Name: Eharra Christa B.

Lasala

Subject: Negotiable Instruments Law

Topic: Liability of a Drawer of a Check

Title: Producers Bank of the Philippines vs Excelsa Industries Inc.,

Citation: G.R. No. 152071 May 8, 2009

Facts:

Sometime in January 1987, Respondent Excelsa Industries, Inc. applied for a packing credit line or a
credit export advance with petitioner Producers Bank of the Philippines, a banking institution duly
organized and existing under Philippines laws.

The application was supported by Letter of Credit issued by Kwang Ju Bank, Ltd. of Seoul, Korea through
its correspondent bank, the Bank of the Philippine Islands, in the amount of US$23,000.00 for the
account of Shin Sung Commercial Co., Ltd., also located in Seoul, Korea. T.L. World Development
Corporation was the original beneficiary of the letter of credit. On 05 December 1986, for value received,
T.L. World transferred to respondent all its rights and obligations under the said letter of credit.
Petitioner approved respondents application for a packing credit line in the amount of P300,000.00, of
which about P96,000.00 in principal remained outstanding. Respondent executed the corresponding
promissory notes evidencing the indebtedness.

Prior to the application for the packing credit line, respondent had obtained a loan from petitioner in the
form of a bill discounted and secured credit accommodation in the amount of P200,000.00, of which
P110,000.00 was outstanding at the time of the approval of the packing credit line. The loan was secured
by a real estate mortgage.

Respondent presented for negotiation to petitioner drafts drawn under the letter of credit and the
corresponding export documents in consideration for its drawings in the amounts of US$5,739.76 and
US$4,585.79. Petitioner purchased the drafts and export documents by paying respondent the peso
equivalent of the drawings. The purchase was subject to the conditions laid down in two separate
undertakings by respondent.

Kwang Ju Bank, Ltd. notified petitioner through cable that the Korean buyer refused to pay respondents
export documents on account of typographical discrepancies. Kwang Ju Bank, Ltd. returned to petitioner
the export documents. Upon learning about the Korean importers non-payment, respondent sent
petitioner a letter informing the latter that respondent had brought the matter before the Korea Trade
Court and that it was ready to liquidate its past due account with petitioner. Respondent sent another
letter, reiterating the same assurance. In a letter, Kwang Ju Bank, Ltd. informed petitioner that it would
be returning the export documents on account of the non-acceptance by the importer.

Petitioner demanded from respondent the payment of the peso equivalent of the export documents,
plus interest and other charges, and also of the other due and unpaid loans. Due to respondents failure
to heed the demand, petitioner moved for the extrajudicial foreclosure on the real estate mortgage over
respondents properties.At the public auction held on 05 January 1988, the Sheriff of Antipolo, Rizal
issued a Certificate of Sale in favor of petitioner as the highest bidder. The certificate of sale was
registered on 24 March 1988. On 12 June 1989, petitioner executed an affidavit of consolidation over the
foreclosed properties after respondent failed to redeem the same. As a result, the Register of Deeds of
Marikina issued new certificates of title in the name of petitioner.

On 17 November 1989, respondent instituted an action for the annulment of the extrajudicial
foreclosure with prayer for preliminary injunction and damages against petitioner and the Register of
Deeds of Marikina. The complaint prayed, among others, that the defendants be enjoined from causing
the transfer of ownership over the foreclosed properties from respondent to petitioner. On 05 April
1990, petitioner filed a petition for the issuance of a writ of possession. The RTC rendered a decision
upholding the validity of the extrajudicial foreclosure and ordering the issuance of a writ of possession in
favor of petitioner. The RTC held that petitioner, whose obligation consisted only of receiving, and not of
collecting, the export proceeds for the purpose of converting into Philippine currency and remitting the
same to respondent, cannot be considered as respondents agent. The RTC also held that petitioner
cannot be presumed to have received the export proceeds, considering that respondent executed
undertakings warranting that the drafts and accompanying documents were genuine and accurately
represented the facts stated therein and would be accepted and paid in accordance with their tenor.
Furthermore, the RTC concluded that petitioner had no obligation to return the export documents and
respondent could not expect their return prior to the payment of the export advances because the drafts
and export documents were the evidence that respondent received export advances from petitioner.
The RTC denied respondents motion for reconsideration. Thus, respondent elevated the matter to the
Court of Appeals, reiterating its claim that petitioner was not only a collection agent but was considered
a purchaser of the export
On 30 May 2001, the Court of Appeals rendered the assailed decision, reversing the RTCs decision. The
Court of Appeals held that respondent should not be faulted for the dishonor of the drafts and export
documents because the obligation to collect the export proceeds from Kwang Ju Bank, Ltd. devolved
upon petitioner. Petitioners motion for reconsideration was denied Hence, the instant petition.

