if this instrument be considered as security for a debt, as it was by
the common law, it has never so found recognition in this state. The
policy of our law has been against such hidden securities for debt. Our
Recorder's Act is such that instruments intended as security for debt
should find a place in the public records, and if not, they have often
been viewed with suspicion, and their bona fides often questioned.
Nor do we thing that the policy of our law is such as to thus place a
debtor in the absolute power of his creditor. The field for fraud is too far
enlarged by such an instrument. Oppression and tyranny would follow
the footsteps of such a diversion in the way of security for debt. Such
instruments procured by duress could shortly be placed in judgment in a
foreign court and much distress result therefrom.
Again, under the law the right to appeal to this court or some other
appellate court is granted to all persons against whom an adverse
judgment is rendered, and this statutory right is by the instrument stricken
down. True it is that such right is not claimed in this case, but it is a part of
the bond and we hardly know why this pound of flesh has not been
demanded. Courts guard with jealous eye any contract innovations
upon their jurisdiction. The instrument before us, considered in the light of
a contract, actually reduces the courts to mere clerks to enter and
record the judgment called for therein. By our statute (Rev. St. 1899, sec.
Page 16 of 44
645) a party to a written instrument of this character has the right to show
a failure of consideration, but this right is brushed to the wind by this
instrument and the jurisdiction of the court to hear that controversy is by
the whose object is to oust the jurisdiction of the courts are contrary to
public policy and will not be enforced. Thus it is held that any stipulation
between parties to a contract distinguishing between the different courts
of the country is contrary to public policy. The principle has also been
applied to a stipulation in a contract that a party who breaks it may not
be sued, to an agreement designating a person to be sued for its breach
who is nowise liable and prohibiting action against any but him, to a
provision in a lease that the landlord shall have the right to take
immediate judgment against the tenant in case of a default on his part,
without giving the notice and demand for possession and filing the
complaint required by statute, to a by-law of a benefit association that
the decisions of its officers on claim shall be final and conclusive, and to
many other agreements of a similar tendency. In some courts, any
agreement as to the time for suing different from time allowed by the
statute of limitations within which suit shall be brought or the right to sue
be barred is held void.
xxx xxx xxx
We shall not pursue this question further. This contract, in so far as it goes
beyond the usual provisions of a note, is void as against the public policy
of the state, as such public policy is found expressed in our laws and
decisions. Such agreements are iniquitous to the uttermost and should be
promptly condemned by the courts, until such time as they may receive
express statutory recognition, as they have in some states.
xxx xxx xxx
From what has been said, it follows that the Circuit Court never had
jurisdiction of the defendant, and the judgement is reversed.
The case of Farquhar and Co. vs. Dehaven ([1912], 70 W. Va., 738; 40 L.R.A. [N.
S.], 956; 75 S.E., 65; Ann. Cas. [1914-A], 640), is another well-considered authority.
The notes referred to in the record contained waiver of presentment and protest,
homestead and exemption rights real and personal, and other rights, and also
the following material provision: "And we do hereby empower and authorize the
said A. B. Farquhar Co. Limited, or agent, or any prothonotary or attorney of any
Court of Record to appear for us and in our name to confess judgement against
us and in favor of said A. B. Farquhar Co., Limited, for the above named sum with
costs of suit and release of all errors and without stay of execution after the
maturity of this note." The Supreme Court of West Virginia, on consideration of the
validity of the judgment note above described, speaking through Mr. Justice
Miller, in part said:
As both sides agree the question presented is one of first impression in this
State. We have no statutes, as has Pennsylvania and many other states,
regulating the subject. In the decision we are called upon to render, we
must have recourse to the rules and principles of the common law, in
force here, and to our statute law, applicable, and to such judicial
decisions and practices in Virginia, in force at the time of the separation,
as are properly binding on us. It is pertinent to remark in this connection,
that after nearly fifty years of judicial history this question, strong
evidence, we think, that such notes, if at all, have never been in very
general use in this commonwealth. And in most states where they are
current the use of them has grown up under statutes authorizing them,
and regulating the practice of employing them in commercial
transactions.
xxx xxx xxx
It is contended, however, that the old legal maxim, qui facit per alium,
facit per se, is as applicable here as in other cases. We do not think so.
Strong reasons exist, as we have shown, for denying its application, when
holders of contracts of this character seek the aid of the courts and of
their execution process to enforce them, defendant having had no day
in court or opportunity to be heard. We need not say in this case that a
debtor may not, by proper power of attorney duly executed, authorize
another to appear in court, and by proper endorsement upon the writ
waive service of process, and confess judgement. But we do not wish to
be understood as approving or intending to countenance the practice
employing in this state commercial paper of the character here
involved. Such paper has heretofore had little if any currency here. If the
practice is adopted into this state it ought to be, we think, by act of the
Legislature, with all proper safeguards thrown around it, to prevent fraud
and imposition. The policy of our law is, that no man shall suffer judgment
at the hands of our courts without proper process and a day to be
heard. To give currency to such paper by judicial pronouncement would
be to open the door to fraud and imposition, and to subject the people
to wrongs and injuries not heretofore contemplated. This we are unwilling
to do.
A case typical of those authorities which lend support to judgment notes is First
National Bank of Las Cruces vs. Baker ([1919], 180 Pac., 291). The Supreme Court
of New Mexico, in a per curiam decision, in part, said:
Page 17 of 44
In some of the states the judgments upon warrants of attorney are
condemned as being against public policy. (Farquhar and Co. vs.
Dahaven, 70 W. Va., 738; 75 S.E., 65; 40 L.R.A. [N. S.], 956; Ann. Cas. [1914
A]. 640, and First National Bank of Kansas City vs. White, 220 Mo., 717; 120
S. W., 36; 132 Am. St. Rep., 612; 16 Ann. Cas., 889, are examples of such
holding.) By just what course of reasoning it can be said by the courts
that such judgments are against public policy we are unable to
understand. It was a practice from time immemorial at common law,
and the common law comes down to us sanctioned as justified by the
reason and experience of English-speaking peoples. If conditions have
arisen in this country which make the application of the common law
undesirable, it is for the Legislature to so announce, and to prohibit the
taking of judgments can be declared as against the public policy of the
state. We are aware that the argument against them is that they enable
the unconscionable creditor to take advantage of the necessities of the
poor debtor and cut him off from his ordinary day in court. On the other
hand, it may be said in their favor that it frequently enables a debtor to
obtain money which he could by no possibility otherwise obtain. It
strengthens his credit, and may be most highly beneficial to him at times.
In some of the states there judgments have been condemned by statute
and of course in that case are not allowed.
Our conclusion in this case is that a warrant of attorney given as security
to a creditor accompanying a promissory note confers a valid power,
and authorizes a confession of judgment in any court of competent
jurisdiction in an action to be brought upon said note; that our cognovit
statute does not cover the same field as that occupied by the common-
law practice of taking judgments upon warrant of attorney, and does
not impliedly or otherwise abrogate such practice; and that the practice
of taking judgments upon warrants of attorney as it was pursued in this
case is not against any public policy of the state, as declared by its laws.
With reference to the conclusiveness of the decisions here mentioned, it may be
said that they are based on the practice of the English-American common law,
and that the doctrines of the common law are binding upon Philippine courts
only in so far as they are founded on sound principles applicable to local
conditions.
Judgments by confession as appeared at common law were considered an
amicable, easy, and cheap way to settle and secure debts. They are a quick
remedy and serve to save the court's time. They also save the time and money of
the litigants and the government the expenses that a long litigation entails. In one
sense, instruments of this character may be considered as special agreements,
with power to enter up judgments on them, binding the parties to the result as
they themselves viewed it.
On the other hand, are disadvantages to the commercial world which outweigh
the considerations just mentioned. Such warrants of attorney are void as against
public policy, because they enlarge the field for fraud, because under these
instruments the promissor bargains away his right to a day in court, and because
the effect of the instrument is to strike down the right of appeal accorded by
statute. The recognition of such a form of obligation would bring about a
complete reorganization of commercial customs and practices, with reference
to short-term obligations. It can readily be seen that judgement notes, instead of
resulting to the advantage of commercial life in the Philippines might be the
source of abuse and oppression, and make the courts involuntary parties thereto.
If the bank has a meritorious case, the judgement is ultimately certain in the
courts.
We are of the opinion that warrants of attorney to confess judgment are not
authorized nor contemplated by our law. We are further of the opinion that
provisions in notes authorizing attorneys to appear and confess judgments
against makers should not be recognized in this jurisdiction by implication and
should only be considered as valid when given express legislative sanction.
The judgment appealed from is set aside, and the case is remanded to the lower
court for further proceedings in accordance with this decision. Without special
finding as to costs in this instance, it is so ordered.
Araullo, C.J., Avanceña, Villamor, Ostrand, Johns and Romualdez, JJ., concur.
NATIONAL BANK V. MANILA OIL REFINING
43 PHIL 444
FACTS:
Manila Oil has issued a promissory note in favor of National Bank which
included a provision on a confession of judgment in case of failure to pay
obligation. Indeed, Manila Oil has failed to pay on demand. This prompted the
bank to file a case in court, wherein an attorney associated with them entered
his appearance for the defendant. To this the defendant objected.
HELD:
Page 18 of 44
Warrants of attorney to confess judgment aren’t authorized nor
contemplated by our law. Provisions in notes authorizing attorneys to
appear and confess judgments against makers should not be recognized in our
jurisdiction by implication and should only be considered as valid when given
express legislative sanction.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 107898 December 19, 1995
MANUEL LIM and ROSITA LIM, petitioners,
vs.
COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents.
BELLOSILLO, J.:
MANUEL LIM and ROSITA LIM, spouses, were charged before the Regional Trial
Court of Malabon with estafa on three (3) counts under Art. 315, par. 2 (d), of The
Revised Penal Code, docketed as Crim. Cases Nos. 1696-MN to 1698-MN. The
Informations substantially alleged that Manuel and Rosita, conspiring together,
purchased goods from Linton Commercial Company, Inc. (LINTON), and with
deceit issued seven Consolidated Bank and Trust Company (SOLIDBANK) checks
simultaneously with the delivery as payment therefor. When presented to the
drawee bank for payment the checks were dishonored as payment on the
checks had been stopped and/or for insufficiency of funds to cover the amounts.
Despite repeated notice and demand the Lim spouses failed and refused to pay
the checks or the value of the goods.
On the basis of the same checks, Manuel and Rosita Lim were also charged with
seven (7) counts of violation of B.P. Blg. 22, otherwise known as the Bouncing
Checks Law, docketed as Crim. Cases Nos. 1699-MN to 1705-MN. In substance,
the Informations alleged that the Lims issued the checks with knowledge that
they did not have sufficient funds or credit with the drawee bank for payment in
full of such checks upon presentment. When presented for payment within ninety
(90) days from date thereof the checks were dishonored by the drawee bank for
insufficiency of funds. Despite receipt of notices of such dishonor the Lims failed
to pay the amounts of the checks or to make arrangements for full payment
within five (5) banking days.
Manuel Lim and Rosita Lim are the president and treasurer, respectively, of Rigi
Bilt Industries, Inc. (RIGI). RIGI had been transacting business with LINTON for years,
the latter supplying the former with steel plates, steel bars, flat bars and purlin
sticks which it uses in the fabrication, installation and building of steel structures.
As officers of RIGI the Lim spouses were allowed 30, 60 and sometimes even up to
90 days credit.
On 27 May 1983 the Lims ordered 100 pieces of mild steel plates worth P51,815.00
from LINTON which were delivered on the same day at their place of business at
666 7th Avenue, 8th Street, Kalookan City. To pay LINTON for the delivery the Lims
issued SOLIDBANK Check No. 027700 postdated 3 September 1983 in the amount
of P51,800.00.1
On 30 May 1983 the Lims ordered another 65 pieces of mild steel plates worth
P63,455.00 from LINTON which were delivered at their place of business on the
same day. They issued as payment SOLIDBANK Check No. 027699 in the amount
of P63,455.00 postdated 20 August 1983.2
The Lim spouses also ordered 2,600 "Z" purlins worth P241,800.00 which were
delivered to them on various dates, to wit: 15 and 22 April 1983; 11, 14, 20, 23, 25,
28 and 30 May 1983; and, 2 and 9 June 1983. To pay for the deliveries, they issued
seven SOLIDBANK checks, five of which were —
Check No. Date of Issue Amount
027683 16 July 1983 P27,900.003
027684 23 July 1983 P27,900.004
027719 6 Aug. 1983 P32,550.005
027720 13 Aug. 1983 P27,900.006
027721 27 Aug. 1983 P37,200.007
William Yu Bin, Vice President and Sales Manager of LINTON, testified that when
those seven (7) checks were deposited with the Rizal Commercial Banking
Corporation they were dishonored for "insufficiency of funds" with the additional
notation "payment stopped" stamped thereon. Despite demand Manuel and
Rosita refused to make good the checks or pay the value of the deliveries.
Salvador Alfonso, signature verifier of SOLIDBANK, Grace Park Branch, Kalookan
City, where the Lim spouses maintained an account, testified on the following
transactions with respect to the seven (7) checks:
CHECK NO. DATE PRESENTED REASON FOR DISHONOR
027683 22 July 1983 Payment Stopped (PS)8
027684 23 July 1983 PS and Drawn Against
Insufficient Fund (DAIF)9
027699 24 Aug. 1983 PS and DAIF10
Page 19 of 44
027700 5 Sept. 1983 PS and DAIF11
027719 9 Aug. 1983 DAIF 12
027720 16 Aug. 1983 PS and DAIF13
027721 30 Aug. 1983 PS and DAIF14
Manuel Lim admitted having issued the seven (7) checks in question to pay for
deliveries made by LINTON but denied that his company's account had
insufficient funds to cover the amounts of the checks. He presented the bank
ledger showing a balance of P65,752.75. Also, he claimed that he ordered
SOLIDBANK to stop payment because the supplies delivered by LINTON were not
in accordance with the specifications in the purchase orders.
Rosita Lim was not presented to testify because her statements would only be
corroborative.
On the basis of the evidence thus presented the trial court held both accused
guilty of estafa and violation of B.P. Blg. 22 in its decision dated 25 January 1989.
In Crim. Case No. 1696-MN they were sentenced to an indeterminate penalty of
six (6) years and one (1) day of prision mayor as minimum to twelve (12) years
and one (1) day of reclusion temporal as maximum plus one (1) year for each
additional P10,000.00 with all the accessory penalties provided for by law, and to
pay the costs. They were also ordered to indemnify LINTON in the amount of
P241,800.00. Similarly sentences were imposed in Crim. Cases Nos. 1697-MN and
1698-MN except as to the indemnities awarded, which were P63,455.00 and
P51,800.00, respectively.