Issue:

Who should be liable for the dishonor of the draft and export documents.

Ruling:

In the two undertakings executed by respondent as a condition for the negotiation of the drafts,
respondent held itself liable if the drafts were not accepted. The two undertakings signed by respondent
are similarly-worded and contained respondents express warranties.

In Velasquez v. Solidbank Corporation, where the drawer therein also executed a separate letter of
undertaking in consideration for the banks negotiation of its sight drafts, the Court held that the drawer
can still be made liable under the letter of undertaking even if he is discharged due to the banks failure
to protest the non-acceptance of the drafts. The Court explained, thus:

Petitioner, however, can still be made liable under the letter of undertaking. It bears stressing that it is a
separate contract from the sight draft. The liability of petitioner under the letter of undertaking is direct
and primary. It is independent from his liability under the sight draft. Liability subsists on it even if the
sight draft was dishonored for non-acceptance or non-payment.

Respondent agreed to purchase the draft and credit petitioner its value upon the undertaking that he
will reimburse the amount in case the sight draft is dishonored. The bank would certainly not have
agreed to grant petitioner an advance export payment were it not for the letter of undertaking. The
consideration for the letter of undertaking was petitioners promise to pay respondent the value of the
sight draft if it was dishonored for any reason by the Bank of Seoul.
 Thus, notwithstanding petitioners alleged failure to comply with the requirements of notice of dishonor
and protest under Sections 89 and 152, respectively, of the Negotiable Instruments Law, respondent may
not escape its liability under the separate undertakings, where respondent promised to pay on demand
the full amount of the drafts.

Name: Eharra Christa B. Lasala

Subject: Negotiable Instruments Law

Topic: Liability of Acceptor

Title: Bank of America vs Associated Citizens Bank

Citation: G.R. No. 141001 May 21, 2009

Facts:

BA-Finance Corporation (BA-Finance) entered into a transaction with Miller Offset Press, Inc. (Miller),
through the latters authorized representatives, i.e., Uy Kiat Chung, Ching Uy Seng, and Uy Chung Guan
Seng. BA-Finance granted Miller a credit line facility through which the latter could assign or discount its
trade receivables with the former. Uy Kiat Chung, Ching Uy Seng, and Uy Chung Guan Seng executed a
Continuing Suretyship Agreement with BA-Finance whereby they jointly and severally guaranteed the full
and prompt payment of any and all indebtedness which Miller may incur with BA-Finance.

Miller discounted and assigned several trade receivables to BA-Finance by executing Deeds of
Assignment in favor of the latter. In consideration of the assignment, BA-Finance issued four checks
payable to the Order of Miller Offset Press, Inc. with the notation For Payees Account Only. These checks
were drawn against Bank of America.

The four checks were deposited by Ching Uy Seng (a.k.a. Robert Ching), then the corporate secretary of
Miller, in Account No. 989 in Associated Citizens Bank (Associated Bank). Account No. 989 is a joint bank
account under the names of Ching Uy Seng and Uy Chung Guan Seng. Associated Bank stamped the
checks with the notation all prior endorsements and/or lack of endorsements guaranteed, and sent
them through clearing. Later, the drawee bank, Bank of America, honored the checks and paid the
proceeds to Associated Bank as the collecting bank.