In Crim. Case No. 1699-MN the trial court sentenced both accused to a straight
penalty of one (1) year imprisonment with all the accessory penalties provided
for by law and to pay the costs. In addition, they were ordered to indemnify
LINTON in the amount of P27,900.00. Again, similar sentences were imposed in
Crim. Cases Nos. 1700-MN to 1705-MN except for the indemnities awarded, which
were P32,550.00, P27,900.00, P27,900.00, P63,455.00, P51,800.00 and P37,200.00
respectively.15
On appeal, the accused assailed the decision as they imputed error to the trial
court as follows: (a) the regional Trial Court of malabon had no jurisdiction over
the cases because the offenses charged ere committed outside its territory; (b)
they could not be held liable for estafa because the seven (7) checks were
issued by them several weeks after the deliveries of the goods; and, (c) neither
could they be held liable for violating B.P. Blg. 22 as they ordered payment of the
checks to be stopped because the goods delivered were not those specified by
them, besides they had sufficient funds to pay the checks.
In the decision of 18 September 199216 respondent Court of Appeals acquitted
accused-appellants of estafa on the ground that indeed the checks were not
made in payment of an obligation contracted at the time of their issuance.
However it affirmed the finding of the trial court that they were guilty of having
violated B.P. Blg. 22.17 On 6 November 1992 their motion for reconsideration was
denied.18
In the case at bench petitioners maintain that the prosecution failed to prove
that any of the essential elements of the crime punishable under B.P. Blg. 22 was
committed within the jurisdiction of the Regional Trial Court of Malabon. They
claim that what was proved was that all the elements of the offense were
committed in Kalookan City. The checks were issued at their place of business,
received by a collector of LINTON, and dishonored by the drawee bank, all in
Kalookan City. Furthermore, no evidence whatsoever supports the proposition
that they knew that their checks were insufficiently funded. In fact, some of the
checks were funded at the time of presentment but dishonored nonetheless
upon their instruction to the bank to stop payment. In fine, considering that the
checks were all issued, delivered, and dishonored in Kalookan City, the trial court
of Malabon exceeded its jurisdiction when it tried the case and rendered
judgment thereon.
The petition has no merit. Section 1, par. 1, of B.P. Blg. 22 punishes "[a]ny person
who makes or draws and issues any check to apply on account or for value,
knowing at the time of issue that he does not have sufficient funds in or credit
with the drawee bank for the payment of such check in full upon its presentment,
which check is subsequently dishonored by the drawee bank for insufficiency of
funds or credit or would have been dishonored for the same reason had not the
drawer, without any valid reason, ordered the bank to stop payment . . ." The
gravamen of the offense is knowingly issuing a worthless check.19 Thus, a
fundamental element is knowledge on the part of the drawer of the insufficiency
of his funds in20 or credit with the drawee bank for the payment of such check in
full upon presentment. Another essential element is subsequent dishonor of the
check by the drawee bank for insufficiency of funds or credit or would have
been dishonored for the same reason had not the drawer, without any valid
reason, ordered the bank to stop payment.21
It is settled that venue in criminal cases is a vital ingredient of jurisdiction.22 Section
14, par. (a), Rule 110, of the Revised Rules of Court, which has been carried over
in Sec. 15, par. (a), Rule 110 of the 1985 Rules on Criminal Procedure, specifically
provides:
Sec. 14. Place where action is to be instituted. — (a) In all
criminal prosecutions the action shall be instituted and tried in
the court of the municipality or province wherein the offense
Page 20 of 44
was committed or anyone of the essential ingredients thereof
took place.
If all the acts material and essential to the crime and requisite of its
consummation occurred in one municipality or territory, the court therein has the
sole jurisdiction to try the case.23 There are certain crimes in which some acts
material and essential to the crimes and requisite to their consummation occur in
one municipality or territory and some in another, in which event, the court of
either has jurisdiction to try the cases, it being understood that the first court
taking cognizance of the case excludes the other.24 These are the so-called
transitory or continuing crimes under which violation of B.P. Blg. 22 is categorized.
In other words, a person charged with a transitory crime may be validly tried in
any municipality or territory where the offense was in part committed.25
In determining proper venue in these cases, the following acts material and
essential to each crime and requisite to its consummation must be considered:
(a) the seven (7) checks were issued to LINTON at its place of business in Balut,
Navotas; b) they were delivered to LINTON at the same place; (c) they were
dishonored in Kalookan City; and, (d) petitioners had knowledge of the
insufficiency of their funds in SOLIDBANK at the time the checks were issued. Since
there is no dispute that the checks were dishonored in Kalookan City, it is no
longer necessary to discuss where the checks were dishonored.
Under Sec. 191 of the Negotiable Instruments Law the term "issue" means the first
delivery of the instrument complete in form to a person who takes it as a holder.
On the other hand, the term "holder" refers to the payee or indorsee of a bill or
note who is in possession of it or the bearer thereof. In People v. Yabut26 this Court
explained —
. . . The place where the bills were written, signed, or dated does
not necessarily fix or determine the place where they were
executed. What is of decisive importance is the delivery thereof.
The delivery of the instrument is the final act essential to
its consummation as an obligation. An undelivered bill or note is
inoperative. Until delivery, the contract is revocable. And the
issuance as well as the delivery of the check must be to a person
who takes it as a holder, which means "(t)he payee or
indorsee of a bill or note, who is in possession of it, or the bearer
thereof." Delivery of the check signifies transfer of possession,
whether actual or constructive, from one person to another with
intent to transfer titlethereto . . .
Although LINTON sent a collector who received the checks from petitioners at
their place of business in Kalookan City, they were actually issued and delivered
to LINTON at its place of business in Balut, Navotas. The receipt of the checks by
the collector of LINTON is not the issuance and delivery to the payee in
contemplation of law. The collector was not the person who could take the
checks as a holder, i.e., as a payee or indorsee thereof, with the intent to transfer
title thereto. Neither could the collector be deemed an agent of LINTON with
respect to the checks because he was a mere employee. As this Court further
explained in People v. Yabut27 —
Modesto Yambao's receipt of the bad checks from Cecilia Que
Yabut or Geminiano Yabut, Jr., in Caloocan City cannot,
contrary to the holding of the respondent Judges, be licitly taken
as delivery of the checks to the complainant Alicia P. Andan at
Caloocan City to fix the venue there. He did not take delivery of
the checks as holder, i.e., as "payee" or "indorsee." And there
appears to be no contract of agency between Yambao and
Andan so as to bind the latter for the acts of the former. Alicia P.
Andan declared in that sworn testimony before the investigating
fiscal that Yambao is but her "messenger" or "part-time
employee." There was no special fiduciary relationship that
permeated their dealings. For a contract of agency to exist, the
consent of both parties is essential. The principal consents that
the other party, the agent, shall act on his behalf, and the agent
consents so as to act. It must exist as afact. The law makes no
presumption thereof. The person alleging it has the burden of
proof to show, not only the fact of its existence, but also its
nature and extent . . .
Section 2 of B.P. Blg. 22 establishes a prima facie evidence of knowledge of
insufficient funds as follows —
The making, drawing and issuance of a check payment of which
is refused by the bank because of insufficient funds in or credit
with such bank, when presented within ninety (90) days from the
date of the check, shall be prima facie evidence of knowledge
of such insufficiency of funds or credit unless such maker or
drawer pays the holder thereof the amount due thereon, or
makes arrangement for payment in full by the drawee of such
check within five (5) banking days after receiving notice that
such check has not been paid by the drawee.
The prima facie evidence has not been overcome by petitioners in the cases
before us because they did not pay LINTON the amounts due on the checks;
neither did they make arrangements for payment in full by the drawee bank
Page 21 of 44
within five (5) banking days after receiving notices that the checks had not been
paid by the drawee bank. In People v. Grospe28 citing People v. Manzanilla29 we
held that ". . . knowledge on the part of the maker or drawer of the check of the
insufficiency of his funds is by itself a continuing eventuality, whether the accused
be within one territory or another."
Consequently, venue or jurisdiction lies either in the Regional Trial Court of
Kalookan City or Malabon. Moreover, we ruled in the
same Grospe and Manzanilla cases as reiterated in Lim v. Rodrigo30 that venue or
jurisdiction is determined by the allegations in the Information. The Informations in
the cases under consideration allege that the offenses were committed in the
Municipality of Navotas which is controlling and sufficient to vest jurisdiction upon
the Regional Trial Court of Malabon.31
We therefore sustain likewise the conviction of petitioners by the Regional Trial
Court of Malabon for violation of B.P. Blg. 22 thus —
Accused-appellants claim that they ordered payment of the
checks to be stopped because the goods delivered were not
those specified by them. They maintain that they had sufficient
funds to cover the amount of the checks. The records of the
bank, however, reveal otherwise. The two letters (Exhs. 21 and
22) dated July 23, and August 10, 1983 which they claim they
sent to Linton Commercial, complaining against the quality of
the goods delivered by the latter, did not refer to the delivery of
mild steel plates (6mm x 4 x 8) and "Z" purlins (16 x 7 x 2-1/2 mts)
for which the checks in question were issued. Rather, the letters
referred to B.1. Lally columns (Sch. #20), which were the subject
of other purchase orders.
It is true, as accused-appellants point out, that in a case brought
by them against the complainant in the Regional Trial Court of
Kalookan City (Civil Case No. C-10921) the complainant was
held liable for actual damages because of the delivery of goods
of inferior quality (Exh. 23). But the supplies involved in that case
were those of B.I. pipes, while the purchases made by accused-
appellants, for which they issued the checks in question, were
purchases of mild steel plates and "Z" purlins.
Indeed, the only question here is whether accused-appellants
maintained funds sufficient to cover the amounts of their checks
at the time of issuance and presentment of such checks. Section
3 of B.P. Blg. 22 provides that "notwithstanding receipt of an
order to stop payment, the drawee bank shall state in the notice
 of dishonor that there were no sufficient funds in or credit with
such bank for the payment in full of the check, if such be the
fact."
The purpose of this provision is precisely to preclude the maker or
drawer of a worthless check from ordering the payment of the
check to be stopped as a pretext for the lack of sufficient funds
to cover the check.
In the case at bar, the notice of dishonor issued by the drawee
bank, indicates not only that payment of the check was
stopped but also that the reason for such order was that the
maker or drawer did not have sufficient funds with which to
cover the checks. . . . Moreover, the bank ledger of accused-
appellants' account in Consolidated Bank shows that at the time
the checks were presented for encashment, the balance of
accused-appellants' account was inadequate to cover the
amounts of the checks.32 . . .
WHEREFORE, the decision of the Court of Appeals dated 18 September 1992
affirming the conviction of petitioners Manuel Lim and Rosita Lim —
In CA-G.R. CR No. 07277 (RTC Crim. Case No. 1699-MN); CA-G.R.
CR No. 07278 (RTC Crim. Case No. 1700-MN); CA-G.R. CR No.
07279 (RTC Crim. Case No. 1701-MN); CA-G.R. CR No. 07280 (RTC
Crim. Case No. 1702-MN); CA-G.R. CR No. 07281 (RTC Crim. Case
No. 1703-MN); CA-G.R. CA No. 07282 (RTC Crim. Case No. 1704-
MN); and CA-G.R. CR No. 07283 (RTC Crim Case No. 1705-MN),
the Court finds the accused-appellants
MANUEL LIM and ROSITA LIM guilty beyond reasonable doubt of
violation of Batas Pambansa Bilang 22 and are hereby
sentenced to suffer a STRAIGHT PENALTY OF ONE (1) YEAR
IMPRISONMENT in each case, together with all the accessory
penalties provided by law, and to pay the costs.
In CA-G.R. CR No. 07277 (RTC Crim. Case No. 1699-MN), both
accused-appellants are hereby ordered to indemnify the
offended party in the sum of P27,900.00.
In CA-G.R. CR No. 07278 (RTC Crim. Case No. 1700-MN) both
accused-appellants are hereby ordered to indemnify the
offended party in the sum of P32,550.00.
Page 22 of 44
In CA-G.R. CR No. 07278 (RTC Crim. Case No. 1701-MN) both
accused-appellants are hereby ordered to indemnify the
offended party in the sum of P27,900.00.
In CA-G.R. CR No. 07280 (RTC Crim. Case No. 1702-MN) both
accused-appellants are hereby ordered to indemnify the
offended party in the sum of P27,900.00.
In CA-G.R. CR No. 07281 (RTC Crim. Case No. 1703-MN) both
accused are hereby ordered to indemnify the offended party in
the sum of P63,455.00.
In CA-G.R CR No. 07282 (RTC Crim. Case No. 1704-MN) both
accused-appellants are hereby ordered to indemnify the
offended party in the sum of P51,800.00, and
In CA-G.R. CR No. 07283 (RTC Crim. Case No. 1705-MN) both
accused-appellants are hereby ordered to indemnify the
offended party in the sum of P37,200.00 33 —
as well as its resolution of 6 November 1992 denying reconsideration
thereof, is AFFIRMED. Costs against petitioners.
SO ORDERED.
Lim vs. CA
G.R. No. 107898. December 19, 1995
Bellosillo, J.
Manuel and Rosita Lim, spouses, and
president and treasurer respectively of Rigi Bilt Industries, Inc., allegedly issued 7
Solidbank checks as payment for goods purchased from and delivered by Linton
Commercial Company, Inc. When deposited with Rizal Commercial Banking
Corporation, said checks were dishonored for “insufficiency of funds” with the
additional notation “payment stopped” stamped thereon. Despite demand,
spouses Lim refused to make good the checks or pay the value of the deliveries.
The RTC held spouses Lim guilty of estafa and violation of BP22. On appeal, the
CA acquitted accused-appellants of estafa on the ground that the checks were
not made in payment of an obligation contracted at the time of their issuance
but affirmed the finding that they were guilty of having violated B.P. Blg. 22. In the
present case, petitioners maintain that the prosecution failed to prove that any
of the essential elements of the crime punishable under B.P. Blg. 22 was
committed within the jurisdiction of RTC-Malabon claiming that what was proved
was that all the elements of the offense were committed in Kalookan City.
RULING:
Under Sec. 191 NIL, the term “issue” means the first delivery of the instrument
complete in form to a person who takes it as a holder. On the other hand, the
term “holder” refers to the payee or indorsee of a bill or note who is in possession
of it or the bearer thereof. Although LINTON sent a collector who received the
checks from petitioners at their place of business in Kalookan City, they were
actually issued and delivered to LINTON at its place of business in Balut, Navotas.
The receipt of the checks by the collector of LINTON is not the issuance and
delivery to the payee in contemplation of law. The collector was not the person
who could take the checks as a holder, i.e., as a payee or indorsee thereof, with
the intent to transfer title thereto. Neither could the collector be deemed an
agent of LINTON with respect to the checks because he was a mere employee.
Section 2 of B.P. Blg. 22 establishes a prima facie evidence of knowledge of
insufficient funds as follows
The making, drawing and issuance of a check payment of which
is refused by the bank because of insufficient funds in or credit
with such bank, when presented within ninety (90) days from the
date of the check, shall be prima facie evidence of knowledge
of such insufficiency of funds or credit unless such maker or
drawer pays the holder thereof the amount due thereon, or
makes arrangement for payment in full by the drawee of such
check within five (5) banking days after receiving notice that
such check has not been paid by the drawee.
The prima facie evidence has not been overcome by petitioners in the cases
before us because they did not pay LINTON the amounts due on the checks;
neither did they make arrangements for payment in full by the drawee bank
within five (5) banking days after receiving notices that the checks had not been
paid by the drawee bank. In People v. Grospe citing People v. Manzanilla we
held that “. . . knowledge on the part of the maker or drawer of the check of the
insufficiency of his funds is by itself a continuing eventuality, whether the accused
be within one territory or another.” Consequently, venue or jurisdiction lies either
in the RTC of Kalookan City or Malabon. Moreover, we ruled in the
same Grospe and Manzanilla cases as reiterated in Lim v. Rodrigo that venue or
jurisdiction is determined by the allegations in the Information. The Informations in
the cases under consideration allege that the offenses were committed in the
Municipality of Navotas which is controlling and sufficient to vest jurisdiction upon
the Regional Trial Court of Malabon. We therefore sustain likewise the conviction
of petitioners by RTC-Malabon for violation of BP22.
Page 23 of 44
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 111190 June 27, 1995
LORETO D. DE LA VICTORIA, as City Fiscal of Mandaue City and in his personal
capacity as garnishee, petitioner,
vs.
HON. JOSE P. BURGOS, Presiding Judge, RTC, Br. XVII, Cebu City, and RAUL H.
SESBREÑO, respondents.
BELLOSILLO, J.:
RAUL H. SESBREÑO filed a complaint for damages against Assistant City Fiscals
Bienvenido N. Mabanto, Jr., and Dario D. Rama, Jr., before the Regional Trial
Court of Cebu City. After trial judgment was rendered ordering the defendants to
pay P11,000.00 to the plaintiff, private respondent herein. The decision having
become final and executory, on motion of the latter, the trial court ordered its
execution. This order was questioned by the defendants before the Court of
Appeals. However, on 15 January 1992 a writ of execution was issued.
On 4 February 1992 a notice of garnishment was served on petitioner Loreto D.
de la Victoria as City Fiscal of Mandaue City where defendant Mabanto, Jr., was
then detailed. The notice directed petitioner not to disburse, transfer, release or
convey to any other person except to the deputy sheriff concerned the salary
checks or other checks, monies, or cash due or belonging to Mabanto, Jr., under
penalty of law. 1 On 10 March 1992 private respondent filed a motion before the
trial court for examination of the garnishees.
On 25 May 1992 the petition pending before the Court of Appeals was dismissed.
Thus the trial court, finding no more legal obstacle to act on the motion for
examination of the garnishees, directed petitioner on 4 November 1992 to submit
his report showing the amount of the garnished salaries of Mabanto, Jr., within
fifteen (15) days from receipt 2 taking into consideration the provisions of Sec. 12,
pars. (f) and (i), Rule 39 of the Rules of Court.
On 24 November 1992 private respondent filed a motion to require petitioner to
explain why he should not be cited in contempt of court for failing to comply with
the order of 4 November 1992.
On the other hand, on 19 January 1993 petitioner moved to quash the notice of
garnishment claiming that he was not in possession of any money, funds, credit,
property or anything of value belonging to Mabanto, Jr., except his salary and
RATA checks, but that said checks were not yet properties of Mabanto, Jr., until
delivered to him. He further claimed that, as such, they were still public funds
which could not be subject to garnishment.
On 9 March 1993 the trial court denied both motions and ordered petitioner to
immediately comply with its order of 4 November 1992. 3 It opined that the
checks of Mabanto, Jr., had already been released through petitioner by the
Department of Justice duly signed by the officer concerned. Upon service of the
writ of garnishment, petitioner as custodian of the checks was under obligation to
hold them for the judgment creditor. Petitioner became a virtual party to, or a
forced intervenor in, the case and the trial court thereby acquired jurisdiction to
bind him to its orders and processes with a view to the complete satisfaction of
the judgment. Additionally, there was no sufficient reason for petitioner to hold
the checks because they were no longer government funds and presumably
delivered to the payee, conformably with the last sentence of Sec. 16 of the
Negotiable Instruments Law.
With regard to the contempt charge, the trial court was not morally convinced of
petitioner's guilt. For, while his explanation suffered from procedural infirmities
nevertheless he took pains in enlightening the court by sending a written
explanation dated 22 July 1992 requesting for the lifting of the notice of
garnishment on the ground that the notice should have been sent to the Finance
Officer of the Department of Justice. Petitioner insists that he had no authority to
segregate a portion of the salary of Mabanto, Jr. The explanation however was
not submitted to the trial court for action since the stenographic reporter failed to
attach it to the record. 4
On 20 April 1993 the motion for reconsideration was denied. The trial court
explained that it was not the duty of the garnishee to inquire or judge for himself
whether the issuance of the order of execution, writ of execution and notice of
garnishment was justified. His only duty was to turn over the garnished checks to
the trial court which issued the order of execution. 5
Petitioner raises the following relevant issues: (1) whether a check still in the hands
of the maker or its duly authorized representative is owned by the payee before
physical delivery to the latter: and, (2) whether the salary check of a government
official or employee funded with public funds can be subject to garnishment.
Petitioner reiterates his position that the salary checks were not owned by
Mabanto, Jr., because they were not yet delivered to him, and that petitioner as
garnishee has no legal obligation to hold and deliver them to the trial court to be
Page 24 of 44
applied to Mabanto, Jr.'s judgment debt. The thesis of petitioner is that the salary
checks still formed part of public funds and therefore beyond the reach of
garnishment proceedings.
Petitioner has well argued his case.
Garnishment is considered as a species of attachment for reaching credits
belonging to the judgment debtor owing to him from a stranger to the
litigation. 6 Emphasis is laid on the phrase "belonging to the judgment debtor"
since it is the focal point in resolving the issues raised.
As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public funds. He
receives his compensation in the form of checks from the Department of Justice
through petitioner as City Fiscal of Mandaue City and head of office. Under Sec.
16 of the Negotiable Instruments Law, every contract on a negotiable instrument
is incomplete and revocable until delivery of the instrument for the purpose of
giving effect thereto. As ordinarily understood, delivery means the transfer of the
possession of the instrument by the maker or drawer with intent to transfer title to
the payee and recognize him as the holder thereof. 7
According to the trial court, the checks of Mabanto, Jr., were already released
by the Department of Justice duly signed by the officer concerned through
petitioner and upon service of the writ of garnishment by the sheriff petitioner was
under obligation to hold them for the judgment creditor. It recognized the role of
petitioner as custodian of the checks. At the same time however it considered
the checks as no longer government funds and presumed delivered to the
payee based on the last sentence of Sec. 16 of the Negotiable Instruments Law
which states: "And where the instrument is no longer in the possession of a party
whose signature appears thereon, a valid and intentional delivery by him is
presumed." Yet, the presumption is not conclusive because the last portion of the
provision says "until the contrary is proved." However this phrase was deleted by
the trial court for no apparent reason. Proof to the contrary is its own finding that
the checks were in the custody of petitioner. Inasmuch as said checks had not
yet been delivered to Mabanto, Jr., they did not belong to him and still had the
character of public funds. In Tiro v. Hontanosas 8 we ruled that —
The salary check of a government officer or employee such as a
teacher does not belong to him before it is physically delivered
to him. Until that time the check belongs to the government.
Accordingly, before there is actual delivery of the check, the
payee has no power over it; he cannot assign it without the
consent of the Government.
As a necessary consequence of being public fund, the checks may not be
garnished to satisfy the judgment. 9 The rationale behind this doctrine is obvious
consideration of public policy. The Court succinctly stated in Commissioner of
Public Highways v. San Diego 10 that —
The functions and public services rendered by the State cannot
be allowed to be paralyzed or disrupted by the diversion of
public funds from their legitimate and specific objects, as
appropriated by law.
In denying petitioner's motion for reconsideration, the trial court expressed the
additional ratiocination that it was not the duty of the garnishee to inquire or
judge for himself whether the issuance of the order of execution, the writ of
execution, and the notice of garnishment was justified, citing our ruling
in Philippine Commercial Industrial Bank v. Court of Appeals. 11 Our precise ruling
in that case was that "[I]t is not incumbent upon the garnishee to inquire or to
judge for itself whether or not the order for the advance execution of a judgment
is valid." But that is invoking only the general rule. We have also established
therein the compelling reasons, as exceptions thereto, which were not taken into
account by the trial court, e.g., a defect on the face of the writ or actual
knowledge by the garnishee of lack of entitlement on the part of the garnisher. It
is worth to note that the ruling referred to the validity of advance execution of
judgments, but a careful scrutiny of that case and similar cases reveals that it was
applicable to a notice of garnishment as well. In the case at bench, it was
incumbent upon petitioner to inquire into the validity of the notice of garnishment
as he had actual knowledge of the non-entitlement of private respondent to the
checks in question. Consequently, we find no difficulty concluding that the trial
court exceeded its jurisdiction in issuing the notice of garnishment concerning the
salary checks of Mabanto, Jr., in the possession of petitioner.
WHEREFORE, the petition is GRANTED. The orders of 9 March 1993 and 20 April
1993 of the Regional Trial Court of Cebu City, Br. 17, subject of the petition are SET
ASIDE. The notice of garnishment served on petitioner dated 3 February 1992 is
ordered DISCHARGED.
SO ORDERED.
Page 25 of 44
De La Victoria vs. Burgos
G.R. No. 111190. June 27, 1995
Assistant City Fiscal Bienvenido N. Mabanto was ordered to pay herein private
respondent Raul Sesbreño P11,000.00 as damages. A notice of garnishment was
served on herein petitioner Loreto D. de la Victoria as City Fiscal of Mandaue City
where Mabanto was detailed. V was directed not to disburse, transfer, release or
convey to any other person except to the deputy sheriff concerned the salary
checks or other checks, monies, or cash due or belonging to Mabanto, Jr., under
penalty of law. Later, V was directed to submit his report showing the amount of
the garnished salaries. V moved to quash the notice of garnishment claiming that
he was not in possession of any money, funds, credit, property or anything of
value belonging to Mabanto, Jr., except his salary and RATA checks, but that
said checks were not yet properties of Mabanto, Jr., until delivered to him. He
further claimed that, as such, they were still public funds which could not be
subject to garnishment.
ISSUE: W/N a check still in the hands of the maker or its duly authorized
representative is owned by the payee before physical delivery to the latter.
RULING:
As Assistant City Fiscal, the source of the salary of Mabanto, Jr., is public funds. He
receives his compensation in the form of checks from the DOJ through V as City
Fiscal of Mandaue City and head of office. Under Sec. 16 of the Negotiable
Instruments Law, every contract on a negotiable instrument is incomplete and
revocable until delivery of the instrument for the purpose of giving effect thereto.
As ordinarily understood, delivery means the transfer of the possession of the
instrument by the maker or drawer with intent to transfer title to the payee and
recognize him as the holder thereof.
Inasmuch as said checks had not yet been delivered to Mabanto, Jr., they did
not belong to him and still had the character of public funds. The salary check of
a government officer or employee does not belong to him before it is physically
delivered to him. Until that time the check belongs to the government.
Accordingly, before there is actual delivery of the check, the payee has no
power over it; he cannot assign it without the consent of the Government. Being
public fund, the checks may not be garnished to satisfy the judgment in
consideration of public policy.
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 92244 February 9, 1993
NATIVIDAD GEMPESAW, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.
L.B. Camins for petitioner.
Angara, Abello, Concepcion, Regals & Cruz for private respondent
CAMPOS, JR., J.:
From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447),
petitioner, Natividad Gempesaw, appealed to this Court in a Petition for Review,
on the issue of the right of the drawer to recover from the drawee bank who pays
a check with a forged indorsement of the payee, debiting the same against the
drawer's account.
The records show that on January 23, 1985, petitioner filed a Complaint against
the private respondent Philippine Bank of Communications (respondent drawee
Bank) for recovery of the money value of eighty-two (82) checks charged
against the petitioner's account with the respondent drawee Bank on the ground
that the payees' indorsements were forgeries. The Regional Trial Court, Branch
CXXVIII of Caloocan City, which tried the case, rendered a decision on
November 17, 1987 dismissing the complaint as well as the respondent drawee
Bank's counterclaim. On appeal, the Court of Appeals in a decision rendered on
February 22, 1990, affirmed the decision of the RTC on two grounds, namely (1)
that the plaintiff's (petitioner herein) gross negligence in issuing the checks was
the proximate cause of the loss and (2) assuming that the bank was also
negligent, the loss must nevertheless be borne by the party whose negligence
was the proximate cause of the loss. On March 5, 1990, the petitioner filed this
petition under Rule 45 of the Rules of Court setting forth the following as the
alleged errors of the respondent Court:1
I confidence on her bookkeeper. The issuance and delivery of the checks to the
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE
NEGLIGENCE OF THE DRAWER IS THE PROXIMATE CAUSE OF THE
Page 26 of 44
RESULTING INJURY TO THE DRAWEE BANK, AND THE DRAWER IS
PRECLUDED FROM SETTING UP THE FORGERY OR WANT OF
AUTHORITY.
II
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT
FINDING AND RULING THAT IT IS THE GROSS AND INEXCUSABLE
NEGLIGENCE AND FRAUDULENT ACTS OF THE OFFICIALS AND
EMPLOYEES OF THE RESPONDENT BANK IN FORGING THE
SIGNATURE OF THE PAYEES AND THE WRONG AND/OR ILLEGAL
PAYMENTS MADE TO PERSONS, OTHER THAN TO THE INTENDED
PAYEES SPECIFIED IN THE CHECKS, IS THE DIRECT AND PROXIMATE
CAUSE OF THE DAMAGE TO PETITIONER WHOSE SAVING (SIC)
ACCOUNT WAS DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT
ORDERING THE RESPONDENT BANK TO RESTORE OR RE-CREDIT THE
CHECKING ACCOUNT OF THE PETITIONER IN THE CALOOCAN CITY
BRANCH BY THE VALUE OF THE EIGHTY-TWO (82) CHECKS WHICH
IS IN THE AMOUNT OF P1,208,606.89 WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four grocery
stores located at Rizal Avenue Extension and at Second Avenue, Caloocan City.
Among these groceries are D.G. Shopper's Mart and D.G. Whole Sale Mart.