Miller failed to deliver to BA-Finance the proceeds of the assigned trade receivables. Consequently, BA-
Finance filed a Complaint against Miller for collection of the amount of P731,329.63 which BA-Finance
allegedly paid in consideration of the assignment, plus interest at the rate of 16% per annum and penalty
charges. Likewise impleaded as party defendants in the collection case were Uy Kiat Chung, Ching Uy
Seng, and Uy Chung Guan Seng. Miller, Uy Kiat Chung, and Uy Chung Guan Seng filed a Joint Answer (to
the BA-Finances Complaint) with Cross-Claim against Ching Uy Seng, wherein they denied that (1) they
received the amount covered by the four Bank of America checks, and (2) they authorized their co-
defendant Ching Uy Seng to transact business with BA-Finance on behalf of Miller. Uy Kiat Chung and Uy
Chung Guan Seng also denied having signed the Continuing Suretyship Agreement with BA-Finance. In
view thereof, BA-Finance filed an Amended Complaint impleading Bank of America as additional
defendant for allegedly allowing encashment and collection of the checks by person or persons other
than the payee named thereon. Ching Uy Seng, on the other hand, did not file his Answer to the
complaint.

Bank of America filed a Third Party Complaint against Associated Bank. In its Answer to the Third Party
Complaint, Associated Bank admitted having received the four checks for deposit in the joint account of
Ching Uy Seng (a.k.a. Robert Ching) and Uy Chung Guan Seng, but alleged that Robert Ching, being one
of the corporate officers of Miller, was duly authorized to act for and on behalf of Miller.

On 28 September 1994, the RTC rendered a Decision, against Bank of America to pay BA Finance
Corporation the sum of P741,277.78, the value of the four (4) checks with legal interest until payment is
made and attorneys fees corresponding to 15% of the amount due and to pay the costs of the suit.
Associated Citizens Bank was also ordered to reimburse Bank of America, of the aforestated amount.

On appeal, the Court of Appeals rendered judgment, affirming with modifications the decision of the
RTC. Bank of America, NT & SA, was ordered to pay BA-Finance Corporation the sum of P741,277.78,
with legal interest thereon from the time of the filing of the complaint until the whole amount is fully
paid; Associated Citizens Bank was likewise ordered to reimburse Bank of America the aforestated
amount;Defendants Ching Uy Seng and/or Uy Chung Guan Seng are also ordered to pay Associated
Citizens Bank the aforestated amount; andThe award of attorneys fees was ordered deleted.
Associated Bank and Bank of America filed their respective Motions for Reconsideration, but these were
denied by the Court of Appeals in its Resolution of 6 December 1999. Hence, these petitions

Issue:

Whether or not the Court of Appeals erred in rendering judgment finding

1. Bank of America liable to pay BA-Finance the amount of the four checks;

2. Associated Bank liable to reimburse Bank of America the amount of the four checks;

3. Ching Uy Seng and/or Uy Chung Guan Seng liable to pay Associated Bank the amount of the four
checks.

Ruling:

1. No. The Court of Appeals did not err in finding Bank of America liable to pay BA-Finance the amount
of the four checks.

The bank on which a check is drawn, known as the drawee bank, is under strict liability, based on the
contract between the bank and its customer (drawer), to pay the check only to the payee or the payees
order. The drawers instructions are reflected on the face and by the terms of the check. When the
drawee bank pays a person other than the payee named on the check, it does not comply with the terms
of the check and violates its duty to charge the drawers account only for properly payable items. Thus,
we ruled in Philippine National Bank v. Rodriguez that a drawee should charge to the drawers accounts
only the payables authorized by the latter; otherwise, the drawee will be violating the instructions of the
drawer and shall be liable for the amount charged to the drawers account.