Petitioner maintains a checking account numbered 13-00038-1 with the
Caloocan City Branch of the respondent drawee Bank. To facilitate payment of
debts to her suppliers, petitioner draws checks against her checking account
with the respondent bank as drawee. Her customary practice of issuing checks in
payment of her suppliers was as follows: the checks were prepared and filled up
as to all material particulars by her trusted bookkeeper, Alicia Galang, an
employee for more than eight (8) years. After the bookkeeper prepared the
checks, the completed checks were submitted to the petitioner for her signature,
together with the corresponding invoice receipts which indicate the correct
obligations due and payable to her suppliers. Petitioner signed each and every
check without bothering to verify the accuracy of the checks against the
corresponding invoices because she reposed full and implicit trust and
payees named therein were left to the bookkeeper. Petitioner admitted that she
did not make any verification as to whether or not the checks were delivered to
their respective payees. Although the respondent drawee Bank notified her of all
checks presented to and paid by the bank, petitioner did not verify he
correctness of the returned checks, much less check if the payees actually
received the checks in payment for the supplies she received. In the course of
her business operations covering a period of two years, petitioner issued,
following her usual practice stated above, a total of eighty-two (82) checks in
favor of several suppliers. These checks were all presented by the indorsees as
holders thereof to, and honored by, the respondent drawee Bank. Respondent
drawee Bank correspondingly debited the amounts thereof against petitioner's
checking account numbered 30-00038-1. Most of the aforementioned checks
were for amounts in excess of her actual obligations to the various payees as
shown in their corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of
P11,895.23 in favor of Kawsek Inc. (Exh. A-60), appellant's actual
obligation to said payee was only P895.33 (Exh. A-83); (2) in
Check No. 652282 issued on September 18, 1984 in favor of
Senson Enterprises in the amount of P11,041.20 (Exh. A-67)
appellant's actual obligation to said payee was only P1,041.20
(Exh. 7); (3) in Check No. 589092 dated April 7, 1984 for the
amount of P11,672.47 in favor of Marchem (Exh. A-61) appellant's
obligation was only P1,672.47 (Exh. B); (4) in Check No. 620450
dated May 10, 1984 in favor of Knotberry for P11,677.10 (Exh. A-
31) her actual obligation was only P677.10 (Exhs. C and C-1); (5)
in Check No. 651862 dated August 9, 1984 in favor of Malinta
Exchange Mart for P11,107.16 (Exh. A-62), her obligation was only
P1,107.16 (Exh. D-2); (6) in Check No. 651863 dated August 11,
1984 in favor of Grocer's International Food Corp. in the amount
of P11,335.60 (Exh. A-66), her obligation was only P1,335.60 (Exh. E
and E-1); (7) in Check No. 589019 dated March 17, 1984 in favor
of Sophy Products in the amount of P11,648.00 (Exh. A-78), her
obligation was only P648.00 (Exh. G); (8) in Check No. 589028
dated March 10, 1984 for the amount of P11,520.00 in favor of
the Yakult Philippines (Exh. A-73), the latter's invoice was only
P520.00 (Exh. H-2); (9) in Check No. 62033 dated May 23, 1984 in
the amount of P11,504.00 in favor of Monde Denmark Biscuit
(Exh. A-34), her obligation was only P504.00 (Exhs. I-1 and I-2).2
Practically, all the checks issued and honored by the respondent drawee bank
were crossed checks.3 Aside from the daily notice given to the petitioner by the
respondent drawee Bank, the latter also furnished her with a monthly statement
of her transactions, attaching thereto all the cancelled checks she had issued
and which were debited against her current account. It was only after the lapse
Page 27 of 44
of more two (2) years that petitioner found out about the fraudulent
manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were brought
to Ernest L. Boon, Chief Accountant of respondent drawee Bank at the Buendia
branch, who, without authority therefor, accepted them all for deposit at the
Buendia branch to the credit and/or in the accounts of Alfredo Y. Romero and
Benito Lam. Ernest L. Boon was a very close friend of Alfredo Y. Romero. Sixty-
three (63) out of the eighty-two (82) checks were deposited in Savings Account
No. 00844-5 of Alfredo Y. Romero at the respondent drawee Bank's Buendia
branch, and four (4) checks in his Savings Account No. 32-81-9 at its Ongpin
branch. The rest of the checks were deposited in Account No. 0443-4, under the
name of Benito Lam at the Elcaño branch of the respondent drawee Bank.
About thirty (30) of the payees whose names were specifically written on the
checks testified that they did not receive nor even see the subject checks and
that the indorsements appearing at the back of the checks were not theirs.
The team of auditors from the main office of the respondent drawee Bank which
conducted periodic inspection of the branches' operations failed to discover,
check or stop the unauthorized acts of Ernest L. Boon. Under the rules of the
respondent drawee Bank, only a Branch Manager and no other official of the
respondent drawee bank, may accept a second indorsement on a check for
deposit. In the case at bar, all the deposit slips of the eighty-two (82) checks in
question were initialed and/or approved for deposit by Ernest L. Boon. The Branch
Managers of the Ongpin and Elcaño branches accepted the deposits made in
the Buendia branch and credited the accounts of Alfredo Y. Romero and Benito
Lam in their respective branches.
On November 7, 1984, petitioner made a written demand on respondent drawee
Bank to credit her account with the money value of the eighty-two (82) checks
totalling P1,208.606.89 for having been wrongfully charged against her account.
Respondent drawee Bank refused to grant petitioner's demand. On January 23,
1985, petitioner filed the complaint with the Regional Trial Court.
This is not a suit by the party whose signature was forged on a check drawn
against the drawee bank. The payees are not parties to the case. Rather, it is the
drawer, whose signature is genuine, who instituted this action to recover from the
drawee bank the money value of eighty-two (82) checks paid out by the drawee
bank to holders of those checks where the indorsements of the payees were
forged. How and by whom the forgeries were committed are not established on
the record, but the respective payees admitted that they did not receive those
checks and therefore never indorsed the same. The applicable law is the
Negotiable Instruments Law4 (heretofore referred to as the NIL). Section 23 of the
NIL provides:
When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative,
and no right to retain the instrument, or to give a discharge
therefor, or to enforce payment thereof against any party
thereto, can be acquired through or under such signature, unless
the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.
Under the aforecited provision, forgery is a real or absolute defense by
the party whose signature is forged. A party whose signature to an
instrument was forged was never a party and never gave his consent to
the contract which gave rise to the instrument. Since his signature does
not appear in the instrument, he cannot be held liable thereon by
anyone, not even by a holder in due course. Thus, if a person's signature
is forged as a maker of a promissory note, he cannot be made to pay
because he never made the promise to pay. Or where a person's
signature as a drawer of a check is forged, the drawee bank cannot
charge the amount thereof against the drawer's account because he
never gave the bank the order to pay. And said section does not refer
only to the forged signature of the maker of a promissory note and of the
drawer of a check. It covers also a forged indorsement, i.e., the forged
signature of the payee or indorsee of a note or check. Since under said
provision a forged signature is "wholly inoperative", no one can gain title
to the instrument through such forged indorsement. Such an indorsement
prevents any subsequent party from acquiring any right as against any
party whose name appears prior to the forgery. Although rights may exist
between and among parties subsequent to the forged indorsement, not
one of them can acquire rights against parties prior to the forgery. Such
forged indorsement cuts off the rights of all subsequent parties as against
parties prior to the forgery. However, the law makes an exception to
these rules where a party is precluded from setting up forgery as a
defense.
As a matter of practical significance, problems arising from forged indorsements
of checks may generally be broken into two types of cases: (1) where forgery
was accomplished by a person not associated with the drawer — for example a
mail robbery; and (2) where the indorsement was forged by an agent of the
drawer. This difference in situations would determine the effect of the drawer's
negligence with respect to forged indorsements. While there is no duty resting on
Page 28 of 44
the depositor to look for forged indorsements on his cancelled checks in contrast
to a duty imposed upon him to look for forgeries of his own name, a depositor is
under a duty to set up an accounting system and a business procedure as are
reasonably calculated to prevent or render difficult the forgery of indorsements,
particularly by the depositor's own employees. And if the drawer (depositor)
learns that a check drawn by him has been paid under a forged indorsement,
the drawer is under duty promptly to report such fact to the drawee bank.5For his
negligence or failure either to discover or to report promptly the fact of such
forgery to the drawee, the drawer loses his right against the drawee who has
debited his account under a forged indorsement.6 In other words, he is
precluded from using forgery as a basis for his claim for re-crediting of his
account.
In the case at bar, petitioner admitted that the checks were filled up and
completed by her trusted employee, Alicia Galang, and were given to her for
her signature. Her signing the checks made the negotiable instrument complete.
Prior to signing the checks, there was no valid contract yet.
Every contract on a negotiable instrument is incomplete and revocable until
delivery of the instrument to the payee for the purpose of giving effect
thereto.7 The first delivery of the instrument, complete in form, to the payee who
takes it as a holder, is called issuance of the instrument.8 Without the initial
delivery of the instrument from the drawer of the check to the payee, there can
be no valid and binding contract and no liability on the instrument.
Petitioner completed the checks by signing them as drawer and thereafter
authorized her employee Alicia Galang to deliver the eighty-two (82) checks to
their respective payees. Instead of issuing the checks to the payees as named in
the checks, Alicia Galang delivered them to the Chief Accountant of the
Buendia branch of the respondent drawee Bank, a certain Ernest L. Boon. It was
established that the signatures of the payees as first indorsers were forged. The
record fails to show the identity of the party who made the forged signatures. The
checks were then indorsed for the second time with the names of Alfredo Y.
Romero and Benito Lam, and were deposited in the latter's accounts as earlier
noted. The second indorsements were all genuine signatures of the alleged
holders. All the eighty-two (82) checks bearing the forged indorsements of the
payees and the genuine second indorsements of Alfredo Y. Romero and Benito
Lam were accepted for deposit at the Buendia branch of respondent drawee
Bank to the credit of their respective savings accounts in the Buendia, Ongpin
and Elcaño branches of the same bank. The total amount of P1,208,606.89,
represented by eighty-two (82) checks, were credited and paid out by
respondent drawee Bank to Alfredo Y. Romero and Benito Lam, and debited
against petitioner's checking account No. 13-00038-1, Caloocan branch.
As a rule, a drawee bank who has paid a check on which an indorsement has
been forged cannot charge the drawer's account for the amount of said check.
An exception to this rule is where the drawer is guilty of such negligence which
causes the bank to honor such a check or checks. If a check is stolen from the
payee, it is quite obvious that the drawer cannot possibly discover the forged
indorsement by mere examination of his cancelled check. This accounts for the
rule that although a depositor owes a duty to his drawee bank to examine his
cancelled checks for forgery of his own signature, he has no similar duty as to
forged indorsements. A different situation arises where the indorsement was
forged by an employee or agent of the drawer, or done with the active
participation of the latter. Most of the cases involving forgery by an agent or
employee deal with the payee's indorsement. The drawer and the payee often
time shave business relations of long standing. The continued occurrence of
business transactions of the same nature provides the opportunity for the
agent/employee to commit the fraud after having developed familiarity with the
signatures of the parties. However, sooner or later, some leak will show on the
drawer's books. It will then be just a question of time until the fraud is discovered.
This is specially true when the agent perpetrates a series of forgeries as in the
case at bar.
The negligence of a depositor which will prevent recovery of an unauthorized
payment is based on failure of the depositor to act as a prudent businessman
would under the circumstances. In the case at bar, the petitioner relied implicitly
upon the honesty and loyalty of her bookkeeper, and did not even verify the
accuracy of amounts of the checks she signed against the invoices attached
thereto. Furthermore, although she regularly received her bank statements, she
apparently did not carefully examine the same nor the check stubs and the
returned checks, and did not compare them with the same invoices. Otherwise,
she could have easily discovered the discrepancies between the checks and the
documents serving as bases for the checks. With such discovery, the subsequent
forgeries would not have been accomplished. It was not until two years after the
bookkeeper commenced her fraudulent scheme that petitioner discovered that
eighty-two (82) checks were wrongfully charged to her account, at which she
notified the respondent drawee bank.
It is highly improbable that in a period of two years, not one of Petitioner's
suppliers complained of non-payment. Assuming that even one single complaint
had been made, petitioner would have been duty-bound, as far as the
respondent drawee Bank was concerned, to make an adequate investigation
Page 29 of 44
on the matter. Had this been done, the discrepancies would have been
discovered, sooner or later. Petitioner's failure to make such adequate inquiry
constituted negligence which resulted in the bank's honoring of the subsequent
checks with forged indorsements. On the other hand, since the record mentions
nothing about such a complaint, the possibility exists that the checks in question
covered inexistent sales. But even in such a case, considering the length of a
period of two (2) years, it is hard to believe that petitioner did not know or realize
that she was paying more than she should for the supplies she was actually
getting. A depositor may not sit idly by, after knowledge has come to her that her
funds seem to be disappearing or that there may be a leak in her business, and
refrain from taking the steps that a careful and prudent businessman would take
in such circumstances and if taken, would result in stopping the continuance of
the fraudulent scheme. If she fails to take steps, the facts may establish her
negligence, and in that event, she would be estopped from recovering from the
bank.9
One thing is clear from the records — that the petitioner failed to examine her
records with reasonable diligence whether before she signed the checks or after
receiving her bank statements. Had the petitioner examined her records more
carefully, particularly the invoice receipts, cancelled checks, check book stubs,
and had she compared the sums written as amounts payable in the eighty-two
(82) checks with the pertinent sales invoices, she would have easily discovered
that in some checks, the amounts did not tally with those appearing in the sales
invoices. Had she noticed these discrepancies, she should not have signed those
checks, and should have conducted an inquiry as to the reason for the irregular
entries. Likewise had petitioner been more vigilant in going over her current
account by taking careful note of the daily reports made by respondent drawee
Bank in her issued checks, or at least made random scrutiny of cancelled checks
returned by respondent drawee Bank at the close of each month, she could
have easily discovered the fraud being perpetrated by Alicia Galang, and could
have reported the matter to the respondent drawee Bank. The respondent
drawee Bank then could have taken immediate steps to prevent further
commission of such fraud. Thus, petitioner's negligence was the proximate cause
of her loss. And since it was her negligence which caused the respondent
drawee Bank to honor the forged checks or prevented it from recovering the
amount it had already paid on the checks, petitioner cannot now complain
should the bank refuse to recredit her account with the amount of such
checks. 10 Under Section 23 of the NIL, she is now precluded from using the
forgery to prevent the bank's debiting of her account.
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong &
Shanghai Bank 11 is not applicable to the case at bar because in said case, the
check was fraudulently taken and the signature of the payee was forged not by
an agent or employee of the drawer. The drawer was not found to be negligent
in the handling of its business affairs and the theft of the check by a total stranger
was not attributable to negligence of the drawer; neither was the forging of the
payee's indorsement due to the drawer's negligence. Since the drawer was not
negligent, the drawee was duty-bound to restore to the drawer's account the
amount theretofore paid under the check with a forged payee's indorsement
because the drawee did not pay as ordered by the drawer.
Petitioner argues that respondent drawee Bank should not have honored the
checks because they were crossed checks. Issuing a crossed check imposes no
legal obligation on the drawee not to honor such a check. It is more of a warning
to the holder that the check cannot be presented to the drawee bank for
payment in cash. Instead, the check can only be deposited with the payee's
bank which in turn must present it for payment against the drawee bank in the
course of normal banking transactions between banks. The crossed check
cannot be presented for payment but it can only be deposited and the drawee
bank may only pay to another bank in the payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank from
having checks with more than one indorsement. The banking rule banning
acceptance of checks for deposit or cash payment with more than one
indorsement unless cleared by some bank officials does not invalidate the
instrument; neither does it invalidate the negotiation or transfer of the said check.
In effect, this rule destroys the negotiability of bills/checks by limiting their
negotiation by indorsement of only the payee. Under the NIL, the only kind of
indorsement which stops the further negotiation of an instrument is a restrictive
indorsement which prohibits the further negotiation thereof.