This Court has taken judicial cognizance of the practice that a check with two parallel lines in the upper
left hand corner means that it could only be deposited and could not be converted into cash. Thus, the
effect of crossing a check relates to the mode of payment, meaning that the drawer had intended the
check for deposit only by the rightful person, i.e., the payee named therein. The crossing may be special
wherein between the two parallel lines is written the name of a bank or a business institution, in which
case the drawee should pay only with the intervention of that bank or company, or general wherein
between two parallel diagonal lines are written the words and Co. or none at all, in which case the
drawee should not encash the same but merely accept the same for deposit. In Bataan Cigar v. Court of
Appeals, we enumerated the effects of crossing a check as follows: (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.

In this case, the four checks were drawn by BA-Finance and made payable to the Order of Miller Offset
Press, Inc. The checks were also crossed and issued For Payees Account Only. Clearly, the drawer
intended the check for deposit only by Miller Offset Press, Inc. in the latters bank account. Thus, when a
person other than Miller, i.e., Ching Uy Seng, a.k.a. Robert Ching, presented and deposited the checks in
his own personal account (Ching Uy Sengs joint account with Uy Chung Guan Seng), and the drawee
bank, Bank of America, paid the value of the checks and charged BA-Finances account therefor, the
drawee Bank of America is deemed to have violated the instructions of the drawer, and therefore, is
liable for the amount charged to the drawers account.

2. No. The Court of Appeals did not err in finding Associated Bank liable to reimburse Bank of America
the amount of the four checks.

A collecting bank where a check is deposited, and which endorses the check upon presentment with the
drawee bank, is an endorser. Under Section 66 of the Negotiable Instruments Law, an endorser warrants
that the instrument is genuine and in all respects what it purports to be; that he has good title to it; that
all prior parties had capacity to contract; and that the instrument is at the time of his endorsement valid
and subsisting. This Court has repeatedly held that in check transactions, the collecting bank or last
endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior
endorsements considering that the act of presenting the check for payment to the drawee is an assertion
that the party making the presentment has done its duty to ascertain the genuineness of the
endorsements.

When Associated Bank stamped the back of the four checks with the phrase all prior endorsements
and/or lack of endorsement guaranteed, that bank had for all intents and purposes treated the checks as
negotiable instruments and, accordingly, assumed the warranty of an endorser. Being so, Associated
Bank cannot deny liability on the checks.
Associated Bank was also clearly negligent in disregarding established banking rules and regulations by
allowing the four checks to be presented by, and deposited in the personal bank account of, a person
who was not the payee named in the checks. The checks were issued to the Order of Miller Offset Press,
Inc., but were deposited, and paid by Associated Bank, to the personal joint account of Ching Uy Seng
(a.k.a. Robert Ching) and Uy Chung Guan Seng. It could not have escaped Associated Banks attention
that the payee of the checks is a corporation while the person who deposited the checks in his own
account is an individual. Verily, when the bank allowed its client to collect on crossed checks issued in
the name of another, the bank is guilty of negligence. As ruled by this Court in Jai-Alai Corporation of the
Philippines v. Bank of the Philippine Islands, one who accepts and encashes a check from an individual
knowing that the payee is a corporation does so at his peril. Accordingly, we hold that Associated Bank is
liable for the amount of the four checks and should reimburse the amount of the checks to Bank of
America.

3. No. The Court of Appeals did not err in finding Ching Uy Seng and/or Uy Chung Guan Seng liable to
pay Associated Bank the amount of the four checks.

It is well-settled that a person who had not given value for the money paid to him has no right to retain
the money he received. This Court, therefore, quotes with approval the ruling of the Court of Appeals in
its decision: It appearing, however, from the evidence on record that since Ching Uy Seng and/or Uy
Chung Guan Seng received the proceeds of the checks as they were deposited in their personal joint
account with Associated Bank, they should, therefore, be obliged to reimburse Associated Bank for the
amount it has to pay to Bank of America, in line with the rule that no person should be allowed to
unjustly enrich himself at the expense of another.

Name: Eharra Christa B. Lasala

Subject: Negotiable Instruments Law

Topic: Liability of General Indorser

Title: Tuazon vs Heirs of B. Ramos

Citation: G.R. No. 156262 July 14, 2005

Facts:

Respondents alleged that between the period of May 2, 1988 and June 5, 1988, spouses Leonilo and
Maria Tuazon purchased a total of 8,326 cavans of rice from the deceased Bartolome Ramos
predecessor-in-interest of respondents. That only 4,437 cavans have been paid for so far, leaving unpaid
3,889 cavans valued at P1,211,919.00. In payment therefor, the spouses Tuazon issued several Traders
Royal Bank checks.

But when these checks were encashed, all of the checks bounced due to insufficiency of funds.
Respondents advanced that before issuing said checks,spouses Tuazon already knew that they had no
available fund to support the checks, and they failed to provide for the payment of these despite
repeated demands made on them.

Respondents averred that because spouses Tuazon anticipated that they would be sued, they conspired
with the other defendants to defraud them as creditors by executing fictitious sales of their properties.
They executed simulated sales of three lots in favor of the spouses Buenaventura, as well as their
residential lot and the house thereon, all located at Nueva Ecija, and another simulated deed of sale
dated July 12, 1988 of a Stake Toyota registered with the Land Transportation Office of Cabanatuan City
on September 7, 1988. Co-petitioner Melecio Tuazon, a son of spouses Tuazon, registered a fictitious
Deed of Sale on July 19, 1988 over a residential lot located at Nueva Ecija. Another simulated sale of a
Toyota Willys was executed on January 25, 1988 in favor of their other son, co-petitioner Alejandro
Tuazon. As a result of the said sales, the titles of these properties issued in the names of spouses Tuazon
were cancelled and new ones were issued in favor of the co-]defendants spouses Buenaventura,
Alejandro Tuazon and Melecio Tuazon. Resultantly, by the said ante-dated and simulated sales and the
corresponding transfers there was no more property left registered in the names of spouses Tuazon
answerable to creditors, to the damage and prejudice of respondents.

Defendants denied having purchased rice from Bartolome Ramos. They alleged that it was Magdalena
Ramos, wife of said deceased, who owned and traded the merchandise and Maria Tuazon was merely
her agent. They argued that it was Evangeline Santos who was the buyer of the rice and issued the
checks to Maria Tuazon as payments therefor. In good faith, the checks were received [by petitioner]
from Evangeline Santos and turned over to Ramos without knowing that these were not funded. And it is
for this reason that [petitioners] have been insisting on the inclusion of Evangeline Santos as an
indispensable party, and her non-inclusion was a fatal error. Refuting that the sale of several properties
were fictitious or simulated, spouses Tuazon contended that these were sold because they were then
meeting financial difficulties but the disposals were made for value and in good faith and done before
the filing of the instant suit. To dispute the contention of plaintiffs that they were the buyers of the rice,
they argued that there was no sales invoice, official receipts or like evidence to prove this. They assert
that they were merely agents and should not be held answerable.

Civil and criminal cases were filed by respondents against Spouses Tuazon. Those cases were later
consolidated and amended to include Spouses Anastacio and Mary Buenaventura, with Alejandro Tuazon
and Melecio Tuazon as additional defendants. Having passed away before the pretrial, Bartolome Ramos
was substituted by his heirs, herein respondents.

Contending that Evangeline Santos was an indispensable party in the case, petitioners moved to file a
third-party complaint against her. Allegedly, she was primarily liable to respondents, because she was
the one who had purchased the merchandise from their predecessor, as evidenced by the fact that the
checks had been drawn in her name. The RTC, however, denied petitioners Motion.The trial court
acquitted petitioners in all three of the consolidated criminal cases, they appealed only its decision
finding them civilly liable to respondents.

Sustaining the RTC, the CA held that petitioners had failed to prove the existence of an agency between
respondents and Spouses Tuazon. The appellate court disbelieved petitioners contention that Evangeline
Santos should have been impleaded as an indispensable party. Inasmuch as all the checks had been
indorsed by Maria Tuazon, who thereby became liable to subsequent holders for the amounts stated in
those checks, there was no need to implead Santos.Hence, this Petition.