Sec. 36. When indorsement restrictive. — An indorsement is
restrictive which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or negotiate must
be written in express words at the back of the instrument, so that any subsequent
party may be forewarned that ceases to be negotiable. However, the restrictive
indorsee acquires the right to receive payment and bring any action thereon as
any indorser, but he can no longer transfer his rights as such indorsee where the
form of the indorsement does not authorize him to do so. 12
Although the holder of a check cannot compel a drawee bank to honor it
because there is no privity between them, as far as the drawer-depositor is
Page 30 of 44
concerned, such bank may not legally refuse to honor a negotiable bill of
exchange or a check drawn against it with more than one indorsement if there is
nothing irregular with the bill or check and the drawer has sufficient funds. The
drawee cannot be compelled to accept or pay the check by the drawer or any
holder because as a drawee, he incurs no liability on the check unless he
accepts it. But the drawee will make itself liable to a suit for damages at the
instance of the drawer for wrongful dishonor of the bill or check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the defense
of forgery by reason of her gross negligence. But under Section 196 of the NIL,
any case not provided for in the Act shall be governed by the provisions of
existing legislation. Under the laws of quasi-delict, she cannot point to the
negligence of the respondent drawee Bank in the selection and supervision of its
employees as being the cause of the loss because negligence is the proximate
cause thereof and under Article 2179 of the Civil Code, she may not be awarded
damages. However, under Article 1170 of the same Code the respondent
drawee Bank may be held liable for damages. The article provides —
Those who in the performance of their obligations are guilty of
fraud, negligence or delay, and those who in any manner
contravene the tenor thereof, are liable for damages.
There is no question that there is a contractual relation between petitioner as
depositor (obligee) and the respondent drawee bank as the obligor. In the
performance of its obligation, the drawee bank is bound by its internal banking
rules and regulations which form part of any contract it enters into with any of its
depositors. When it violated its internal rules that second endorsements are not to
be accepted without the approval of its branch managers and it did accept the
same upon the mere approval of Boon, a chief accountant, it contravened the
tenor of its obligation at the very least, if it were not actually guilty of fraud or
negligence.
Furthermore, the fact that the respondent drawee Bank did not discover the
irregularity with respect to the acceptance of checks with second indorsement
for deposit even without the approval of the branch manager despite periodic
inspection conducted by a team of auditors from the main office constitutes
negligence on the part of the bank in carrying out its obligations to its depositors.
Article 1173 provides —
The fault or negligence of the obligor consists in the omission of
that diligence which is required by the nature of the obligation
and corresponds with the circumstance of the persons, of the
time and of the place. . . .
We hold that banking business is so impressed with public interest where the trust
and confidence of the public in general is of paramount importance such that
the appropriate standard of diligence must be a high degree of diligence, if not
the utmost diligence. Surely, respondent drawee Bank cannot claim it exercised
such a degree of diligence that is required of it. There is no way We can allow it
now to escape liability for such negligence. Its liability as obligor is not merely
vicarious but primary wherein the defense of exercise of due diligence in the
selection and supervision of its employees is of no moment.
Premises considered, respondent drawee Bank is adjudged liable to share the
loss with the petitioner on a fifty-fifty ratio in accordance with Article 172 which
provides:
Responsibility arising from negligence in the performance of
every kind of obligation is also demandable, but such liability
may be regulated by the courts according to the
circumstances.
With the foregoing provisions of the Civil Code being relied upon, it is being
made clear that the decision to hold the drawee bank liable is based on law and
substantial justice and not on mere equity. And although the case was brought
before the court not on breach of contractual obligations, the courts are not
precluded from applying to the circumstances of the case the laws pertinent
thereto. Thus, the fact that petitioner's negligence was found to be the proximate
cause of her loss does not preclude her from recovering damages. The reason
why the decision dealt on a discussion on proximate cause is due to the error
pointed out by petitioner as allegedly committed by the respondent court. And
in breaches of contract under Article 1173, due diligence on the part of the
defendant is not a defense.
PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court
for the reception of evidence to determine the exact amount of loss suffered by
the petitioner, considering that she partly benefited from the issuance of the
questioned checks since the obligation for which she issued them were
apparently extinguished, such that only the excess amount over and above the
total of these actual obligations must be considered as loss of which one half
must be paid by respondent drawee bank to herein petitioner.
SO ORDERED.
218 SCRA 682 – Mercantile Law – Negotiable Instruments Law – Liabilities of Parties
– Forgery – Forged Indorsements
Natividad Gempesaw is a businesswoman who entrusted to her bookkeeper,
Alicia Galang, the preparation of checks about to be issued in the course of her
Page 31 of 44
business transactions. From 1984 to 1986, 82 checks amounting to P1,208,606.89,
were prepared and were supposed to be delivered to Gempesaw’s clients as
payees named thereon. However, through Galang, these checks were never
delivered to the supposed payees. Instead, the checks were fraudulently
indorsed to Alfredo Romero and Benito Lam.
ISSUE: Whether or not the bank should refund the money lost by reason of the
forged indorsements.
HELD: No. Gempesaw cannot set up the defense of forgery by reason of her
negligence. As a rule, a drawee bank (in this case the Philippine Bank of
Communications) who has paid a check on which an indorsement has been
forged cannot charge the drawer’s (Gempesaw’s) account for the amount of
said check. An exception to this rule is where the drawer is guilty of such
negligence which causes the bank to honor such a check or checks. If a check is
stolen from the payee, it is quite obvious that the drawer cannot possibly discover
the forged indorsement by mere examination of his cancelled check. A different
situation arises where the indorsement was forged by an employee or agent of
the drawer, or done with the active participation of the latter.
The negligence of a depositor which will prevent recovery of an unauthorized
payment is based on failure of the depositor to act as a prudent businessman
would under the circumstances. In the case at bar, Gempesaw relied implicitly
upon the honesty and loyalty of Galang, and did not even verify the accuracy of
amounts of the checks she signed against the invoices attached thereto.
Furthermore, although she regularly received her bank statements, she
apparently did not carefully examine the same nor the check stubs and the
returned checks, and did not compare them with the same invoices. Otherwise,
she could have easily discovered the discrepancies between the checks and the
documents serving as bases for the checks. With such discovery, the subsequent
forgeries would not have been accomplished. It was not until two years after
Galang commenced her fraudulent scheme that Gempesaw discovered that
eighty-two (82) checks were wrongfully charged to her account, at which she
notified the Philippine Bank of Communications
 THIRD DIVISION Sometime in September, 1988, the BIR again assessed plaintiffs for their tax
[G.R. No. 138510. October 10, 2002] liabilities for the years 1979-82. It was then they discovered that the three (3)
managers checks (Nos. 30652, 30650 and 30796) intended as payment for their
TRADERS ROYAL BANK, petitioner, vs. RADIO PHILIPPINES NETWORK, INC.,
taxes were never delivered nor paid to the BIR by Mrs. Vera. Instead, the checks
INTERCONTINENTAL BROADCASTING CORPORATION and BANAHAW
were presented for payment by unknown persons to defendant Security Bank
BROADCASTING CORPORATION, through the BOARD OF
and Trust Company (SBTC), Taytay Branch as shown by the banks routing symbol
ADMINISTRATORS, and SECURITY BANK AND
transit number (BRSTN 01140027) or clearing code stamped on the reverse sides
TRUSTCOMPANY, respondents.
of the checks.
DECISION
Meanwhile, for failure of the plaintiffs to settle their obligations, the BIR issued
CORONA, J.: warrants of levy, distraint and garnishment against them. Thus, they were
Petitioner seeks the review and prays for the reversal of the Decision [1] of constrained to enter into a compromise and paid BIR P18,962,225.25 in settlement
April 30, 1999 of Court of Appeals in CA-G.R. CV No. 54656, the dispositive portion of their unpaid deficiency taxes.
of which reads: Thereafter, plaintiffs sent letters to both defendants, demanding that the amounts
WHEREFORE, the appealed decision is AFFIRMED with modification in the sense covered by the checks be reimbursed or credited to their account. The
that appellant SBTC is hereby absolved from any liability. Appellant TRB is solely defendants refused, hence, the instant suit.[3]
liable to the appellees for the damages and costs of suit specified in the On February 17, 1985, the trial court rendered its decision, thus:
dispositive portion of the appealed decision. Costs against appellant TRB.
WHEREFORE, in view of the foregoing considerations, judgment is hereby
SO ORDERED.[2] rendered in favor of the plaintiffs and against the defendants by :
As found by the Court of Appeals, the antecedent facts of the case are as a) Condemning the defendant Traders Royal Bank to pay actual
follows: damages in the sum of Nine Million Seven Hundred Ninety
On April 15, 1985, the Bureau of Internal Revenue (BIR) assessed plaintiffs Radio Thousand and Seven Hundred Sixteen Pesos and Eighty-Seven
Philippines Network (RPN), Intercontinental Broadcasting Corporation (IBC), and Centavos (P9,790,716.87) broken down as follows:
Banahaw Broadcasting Corporation (BBC) of their tax obligations for the 1) To plaintiff RPN-9 - P4,155,835.00
taxable years 1978 to 1983.
2) To Plaintiff IBC-13 - P3,949,406.12
On March 25, 1987, Mrs. Lourdes C. Vera, plaintiffs comptroller, sent a letter to the
3) To Plaintiff BBC-2 - P1,685,475.72
BIR requesting settlement of plaintiffs tax obligations.
plus interest at the legal rate from the filing of this case in court.
The BIR granted the request and accordingly, on June 26, 1986, plaintiffs
purchased from defendant Traders Royal Bank (TRB) three (3) managers checks b) Condemning the defendant Security Bank and Trust Company,
to be used as payment for their tax liabilities, to wit: being collecting bank, to reimburse the defendant Traders Royal
Bank, all the amounts which the latter would pay to the
Check Number Amount
aforenamed plaintiffs;
30652 P4,155.835.00
c) Condemning both defendants to pay to each of the plaintiffs the
30650 3,949,406.12 sum of Three Hundred Thousand (P300,000.00) Pesos as exemplary
30796 1,685,475.75 damages and attorneys fees equivalent to twenty-five percent of
Defendant TRB, through Aida Nuez, TRB Branch Manager at Broadcast City the total amount recovered; and
Branch, turned over the checks to Mrs. Vera who was supposed to deliver the d) Costs of suit.
same to the BIR in payment of plaintiffs taxes. SO ORDERED.[4]

Page 32 of 44
 Defendants Traders Royal Bank and Security Bank and Trust Company, Inc.
both appealed the trial courts decision to the Court of Appeals. However, as
quoted in the beginning hereof, the appellate court absolved defendant SBTC
from any liability and held TRB solely liable to respondent networks for damages
and costs of suit.
In the instant petition for review on certiorari of the Court of Appeals
decision, petitioner TRB assigns the following errors: (a) the Honorable Court of
Appeals manifestly overlooked facts which would justify the conclusion that
negligence on the part of RPN, IBC and BBC bars them from recovering anything
from TRB, (b) the Honorable Court of Appeals plainly erred and misapprehended
the facts in relieving SBTC of its liability to TRB as collecting bank and indorser by
overturning the trial courts factual finding that SBTC did endorse the three (3)
managers checks subject of the instant case, and (c) the Honorable Court of
Appeals plainly misapplied the law in affirming the award of exemplary damages
in favor of RPN, IBC and BBC.
In reply, respondents RPN, IBC, and BBC assert that TRBs petition raises
questions of fact in violation of Rule 45 of the 1997 Revised Rules on Civil
Procedure which restricts petitions for review on certiorari of the decisions of the
Court of Appeals on pure questions of law. RPN, IBC and BBC maintain that the
issue of whether or not respondent networks had been negligent were already
passed upon both by the trial and appellate courts, and that the factual findings
of both courts are binding and conclusive upon this Court.
Likewise, respondent SBTC denies liability on the ground that it had no
participation in the negotiation of the checks, emphasizing that the BRSTN
imprints at the back of the checks cannot be considered as proof that
respondent SBTC accepted the disputed checks and presented them to
Philippine Clearing House Corporation for clearing.
Setting aside the factual ramifications of the instant case, the threshold issue
now is whether or not TRB should be held solely liable when it paid the amount of
the checks in question to a person other than the payee indicated on the face
of the check, the Bureau of Internal Revenue.
When a signature is forged or made without the authority of the person
whose signature it purports to be, it is wholly inoperative, and no right to retain
the instrument, or to give a discharge therefor, or to enforce payment thereof
against any party thereto, can be acquired through or under such
signature.[5] Consequently, if a bank pays a forged check, it must be considered
as paying out of its funds and cannot charge the amount so paid to the account
of the depositor.
Page 33 of 44
In the instant case, the 3 checks were payable to the BIR. It was established,
however, that said checks were never delivered or paid to the payee BIR but
were in fact presented for payment by some unknown persons who, in order to
receive payment therefor, forged the name of the payee. Despite this fraud,
petitioner TRB paid the 3 checks in the total amount of P9,790,716.87.
Petitioner ought to have known that, where a check is drawn payable to
the order of one person and is presented for payment by another and purports
upon its face to have been duly indorsed by the payee of the check, it is the
primary duty of petitioner to know that the check was duly indorsed by the
original payee and, where it pays the amount of the check to a third person who
has forged the signature of the payee, the loss falls upon petitioner who cashed
the check. Its only remedy is against the person to whom it paid the money.[6]
It should be noted further that one of the subject checks was crossed. The
crossing of one of the subject checks should have put petitioner on guard; it was
duty-bound to ascertain the indorsers title to the check or the nature of his
possession. Petitioner should have known the effects of a crossed check: (a) the
check may not be encashed but only deposited in the bank; (b) the check may
be negotiated only once to one who has an account with a bank and (c) the
act of crossing the check serves as a warning to the holder that the check has
been issued for a definite purpose so that he must inquire if he has received the
check pursuant to that purpose, otherwise, he is not a holder in due course.[7]
By encashing in favor of unknown persons checks which were on their face
payable to the BIR, a government agency which can only act only through its
agents, petitioner did so at its peril and must suffer the consequences of the
unauthorized or wrongful endorsement.[8] In this light, petitioner TRB cannot
exculpate itself from liability by claiming that respondent networks were
themselves negligent.
A bank is engaged in a business impressed with public interest and it is its
duty to protect its many clients and depositors who transact business with it. It is
under the obligation to treat the accounts of the depositors and clients with
meticulous care, whether such accounts consist only of a few hundreds or millions
of pesos.[9]
Petitioner argues that respondent SBTC, as the collecting bank and indorser,
should be held responsible instead for the amount of the checks.
The Court of Appeals addressed exactly the same issue and made the
following findings and conclusions:
As to the alleged liability of appellant SBTC, a close examination of the records
constrains us to deviate from the lower courts finding that SBTC, as a collecting
bank, should similarly bear the loss.
A collecting bank where a check is deposited and which indorses the check
upon presentment with the drawee bank, is such an indorser. So even if the
indorsement on the check deposited by the banks client is forged, the collecting
bank is bound by his warranties as an indorser and cannot set up the defense of
forgery as against the drawee bank.
To hold appellant SBTC liable, it is necessary to determine whether it is a party to
the disputed transactions.
Section 3 of the Negotiable Instruments Law reads:
SECTION 63. When person deemed indorser. - A person placing his signature
upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to
be an indorser unless he clearly indicates by appropriate words his intention to be
bound in some other capacity.