Issues:

1. Whether or not the Honorable Court of Appeals erred in ruling that petitioners are not agents of the
respondents.

2. Whether or not the Honorable Court of Appeals erred in rendering judgment against the petitioners
despite the failure of the respondents to include in their action Evangeline Santos, an indispensable
party to the suit
Ruling:

1. No. In a contract of agency, one binds oneself to render some service or to do something in
representation or on behalf of another, with the latter’s consent or authority.

The following are the elements of agency: (1) the parties consent, express or implied, to establish the
relationship; (2) the object, which is the execution of a juridical act in relation to a third person; (3) the
representation, by which the one who acts as an agent does so, not for oneself, but as a representative;
(4) the limitation that the agent acts within the scope of his or her authority. As the basis of agency is
representation, there must be, on the part of the principal, an actual intention to appoint, an intention
naturally inferable from the principals words or actions. In the same manner, there must be an intention
on the part of the agent to accept the appointment and act upon it. Absent such mutual intent, there is
generally no agency.

This Court finds no reversible error in the findings of the courts a quo that petitioner were the rice
buyers themselves; they were not mere agents of respondents in their rice dealership. The question of
whether a contract is one of sale or of agency depends on the intention of the parties.

The declarations of agents alone are generally insufficient to establish the fact or extent of their
authority. The law makes no presumption of agency; proving its existence, nature and extent is
incumbent upon the person alleging it. In the present case, petitioners raise the fact of agency as an
affirmative defense, yet fail to prove its existence.

The Court notes that petitioners, on their own behalf, sued Evangeline Santos for collection of the
amounts represented by the bounced checks, in a separate civil case that they sought to be consolidated
with the current one. If, as they claim, they were mere agents of respondents, petitioners should have
brought the suit against Santos for and on behalf of their alleged principal, in accordance with Section 2
of Rule 3 of the Rules on Civil Procedure. Their filing a suit against her in their own names negates their
claim that they acted as mere agents in selling the rice obtained from Bartolome Ramos.

2. No. We hold that respondents cause of action is clearly founded on petitioners failure to pay the
purchase price of the rice. The trial court held that Petitioner Maria Tuazon had indorsed the questioned
checks in favor of respondents, in accordance with Sections 31 and 63 of the Negotiable Instruments
Law.That Santos was the drawer of the checks is thus immaterial to the respondents cause of action.

As indorser, Petitioner Maria Tuazon warranted that upon due presentment, the checks were to be
accepted or paid, or both, according to their tenor; and that in case they were dishonored, she would
pay the corresponding amount. After an instrument is dishonored by nonpayment, indorsers cease to be
merely secondarily liable; they become principal debtors whose liability becomes identical to that of the
original obligor. The holder of a negotiable instrument need not even proceed against the maker before
suing the indorser. Clearly, Evangeline Santos -- as the drawer of the checks -- is not an indispensable
party in an action against Maria Tuazon, the indorser of the checks.

Indispensable parties are defined as parties in interest without whom no final determination can be
had.The instant case was originally one for the collection of the purchase price of the rice bought by
Maria Tuazon from respondents predecessor. In this case, it is clear that there is no privity of contract
between respondents and Santos. Hence, a final determination of the rights and interest of the parties
may be made without any need to implead her.

Name: Eharra Christa B. Lasala

Subject: Negotiable Instruments Law

Topic: Liability under an Incomplete but Delivered Instrument

Title: Alvin Patrimonio vs Napoleon Gutierrez and Octavio Marasigan III

Citation: G.R. No. 187769 June 4, 2014

Facts:

The petitioner and the respondent Napoleon Gutierrez (Gutierrez) entered into a business venture under
the name of Slam Dunk Corporation (Slum Dunk), a production outfit that produced mini-concerts and
shows related to basketball. Petitioner was already then a decorated professional basketball player while
Gutierrez was a well-known sports columnist.
In the course of their business, the petitioner pre-signed several checks to answer for the expenses of
Slam Dunk. Although signed, these checks had no payee’s name, date or amount. The blank checks were
entrusted to Gutierrez with the specific instruction not to fill them out without previous notification to
and approval by the petitioner. According to petitioner, the arrangement was made so that he could
verify the validity of the payment and make the proper arrangements to fund the account.