Upon the other hand, the Philippine Clearing House Corporation (PCHC) rules
provide:
Sec. 17.- BANK GUARANTEE. All checks cleared through the PCHC shall bear the
guarantee affixed thereto by the Presenting Bank/Branch which shall read as
follows:
Cleared thru the Philippine Clearing House Corporation. All prior endorsements
and/or lack of endorsement guaranteed. NAME OF BANK/BRANCH BRSTN (Date
of clearing).
Here, not one of the disputed checks bears the requisite endorsement of
appellant SBTC. What appears to be a guarantee stamped at the back of the
checks is that of the Philippine National Bank, Buendia Branch, thereby indicating
that it was the latter Bank which received the same.
It was likewise established during the trial that whenever appellant SBTC receives
a check for deposit, its practice is to stamp on its face the words, non-
negotiable. Lana Echevarrias testimony is relevant:
ATTY. ROMANO: Could you tell us briefly the procedure you follow in receiving
checks?
A: First of all, I verify the check itself, the place, the date, the amount in words
and everything. And then, if all these things are in order and verified in the data
sheet I stamp my non-negotiable stamp at the face of the check.
Unfortunately, the words non-negotiable do not appear on the face of either of
the three (3) disputed checks.
Page 34 of 44
Moreover, the aggregate amount of the checks is not reflected in the clearing
documents of appellant SBTC. Section 19 of the Rules of the PCHC states:
Section 19 Regular Item Procedure:
Each clearing participant, through its authorized representatives, shall deliver to
the PCHC fully qualified MICR checks grouped in 200 or less items to a batch and
supported by an add-list, a batch control slip, and a delivery statement.
It bears stressing that through the add-list, the PCHC can countercheck and
determine which checks have been presented on a particular day by a
particular bank for processing and clearing. In this case, however, the add-list
submitted by appellant SBTC together with the checks it presented for clearing
on August 3, 1987 does not show that Check No. 306502 in the sum of
P3,949,406.12 was among those that passed for clearing with the PCHC on that
date. The same is true with Check No. 30652 with a face amount of P4,155,835.00
presented for clearing on August 11, 1987 and Check No. 30796 with a face
amount of P1,685,475.75.
The foregoing circumstances taken altogether create a serious doubt on whether
the disputed checks passed through the hands of appellant SBTC. [10]
We subscribe to the foregoing findings and conclusions of the Court of
Appeals.
A collecting bank which indorses a check bearing a forged indorsement
and presents it to the drawee bank guarantees all prior indorsements, including
the forged indorsement itself, and ultimately should be held liable
therefor. However, it is doubtful if the subject checks were ever presented to and
accepted by SBTC so as to hold it liable as a collecting bank, as held by the
Court of Appeals.
Since TRB did not pay the rightful holder or other person or entity entitled to
receive payment, it has no right to reimbursement. Petitioner TRB was remiss in its
duty and obligation, and must therefore suffer the consequences of its own
negligence and disregard of established banking rules and procedures.
We agree with petitioner, however, that it should not be made to pay
exemplary damages to RPN, IBC and BBC because its wrongful act was not done
in bad faith, and it did not act in a wanton, fraudulent, reckless or malevolent
manner.[11]
We find the award of attorneys fees, 25% of P10 million, to be manifestly
exorbitant.[12] Considering the nature and extent of the services rendered by
respondent networks counsel, however, the Court deems it appropriate to award
the amount of P100,000 as attorneys fees.
 WHEREFORE, the appealed decision is MODIFIED by deleting the award of
exemplary damages. Further, respondent networks are granted the amount of
P100,000 as attorneys fees. In all other respects, the Court of Appeals decision is
hereby AFFIRMED.
SO ORDERED.
TRADERS ROYAL BANK VS. RADIO PHILIPPINES NETWORK INC.
390 SCRA 608
FACTS:
RPN, IBC and BBC were all assessed for tax by the BIR. To pay the
assessed taxes, they bought manager’s checks from petitioner bank. None
of these checks were paid to the BIR. They were found to have been
deposited in the account of a third person in Security Bank. As the taxes
remained unpaid, the BIR issued a levy, distraint and garnishment against
the three networks. An action was filed wherein it was decided that the
networks should be reimbursed for the amounts of the checks by petitioner bank
and the latter in turn, must be reimbursed by Security Bank. In the
appellate court, it was held that Traders Bank should be the only bank
liable.
HELD:
Petitioner ought to have known that where a check is drawn payable to the
order of one person and is presented for payment by another and purports upon
its face to have been duly indorsed by the payee of the check, it is
the primary duty of the petitioner to know that the check was duly
indorsed by the original payee, and it pays the amount of the check to the third
person, who has forged the signature of the payee, the loss falls upon the
petitioner who cashed the check. Its only remedy is against the person
to whom it paid the money.
It should be further noted that one of the checks was a crossed check. The
crossing of the check should have put petitioner on guard; it was duty-
bound to ascertain the indorser’s title to the check or the nature of his
possession. Republic of the Philippines
Page 35 of 44
SUPREME COURT
Manila
EN BANC
G.R. No. L-2861 February 26, 1951
ENRIQUE P. MONTINOLA, plaintiff-appellant,
vs.
THE PHILIPPINE NATIONAL BANK, ET AL., defendants-appellees.
Quijano, Rosete and Lucena for appellant.
Second Assistant Corporate Counsel Hilarion U. Jarencio for appellee Philippine
National Bank.
Office of the Solicitor General Felix Bautista Angelo and Solicitor Augusto M.
Luciano for appellee Provincial Treasurer of Misamis Oriental.
MONTEMAYOR, J.:
In August, 1947, Enrique P. Montinola filed a complaint in the Court of First
Instance of Manila against the Philippine National Bank and the Provincial
Treasurer of Misamis Oriental to collect the sum of P100,000, the amount of Check
No. 1382 issued on May 2, 1942 by the Provincial Treasurer of Misamis Oriental to
Mariano V. Ramos and supposedly indorsed to Montinola. After hearing, the
court rendered a decision dismissing the complaint with costs against plaintiff-
appellant. Montinola has appealed from that decision directly to this Court
inasmuch as the amount in controversy exceeds P50,000.
There is no dispute as to the following facts. In April and May, 1942, Ubaldo D.
Laya was the Provincial Treasurer of Misamis Oriental. As such Provincial Treasurer
he was ex officio agent of the Philippine National Bank branch in the province.
Mariano V. Ramos worked under him as assistant agent in the bank branch
aforementioned. In April of that year 1942, the currency being used in Mindanao,
particularly Misamis Oriental and Lanao which had not yet been occupied by
the Japanese invading forces, was the emergency currency which had been
issued since January, 1942 by the Mindanao Emergency Currency Board by
authority of the late President Quezon.
About April 26, 1942, thru the recommendation of Provincial Treasurer Laya, his
assistant agent M. V. Ramos was inducted into the United States Armed Forces in
the Far East (USAFFE) as disbursing officer of an army division. As such disbursing
officer, M. V. Ramos on April 30, 1942, went to the neighboring Province Lanao to
procure a cash advance in the amount of P800,000 for the use of the USAFFE in
Cagayan de Misamis. Pedro Encarnacion, Provincial Treasurer of Lanao did not
have that amount in cash. So, he gave Ramos P300,000 in emergency notes and
a check for P500,000. On May 2, 1942 Ramos went to the office of Provincial
Treasurer Laya at Misamis Oriental to encash the check for P500,000 which he
had received from the Provincial Treasurer of Lanao. Laya did not have enough
cash to cover the check so he gave Ramos P400,000 in emergency notes and a
check No. 1382 for P100,000 drawn on the Philippine National Bank. According to
Laya he had previously deposited P500,000 emergency notes in the Philippine
National Bank branch in Cebu and he expected to have the check issued by
him cashed in Cebu against said deposit.
Ramos had no opportunity to cash the check because in the evening of the
same day the check was issued to him, the Japanese forces entered the capital
of Misamis Oriental, and on June 10, 1942, the USAFFE forces to which he was
attached surrendered. Ramos was made a prisoner of war until February 12,
1943, after which, he was released and he resumed his status as a civilian.
About the last days of December, 1944 or the first days of January, 1945, M. V.
Ramos allegedly indorsed this check No. 1382 to Enrique P. Montinola. The
circumstances and conditions under which the negotiation or transfer was made
are in controversy.
According to Montinola's version, sometime in June, 1944, Ramos, needing
money with which to buy foodstuffs and medicine, offered to sell him the check;
to be sure that it was genuine and negotiable, Montinola, accompanied by his
agents and by Ramos himself, went to see President Carmona of the Philippine
National Bank in Manila about said check; that after examining it President
Carmona told him that it was negotiable but that he should not let the Japanese
catch him with it because possession of the same would indicate that he was still
waiting for the return of the Americans to the Philippines; that he and Ramos
finally agreed to the sale of the check for P850,000 Japanese military notes,
payable in installments; that of this amount, P450,000 was paid to Ramos in
Japanese military notes in five installments, and the balance of P400,000 was
paid in kind, namely, four bottles of sulphatia sole, each bottle containing 1,000
tablets, and each tablet valued at P100; that upon payment of the full price, M.
V. Ramos duly indorsed the check to him. This indorsement which now appears
on the back of the document is described in detail by trial court as follows:
The endorsement now appearing at the back of the check (see Exhibit
A-1) may be described as follows: The woods, "pay to the order of" — in
rubber stamp and in violet color are placed about one inch from the
top. This is followed by the words "Enrique P. Montinola" in typewriting
which is approximately 5/8 an inch below the stamped words "pay to the
order of". Below "Enrique P. Montinola", in typewriting are words and
figures also in typewriting, "517 Isabel Street" and about ¹/8 of an inch
therefrom, the edges of the check appear to have been burned, but
Page 36 of 44
there are words stamped apparently in rubber stamp which, according
to Montinola, are a facsimile of the signature of Ramos. There is a
signature which apparently reads "M. V. Ramos" also in green ink but
made in handwriting."
To the above description we may add that the name of M. V. Ramos is hand
printed in green ink, under the signature. According to Montinola, he asked
Ramos to hand print it because Ramos' signature was not clear.
Ramos in his turn told the court that the agreement between himself and
Montinola regarding the transfer of the check was that he was selling only
P30,000 of the check and for this reason, at the back of the document he wrote
in longhand the following:
Pay to the order of Enrique P. Montinola P30,000 only. The balance to be
deposited in the Philippine National Bank to the credit of M. V. Ramos.
Ramos further said that in exchange for this assignment of P30,000 Montinola
would pay him P90,000 in Japanese military notes but that Montinola gave him
only two checks of P20,000 and P25,000, leaving a balance unpaid of P45,000. In
this he was corroborated by Atty. Simeon Ramos Jr. who told the court that the
agreement between Ramos and Montinola was that the latter, for the sale to him
of P30,000 of the check, was to pay Ramos P90,000 in Japanese military notes;
that when the first check for P20,000 was issued by Montinola, he (Simeon)
prepared a document evidencing said payment of P20,000; that when the
second check for P25,000 was issued by Montinola, he (Simeon) prepared
another document with two copies, one for Montinola and the other for Ramos,
both signed by Montinola and M. V. Ramos, evidencing said payment, with the
understanding that the balance of P45,000 would be paid in a few days.
The indorsement or writing described by M. V. Ramos which had been written by
him at the back of the check, Exhibit A, does not now appear at the back of said
check. What appears thereon is the indosement testified to by Montinola and
described by the trial court as reproduced above. Before going into a discussion
of the merits of the version given by Ramos and Montinola as to the indorsement
or writing at the back of the check, it is well to give a further description of it as
we shall later.
When Montinola filed his complaint in 1947 he stated therein that the check had
been lost, and so in lieu thereof he filed a supposed photostic copy. However, at
the trial, he presented the check itself and had its face marked Exhibit A and the
back thereof Exhibit A-1. But the check is badly mutilated, bottled, torn and
partly burned, and its condition can best be appreciated by seeing it. Roughly, it
may be stated that looking at the face of the check (Exhibit A) we see that the
left third portion of the paper has been cut off perpendicularly and severed from
the remaining 2/3 portion; a triangular portion of the upper right hand corner of
said remaining 2/3portion has been similarly cut off and severed, and to keep
and attach this triangular portion and the rectangular ¹/3 portion to the rest of
the document, the entire check is pasted on both sides with cellophane; the
edges of the severed portions as well as of the remaining major portion, where
cut bear traces of burning and searing; there is a big blot with indelible ink about
the right middle portion, which seems to have penetrated to the back of the
check (Exhibit A-1), which back bears a larger smear right under the blot, but not
black and sharp as the blot itself; finally, all this tearing, burning, blotting and
smearing and pasting of the check renders it difficult if not impossible to read
some of the words and figures on the check.
In explanation of the mutilation of the check Montinola told the court that several
months after indorsing and delivering the check to him, Ramos demanded the
return of the check to him, threatening Montinola with bodily harm, even death
by himself or his guerrilla forces if he did not return said check, and that in order
to justify the non-delivery of the document and to discourage Ramos from
getting it back, he (Montinola) had to resort to the mutilation of the document.
As to what was really written at the back of the check which Montinola claims to
be a full indorsement of the check, we agree with trial court that the original
writing of Ramos on the back of the check was to the effect that he was
assigning only P30,000 of the value of the document and that he was instructing
the bank to deposit to his credit the balance. This writing was in some mysterious
way obliterated, and in its place was placed the present indorsement appearing
thereon. Said present indorsement occupies a good portion of the back of the
check. It has already been described in detail. As to how said present
indorsement came to be written, the circumstances surrounding its preparation,
the supposed participation of M. V. Ramos in it and the writing originally
appearing on the reverse side of the check, Exhibit A-1, we quote with approval
what the trial court presided over by Judge Conrado V. Sanchez, in its well-
prepared decision, says on these points:
The allegedly indorsement: "Pay to the order of Enrique P. Montinola the
amount of P30,000 only. The balance to be deposited to the credit of M.
V. Ramos", signed by M. V. Ramos-according to the latter-does not now
appear at the back of the check. A different indorsement, as aforesaid,
now appears.
Had Montinola really paid in full the sum of P850,000 in Japanese Military
Notes as consideration for the check? The following observations are in
point:
Page 37 of 44
(a) According to plaintiff's witness Gregorio A. Cortado, the oval line in
violet, enclosing "P." of the words "Enrique P. Montinola" and the line in
the form of cane handle crossing the word "street" in the words and
figures "517 Isabel Street" in the endorsement Exhibit A-1 "unusual" to him,
and that as far as he could remember this writing did not appear on the
instrument and he had no knowledge as to how it happened to be
there. Obviously Cortado had no recollection as to how such marks ever
were stamped at the back of the check.
(b) Again Cortado, speaking of the endorsement as it now appears at
the back of the check (Exh. A-1) stated that Ramos typewrote these
words outside of the premises of Montinola, that is, a nearby house.
Montinola, on the other hand, testified that Ramos typewrote the words
"Enrique P. Montinola 517 Isabel Street", in his own house. Speaking of the
rubber stamp used at the back of the check and which produced the
words "pay to the order of", Cortado stated that when he (Cortado),
Atadero, Montinola and Ramos returned in group to the house of
Montinola, the rubber stamp was already in the house of Montinola, and
it was on the table of the upper floor of the house, together with the
stamp pad used to stamp the same. Montinola, on the other hand,
testified that Ramos carried in his pocket the said rubber stamp as well as
the ink pad, and stamped it in his house.
The unusually big space occupied by the indorsement on the back of
the check and the discrepancies in the versions of Montinola and his
witness Cortado just noted, create doubts as to whether or not really
Ramos made the indorsement as it now appears at the back of Exhibit A.
One thing difficult to understand is why Ramos should go into the
laborious task of placing the rubber stamp "Pay to the order of" and
afterwards move to the typewriter and write the words "Enrique P.
Montinola" "and "517 Isabel Street", and finally sign his name too far
below the main indorsement.
(c) Another circumstances which bears heavily upon the claim of plaintiff
Montinola that he acquired the full value of the check and paid the full
consideration therefor is the present condition of said check. It is now so
unclean and discolored; it is pasted in cellophane, bottled with ink on
both sides torn three parts, and with portions thereof burned-all done by
plaintiff, the alleged owner thereof.
The acts done by the very plaintiff on a document so important and
valuable to him, and which according to him involves his life savings,
approximate intentional cancellation. The only reason advanced by
plaintiff as to why tore check, burned the torn edges and bottled out the
registration at the back, is found in the following: That Ramos came to his
house, armed with a revolver, threatened his life and demanded from
him the return of the check; that when he informed Ramos that he did
not have it in the house, but in some deposit outside thereof and that
Ramos promised to return the next day; that the same night he tore the
check into three parts, burned the sides with a parrafin candle to show
traces of burning; and that upon the return of Ramos the next day he
showed the two parts of the check, the triangle on the right upper part
and the torn piece on the left part, and upon seeing the condition
thereof Ramos did not bother to get the check back. He also said that
he placed the blots in indelible ink to prevent Ramos — if he would be
forced to surrender the middle part of the check — from seeing that it
was registered in the General Auditing Office.
Conceding at the moment these facts to be true, the question is: Why
should Montinola be afraid of Ramos? Montinola claims that Ramos went
there about April, 1945, that is, during liberation. If he believed he was
standing by his rights, he could have very well sought police protection
or transferred to some place where Ramos could not bother him. And
then, really Ramos did not have anything more to do with this check for
the reason that Montinola had obtained in full the amount thereof, there
could not be any reason why Ramos should have threatened Montinola
as stated by the latter. Under the circumstances, the most logical
conclusion is that Ramos wanted the check at all costs because
Montinola did not acquire the check to such an extent that it borders on
intentional cancellation thereof (see Sections 119-123 Negotiable
Instruments Law) there is room to believe that Montinola did not have so
much investments in that check as to adopted an "what do I care?"
attitude.
And there is the circumstance of the alleged loss of the check. At the
time of the filing of the complaint the check was allegedly lost, so much
so that a photostatic copy thereof was merely attached to the
complaint (see paragraph 7 of the complaint). Yet, during the trial the
original check Exhibit A was produced in court.
But a comparison between the photostatic copy and the original check
reveals discrepancies between the two. The condition of the check as it
was produced is such that it was partially burned, partially blotted, badly
mutilated, discolored and pasted with cellophane. What is worse is that
Montinola's excuse as to how it was lost, that it was mixed up with
Page 38 of 44
household effects is not plausible, considering the fact that it involves his
life savings, and that before the alleged loss, he took extreme pains and
precautions to save the check from the possible ravages of the war, had
it photographed, registered said check with the General Auditing Office
and he knew that Ramos, since liberation, was hot after the possession of
that check.
(d) It seems that Montinola was not so sure as to what he had testified to
in reference to the consideration he paid for the check. In court he
testified that he paid P450,000 in cash from June to December 1944, and
P400,000 worth of sulphatiazole in January 1945 to complete the alleged
consideration of P850,000. When Montinola testified this way in court,
obviously he overlooked a letter he wrote to the provincial treasurer of
Cagayan, Oriental Misamis, dated May 1, 1947, Exhibit 3 the record. In
that letter Exhibit 3, Montinola told Provincial Treasurer Elizalde of Misamis
Oriental that "Ramos endorsed it (referring to check) to me for goods in
kind, medicine, etc., received by him for the use of the guerrillas." In said
letter Exhibit 3, Montinola did not mention the cash that he paid for the
check.
From the foregoing the court concludes that plaintiff Montinola came
into the possession of the check in question about the end of December
1944 by reason of the fact that M. V. Ramos sold to him P30,000 of the
face value thereof in consideration of the sum of P90,000 Japanese
money, of which only one-half or P45,000 (in Japanese money) was
actually paid by said plaintiff to Ramos. (R. on A., pp. 31-33; Brief of
Appellee, pp. 14-20.)
At the beginning of this decision, we stated that as Provincial Treasurer of Misamis
Oriental, Ubaldo D. Laya was ex officio agent of the Philippine National Bank
branch in that province. On the face of the check (Exh. A) we now find the
words in parenthesis "Agent, Phil. National Bank" under the signature of Laya,
purportedly showing that he issued the check as agent of the Philippine National
Bank. It this is true, then the bank is not only drawee but also a drawer of the
check, and Montinola evidently is trying to hold the Philippine National Bank
liable in that capacity of drawer, because as drawee alone, inasmuch as the
bank has not yet accepted or certified the check, it may yet avoid payment.
Laya, testifying in court, stated that he issued the check only as Provincial
Treasurer, and that the words in parenthesis "Agent, Phil. National Bank" now
appearing under his signature did not appear on the check when he issued the
same. In this he was corroborated by the payee M. V. Ramos who equally
assured the court that when he received the check and then delivered it to
Montinola, those words did not appear under the signature of Ubaldo D. Laya.
We again quote with approval the pertinent portion of the trial court's decision:
The question is reduced to whether or not the words, "Agent, Phil.
National Bank" were added after Laya had issued the check. In a
straightforward manner and without vacillation Laya positively testified
that the check Exhibit A was issued by him in his capacity as Provincial
Treasurer of Misamis Oriental and that the words "Agent, Phil. National
Bank" which now appear on the check Exhibit A were not typewritten
below his signature when he signed the said check and delivered the
same to Ramos. Laya assured the court that there could not be any
mistake as to this. For, according to Laya, when he issued check in his
capacity as agent of the Misamis Oriental agency of the Philippine
National Bank the said check must be countersigned by the cashier of
the said agency — not by the provincial auditor. He also testified that the
said check was issued by him in his capacity as provincial treasurer of
Misamis Oriental and that is why the same was countersigned by
Provincial Auditor Flores. The Provincial Auditor at that time had no
connection in any capacity with the Misamis Oriental agency of the
Philippine National Bank. Plaintiff Montinola on the other hand testified
that when he received the check Exhibit A it already bore the words
"Agent, Phil. National Bank" below the signature of Laya and the printed
words "Provincial Treasurer".
After considering the testimony of the one and the other, the court finds
that the preponderance of the evidence supports Laya's testimony. In
the first place, his testimony was corroborated by the payee M. V.
Ramos. But what renders more probable the testimony of Laya and
Ramos is the fact that the money for which the check was issued was
expressly for the use of the USAFFE of which Ramos was then disbursing
officer, so much so that upon the delivery of the P400,000 in emergency
notes and the P100,000 check to Ramos, Laya credited his depository
accounts as provincial treasurer with the corresponding credit entry. In
the normal course of events the check could not have been issued by
the bank, and this is borne by the fact that the signature of Laya was
countersigned by the provincial auditor, not the bank cashier. And then,
too there is the circumstance that this check was issued by the provincial
treasurer of Lanao to Ramos who requisitioned the said funds in his
capacity as disbursing officer of the USAFFE. The check, Exhibit A is not
what we may term in business parlance, "certified check" or "cashier's
check."
Page 39 of 44
Besides, at the time the check was issued, Laya already knew that Cebu
and Manila were already occupied. He could not have therefore issued
the check-as a bank employee-payable at the central office of the
Philippine National Bank.
Upon the foregoing circumstances the court concludes that the words
"Agent, Phil. National Bank' below the signature of Ubaldo D. Laya and
the printed words "Provincial Treasurer" were added in the check after
the same was issued by the Provincial Treasurer of Misamis Oriental.
From all the foregoing, we may safely conclude as we do that the words "Agent,
Phil. National Bank" now appearing on the face of the check (Exh. A) were
added or placed in the instrument after it was issued by Provincial Treasurer Laya
to M. V. Ramos. There is no reason known to us why Provincial Treasurer Laya
should issue the check (Exh. A) as agent of the Philippine National Bank. Said
check for P100,000 was issued to complete the payment of the other check for
P500,000 issued by the Provincial Treasurer of Lanao to Ramos, as part of the
advance funds for the USAFFE in Cagayan de Misamis. The balance of P400,000
in cash was paid to Ramos by Laya from the funds, not of the bank but of the
Provincial Treasury. Said USAFFE were being financed not by the Bank but by the
Government and, presumably, one of the reasons for the issuance of the
emergency notes in Mindanao was for this purpose. As already stated, according
to Provincial Treasurer Laya, upon receiving a relatively considerable amount of
these emergency notes for his office, he deposited P500,000 of said currency in
the Philippine National Bank branch in Cebu, and that in issuing the check (Exh.
A), he expected to have it cashed at said Cebu bank branch against his deposit
of P500,000.
The logical conclusion, therefore, is that the check was issued by Laya only as
Provincial Treasurer and as an official of the Government which was under
obligation to provide the USAFFE with advance funds, and not by the Philippine
National Bank which has no such obligation. The very Annex C, made part of
plaintiff's complaint, and later introduced in evidence for him as Exhibit E states
that Laya issued the check "in his capacity as Provincial Treasurer of Misamis
Oriental", obviously, not as agent of the Bank.
Now, did M. V. Ramos add or place those words below the signature of Laya
before transferring the check to Montinola? Let us bear in mind that Ramos
before his induction into the USAFFE had been working as assistant of Treasurer
Laya as ex-officio agent of the Misamis Oriental branch of the Philippine National
Bank. Naturally, Ramos must have known the procedure followed there as to the
issuance of checks, namely, that when a check is issued by the Provincial
Treasurer as such, it is countersigned by the Provincial Auditor as was done on the
check (Exhibit A), but that if the Provincial Treasurer issues a check as agent of
the Philippine National Bank, the check is countersigned not by the Provincial
Auditor who has nothing to do with the bank, but by the bank cashier, which was
not done in this case. It is not likely, therefore, that Ramos had made the insertion
of the words "Agent, Phil. National Bank" after he received the check, because
he should have realized that following the practice already described, the check
having been issued by Laya as Provincial Treasurer, and not as agent of the
bank, and since the check bears the countersignature not of the Bank cashier of
the Provincial Auditor, the addition of the words "Agent, Phil. National Bank"
could not change the status and responsibility of the bank. It is therefore more
logical to believe and to find that the addition of those words was made after
the check had been transferred by Ramos to Montinola. Moreover, there are
other facts and circumstances involved in the case which support this view.
Referring to the mimeographed record on appeal filed by the plaintiff-appellant,
we find that in transcribing and copying the check, particularly the face of it
(Exhibit A) in the complaint, the words "Agent, Phil. National Bank" now appearing
on the face of the check under the signature of the Provincial Treasurer, is
missing. Unless the plaintiff in making this copy or transcription in the complaint
committed a serious omission which is decisive as far as the bank is concerned,
the inference is, that at the time the complaint was filed, said phrase did not
appear on the face of the check. That probably was the reason why the bank in
its motion to dismiss dated September 2, 1947, contended that if the check in
question had been issued by the provincial treasurer in his capacity as agent of
the Philippine National Bank, said treasurer would have placed below his
signature the words "Agent of the Philippine National Bank". The plaintiff because
of the alleged loss of the check, allegedly attached to the complaint a
photostatic copy of said check and marked it as Annex A. But in transcribing and
copying said Annex A in his complaint, the phrase "Agent, Phil. National Bank"
does not appear under the signature of the provincial treasurer. We tried to verify
this discrepancy by going over the original records of the Court of First Instance
so as to compare the copy of Annex A in the complaint, with the original Annex
A, the photostatic copy, but said original Annex A appears to be missing from the
record. How it disappeared is not explained. Of course, now we have in the list of
exhibit a photostatic copy marked Annex A and Exhibit B, but according to the
manifestation of counsel for the plaintiff dated October 15, 1948, said photostatic
copy now marked Annex A and Exhibit B was submitted on October 15, 1948, in
compliance with the verbal order of the trial court. It is therefore evident that the
Annex A now available is not the same original Annex A attached to the
complaint in 1947.
Page 40 of 44
There is one other circumstance, important and worth nothing. If Annex A also
marked Exhibit B is the photostatic copy of the original check No. 1382
particularly the face thereof (Exhibit A), then said photostatic copy should be a
faithful and accurate reproduction of the check, particularly of the phrase
"Agent, Phil. National Bank" now appearing under the signature of the Provincial
Treasurer on the face of the original check (Exhibit A). But a minute examination
of and comparison between Annex A, the photostatic copy also marked Exhibit
B and the face of the check, Exhibit A, especially with the aid of a handlens,
show notable differences and discrepancies. For instance, on Exhibit A, the letter
A of the word "Agent" is toward the right of the tail of the beginning letter of the
signature of Ubaldo D. Laya; this same letter "A" however in Exhibit B is directly
under said tail.
The letter "N" of the word "National" on Exhibit A is underneath the space
between "Provincial" and "Treasurer"; but the same letter "N" is directly under the
letter "I" of the word "Provincial" in Exhibit B.
The first letter "a" of the word "National" is under "T" of the word "Treasurer" in
Exhibit A; but the same letter "a" in Exhibit "B" is just below the space between the
words "Provincial" and "Treasurer".
The letter "k" of the word "Bank" in Exhibit A is after the green perpendicular
border line near the lower right hand corner of the edge of the check (Exh. A);
this same letter "k" however, on Exhibit B is on the very border line itself or even
before said border line.
The closing parenthesis ")" on Exhibit A is a little far from the perpendicular green
border line and appears to be double instead of one single line; this same ")" on
Exhibit B appears in a single line and is relatively nearer to the border line.
There are other notable discrepancies between the check Annex A and the
photostatic copy, Exhibit B, as regards the relative position of the phrase "Agent,
Phil. National Bank", with the title Provincial Treasurer, giving ground to the doubt
that Exhibit B is a photostatic copy of the check (Exhibit A).
We then have the following facts. Exhibit A was issued by Laya in his capacity as
Provincial Treasurer of Misamis Oriental as drawer on the Philippine National Bank
as drawee. Ramos sold P30,000 of the check to Enrique P. Montinola for P90,000
Japanese military notes, of which only P45,000 was paid by Montinola. The writing
made by Ramos at the back of the check was an instruction to the bank to pay
P30,000 to Montinola and to deposit the balance to his (Ramos) credit. This
writing was obliterated and in its place we now have the supposed indorsement
appearing on the back of the check (Exh. A-1).
At the time of the transfer of this check (Exh. A) to Montinola about the last days
of December, 1944, or the first days of January, 1945, the check which, being a
negotiable instrument, was payable on demand, was long overdue by about 2 ½
years. It may therefore be considered, even then, a stable check. Of course,
Montinola claims that about June, 1944 when Ramos supposedly approached
him for the purpose of negotiating the check, he (Montinola) consulted President
Carmona of the Philippine National Bank who assured him that the check was
good and negotiable. However, President Carmona on the witness stand flatly
denied Montinola's claim and assured the court that the first time that he saw
Montinola was after the Philippine National Bank, of which he was President,
reopened, after liberation, around August or September, 1945, and that when
shown the check he told Montinola that it was stale. M. V. Ramos also told the
court that it is not true that he ever went with Montinola to see President
Carmona about the check in 1944.
On the basis of the facts above related there are several reasons why the
complaint of Montinola cannot prosper. The insertion of the words "Agent, Phil.
National Bank" which converts the bank from a mere drawee to a drawer and
therefore changes its liability, constitutes a material alteration of the instrument
without the consent of the parties liable thereon, and so discharges the
instrument. (Section 124 of the Negotiable Instruments Law). The check was not
legally negotiated within the meaning of the Negotiable Instruments Law. Section
32 of the same law provides that "the indorsement must be an indorsement of the
entire instrument. An indorsement which purports to transfer to the indorsee a
part only of the amount payable, . . . (as in this case) does not operate as a
negotiation of the instrument." Montinola may therefore not be regarded as an
indorsee. At most he may be regarded as a mere assignee of the P30,000 sold to
him by Ramos, in which case, as such assignee, he is subject to all defenses
available to the drawer Provincial Treasurer of Misamis Oriental and against
Ramos. Neither can Montinola be considered as a holder in due course because
section 52 of said law defines a holder in due course as a holder who has taken
the instrument under certain conditions, one of which is that he became the
holder before it was overdue. When Montinola received the check, it was long
overdue. And, Montinola is not even a holder because section 191 of the same
law defines holder as the payee or indorsee of a bill or note and Montinola is not
a payee. Neither is he an indorsee for as already stated, at most he can be
considered only as assignee. Neither could it be said that he took it in good faith.
As already stated, he has not paid the full amount of P90,000 for which Ramos
sold him P30,000 of the value of the check. In the second place, as was stated by
the trial court in its decision, Montinola speculated on the check and took a
chance on its being paid after the war. Montinola must have known that at the
Page 41 of 44
time the check was issued in May, 1942, the money circulating in Mindanao and
the Visayas was only the emergency notes and that the check was intended to
be payable in that currency. Also, he should have known that a check for such a
large amount of P100,000 could not have been issued to Ramos in his private
capacity but rather in his capacity as disbursing officer of the USAFFE, and that at
the time that Ramos sold a part of the check to him, Ramos was no longer
connected with the USAFFE but already a civilian who needed the money only
for himself and his family.
As already stated, as a mere assignee Montinola is subject to all the defenses
available against assignor Ramos. And, Ramos had he retained the check may
not now collect its value because it had been issued to him as disbursing officer.
As observed by the trial court, the check was issued to M. V. Ramos not as a
person but M. V. Ramos as the disbursing officer of the USAFFE. Therefore, he had
no right to indorse it personally to plaintiff. It was negotiated in breach of trust,
hence he transferred nothing to the plaintiff.
In view of all the foregoing, finding no reversible error in the decision appealed
from, the same is hereby affirmed with costs.
In the prayer for relief contained at the end of the brief for the Philippine National
Bank dated September 27, 1949, we find this prayer:
It is also respectfully prayed that this Honorable Court refer the check,
Exhibit A, to the City Fiscal's Office for appropriate criminal action against
the plaintiff-appellant if the facts so warrant.
Subsequently, in a petition signed by plaintiff-appellant Enrique P. Montinola
dated February 27, 1950, he asked this Court to allow him to withdraw the original
check (Exh. A) for him to keep, expressing his willingness to submit it to the court
whenever needed for examination and verification. The bank on March 2, 1950
opposed the said petition on the ground that inasmuch as the appellant's cause
of action in this case is based on the said check, it is absolutely necessary for the
court to examine the original in order to see the actual alterations supposedly
made thereon, and that should this Court grant the prayer contained in the
bank's brief that the check be later referred to the city fiscal for appropriate
action, said check may no longer be available if the appellant is allowed to
withdraw said document. In view of said opposition this Court resolution of March
6, 1950, denied said petition for withdrawal.
Acting upon the petition contained in the bank's brief already mentioned, once
the decision becomes final, let the Clerk of Court transmit to the city fiscal the
check (Exh. A) together with all pertinent papers and documents in this case, for
any action he may deem proper in the premises.
Moran, C.J., Paras, Feria, Pablo, Bengzon, Padilla, Tuazon, Reyes and Bautista
Angelo, JJ., concur.
88 Phil 178 – Commercial Law – Negotiable Instruments Law – Alteration –
Assignee – Partial Indorsement
ENRIQUE MONTINOLA VS. PNB
GR NO. L-2861, FEB. 26, 1951
In May 1942, Ubaldo Laya, as provincial treasurer of Misamis Oriental issued a
P100,000.00 Philippine National Bank (PNB) check to Mariano Ramos. The said
check was to be used by Ramos, as disbursing officer of the US forces at that
time, for military purposes. Before Ramos can encash the check, he was made a
prisoner of war by the invading Japanese forces. When he got free in December
1944, he needed some cash for himself and so he went to a certain Enrique
Montinola and made arrangements.
On the back of the check, Ramos wrote:
Pay to the order of Enrique P. Montinola P30,000 only. The balance to be
deposited in the Philippine National Bank to the credit of M. V. Ramos.
In consideration thereof, Montinola promised to pay 85,000 in Japanese notes
(that time peso notes are valued higher). However, he was only able to pay 45k
in Japanese notes to Ramos.
Later, Montinola sought to have the check encashed but PNB dishonored the
check. It appears that there was an insertion made. Under the signature of Laya,
the words “Agent, Philippine National Bank” was inserted, thus making it appear
that Laya disbursed the check as an agent of PNB and not as provincial treasurer
of Misamis Oriental (NOTE: at that time, a provincial treasurer is an ex officio
agent of the government’s bank).
ISSUE: Whether or not the subject check is a negotiable instrument.
HELD: No. It was not negotiated according to the Negotiable Instruments Law
(NIL) hence it is not a negotiable instrument. There was only a partial indorsement
and not a negotiation contemplated under the NIL. Only P30k of the P100k
amount of the check was indorsed. This merely make Montinola a mere assignee
– and this is the clear intent of Ramos. Ramos was merely assigning P30k to
Montinola. Montinola may therefore not be regarded as an indorsee and PNB
has all the right to dishonor the check. As mere assignee, he is subject to all
defenses available to the drawer Provincial Treasurer of Misamis Oriental and
against Ramos.
Page 42 of 44
Anent the issue of alteration, the apparent purpose of which is to make the
drawee (PNB) the drawer against which Montinola can recover from directly.
Such material alteration which was done by Montinola without the consent of the
parties liable thereon discharges the instrument, pursuant to Sec. 124 of the NIL.
Montinola cannot be said to be a holder. He is an assignee. And even if he is a
holder, he is not in good faith because he did not pay the full amount of the
consideration for which the P30k was issued to him – he only paid 45k Japanese
notes out of the 90k Japanese notes consideration.
At any rate, even assuming that there is proper negotiation, Montinola can no
longer encash said check because when he sought to have it encashed in
January 1945, it is already stale there being two and half years passing since its
time of issuance.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-39641 February 28, 1983
METROPOL (BACOLOD) FINANCING & INVESTMENT CORPORATION, plaintiff-
appellee,
vs.
SAMBOK MOTORS COMPANY and NG SAMBOK SONS MOTORS CO.,
LTD., defendants-appellants.
Rizal Quimpo & Cornelio P. Revena for plaintiff-appellee.
Diosdado Garingalao for defendants-appellants.
DE CASTRO, J.:
The former Court of Appeals, by its resolution dated October 16, 1974 certified this
case to this Court the issue issued therein being one purely of law.
On April 15, 1969 Dr. Javier Villaruel executed a promissory note in favor of Ng
Sambok Sons Motors Co., Ltd., in the amount of P15,939.00 payable in twelve (12)
equal monthly installments, beginning May 18, 1969, with interest at the rate of
one percent per month. It is further provided that in case on non-payment of any
of the installments, the total principal sum then remaining unpaid shall become
due and payable with an additional interest equal to twenty-five percent of the
total amount due.
On the same date, Sambok Motors Company (hereinafter referred to as
Sambok), a sister company of Ng Sambok Sons Motors Co., Ltd., and under the
same management as the former, negotiated and indorsed the note in favor of
plaintiff Metropol Financing & Investment Corporation with the following
indorsement:
Pay to the order of Metropol Bacolod Financing & Investment
Corporation with recourse. Notice of Demand; Dishonor; Protest;
and Presentment are hereby waived.
SAMBOK
MOTORS CO.
(BACOLOD)
By:
RODOLFO G. NONILLO Asst. General Manager
The maker, Dr. Villaruel defaulted in the payment of his installments when they
became due, so on October 30, 1969 plaintiff formally presented the promissory
note for payment to the maker. Dr. Villaruel failed to pay the promissory note as
demanded, hence plaintiff notified Sambok as indorsee of said note of the fact
that the same has been dishonored and demanded payment.
Sambok failed to pay, so on November 26, 1969 plaintiff filed a complaint for
collection of a sum of money before the Court of First Instance of Iloilo, Branch I.
Sambok did not deny its liability but contended that it could not be obliged to
pay until after its co-defendant Dr. Villaruel has been declared insolvent.
During the pendency of the case in the trial court, defendant Dr. Villaruel died,
hence, on October 24, 1972 the lower court, on motion, dismissed the case
against Dr. Villaruel pursuant to Section 21, Rule 3 of the Rules of Court. 1
On plaintiff's motion for summary judgment, the trial court rendered its decision
dated September 12, 1973, the dispositive portion of which reads as follows:
WHEREFORE, judgment is rendered:
(a) Ordering Sambok Motors Company to pay to the plaintiff the
sum of P15,939.00 plus the legal rate of interest from October 30,
1969;
(b) Ordering same defendant to pay to plaintiff the sum
equivalent to 25% of P15,939.00 plus interest thereon until fully
paid; and
(c) To pay the cost of suit.
Not satisfied with the decision, the present appeal was instituted, appellant
Sambok raising a lone assignment of error as follows:
The trial court erred in not dismissing the complaint by finding
defendant appellant Sambok Motors Company as assignor and
Page 43 of 44
a qualified indorsee of the subject promissory note and in not
holding it as only secondarily liable thereof.
Appellant Sambok argues that by adding the words "with recourse" in the
indorsement of the note, it becomes a qualified indorser that being a qualified
indorser, it does not warrant that if said note is dishonored by the maker on
presentment, it will pay the amount to the holder; that it only warrants the
following pursuant to Section 65 of the Negotiable Instruments Law: (a) that the
instrument is genuine and in all respects what it purports to be; (b) that he has a
good title to it; (c) that all prior parties had capacity to contract; (d) that he has
no knowledge of any fact which would impair the validity of the instrument or
render it valueless.
The appeal is without merit.
A qualified indorsement constitutes the indorser a mere assignor of the title to the
instrument. It may be made by adding to the indorser's signature the words
"without recourse" or any words of similar import. 2 Such an indorsement relieves
the indorser of the general obligation to pay if the instrument is dishonored but
not of the liability arising from warranties on the instrument as provided in Section
65 of the Negotiable Instruments Law already mentioned herein. However,
appellant Sambok indorsed the note "with recourse" and even waived the notice
of demand, dishonor, protest and presentment.
"Recourse" means resort to a person who is secondarily liable after the default of
the person who is primarily liable. 3 Appellant, by indorsing the note "with
recourse" does not make itself a qualified indorser but a general indorser who is
secondarily liable, because by such indorsement, it agreed that if Dr. Villaruel fails
to pay the note, plaintiff-appellee can go after said appellant. The effect of such
indorsement is that the note was indorsed without qualification. A person who
indorses without qualification engages that on due presentment, the note shall
be accepted or paid, or both as the case may be, and that if it be dishonored,
he will pay the amount thereof to the holder. 4 Appellant Sambok's intention of
indorsing the note without qualification is made even more apparent by the fact
that the notice of demand, dishonor, protest and presentment were an waived.
The words added by said appellant do not limit his liability, but rather confirm his
obligation as a general indorser.
Lastly, the lower court did not err in not declaring appellant as only secondarily
liable because after an instrument is dishonored by non-payment, the person
secondarily liable thereon ceases to be such and becomes a principal
debtor. 5 His liabiliy becomes the same as that of the original
obligor. 6 Consequently, the holder need not even proceed against the maker
before suing the indorser.
WHEREFORE, the decision of the lower court is hereby affirmed. No costs. Recourse means resort to a person who is secondarily liable after the
SO ORDERED. default of the person who is primarily liable. Sambok by indorsing the note “with
recourse” does not make itself a qualified indorser but a general indorser who is
secondarily liable, because by such indorsement, it agreed that if Villaruel fails to
Metropol vs. Sambok pay the not the holder can go after it. The effect of such indorsement is that the
L-39641 February 28, 1983 note was indorsed witout qualification. A person who indorses without
De Castro, J.: qualification engages that on due presentment, the note shall be accepted or
paid, or both as the case maybe, and that if it be dishonored, he will pay the
amount thereof to the holder. The words added by Sambok do not limit his
Facts: liability, but rather confirm his obligation as general indorser
Dr. Javier Villaruel executed a promissory note in favor of Ng Sambok Sons
Motors Co., Ltd. Payable in 12 equal monthly installments with interest. It is further
provided that in case on non-payment of any of the installments, the total
principal sum then remaining unpaid shall become due and payable with an
additional interest. Sambok Motors co., a sister company of Ng Sambok Sons
negotiated and indorsed the note in favor of Metropol Financing & investment
Corporation. Villaruel defaulted in the payment, upon presentment of the
promissory note he failed to pay the promissory note as demanded, hence Ng
Sambok Sons Motors Co., Ltd. notified Sambok as indorsee that the promissory
note has been dishonored and demanded payment. Sambok failed to pay. Ng
Sambok Sons filed a complaint for the collection of sum of money. During the
pendency of the case Villaruel died. Sambok argues that by adding the words
“with recourse” in the indorsement of the note, it becomes a qualified indorser,
thus, it does not warrant that in case that the maker failed to pay upon
presentment it will pay the amount to the holder.

Issue:
Whether or not Sambok Motors Co is a qualified indorser, thus it is not liable
upon the failure of payment of the maker.

Held:
No. A qualified indorserment constitutes the indorser a mere assignor of
the title to the instrument. It may be made by adding to the indorser’s signature
the words “without recourse” or any words of similar import. Such indorsement
relieves the indorser of the general obligation to pay if the instrument is
dishonored but not of the liability arising from warranties on the instrument as
provided by section 65 of NIL. However, Sambok indorsed the note “with
recourse” and even waived the notice of demand, dishonor, protest and
presentment.
Page 44 of 44