In the middle of 1993, without the petitioner’s knowledge and consent, Gutierrez went to Marasigan
(the petitioner’s former teammate), to secure a loan in the amount of ₱200,000.00 on the excuse that
the petitioner needed the money for the construction of his house. In addition to the payment of the
principal, Gutierrez assured Marasigan that he would be paid an interest of 5% per month from March to
May 1994.

Marasigan acceded to Gutierrez’ request and gave him ₱200,000.00 sometime in February 1994.
Gutierrez simultaneously delivered to Marasigan one of the blank checks the petitioner pre-signed with
Pilipinas Bank, Greenhills Branch, Check No. 21001764 with the blank portions filled out with the words
"Cash" "Two Hundred Thousand Pesos Only", and the amount of "₱200,000.00". The upper right portion
of the check corresponding to the date was also filled out with the words "May 23, 1994" but the
petitioner contended that the same was not written by Gutierrez.

On May 24, 1994, Marasigan deposited the check but it was dishonored for the reason "ACCOUNT
CLOSED." It was later revealed that petitioner’s account with the bank had been closed since May 28,
1993.Marasigan sought recovery from Gutierrez, to no avail. He thereafter sent several demand letters to
the petitioner asking for the payment, but his demands likewise went unheeded. Consequently, he filed
a criminal case for violation of B.P. 22 against the petitioner.

The petitioner filed before the Regional Trial Court (RTC) a Complaint for Declaration of Nullity of Loan
and Recovery of Damages against Gutierrez and co-respondent Marasigan. He completely denied
authorizing the loan or the check’s negotiation, and asserted that he was not privy to the parties’ loan
agreement.
The RTC ruled on February 3,2003 in favor of Marasigan. It found that the petitioner, in issuing the pre-
signed blank checks, had the intention of issuing a negotiable instrument, albeit with specific
instructions to Gutierrez not to negotiate or issue the check without his approval. While under Section
14 of the Negotiable Instruments Law Gutierrez had the prima facie authority to complete the checks by
filling up the blanks therein, the RTC ruled that he deliberately violated petitioner’s specific instructions
and took advantage of the trust reposed in him by the latter.

Nonetheless, the RTC declared Marasigan as a holder in due course and accordingly dismissed the
petitioner’s complaint for declaration of nullity of the loan. It ordered the petitioner to pay Marasigan
the face value of the check with a right to claim reimbursement from Gutierrez.The petitioner elevated
the case to the Court of Appeals (CA), which affirmed the RTC decision.

Issues:

1. Whether or not Gutierrez completely filled out the subject check strictly under the petitioner’s
authority;

2. Whether or not Marasigan is a holder in due course

Ruling:

1. No. The check was not completed strictly under the authority given by the petitioner.

Gutierrez has exceeded the authority to fill up the blanks and use the check. To repeat, petitioner gave
Gutierrez pre-signed checks to be used in their business provided that he could only use them upon his
approval. His instruction could not be any clearer as Gutierrez’ authority was limited to the use of the
checks for the operation of their business, and on the condition that the petitioner’s prior approval be
first secured.While under the law, Gutierrez had a prima facie authority to complete the check, such
prima facie authority does not extend to its use (i.e., subsequent transfer or negotiation)once the check
is completed. In other words, only the authority to complete the check is presumed. Further, the law
used the term "prima facie" to underscore the fact that the authority which the law accords to a holder
is a presumption juris tantumonly; hence, subject to subject to contrary proof. Thus, evidence that there
was no authority or that the authority granted has been exceeded may be presented by the maker in
order to avoid liability under the instrument.
In the present case, no evidence is on record that Gutierrez ever secured prior approval from the
petitioner to fill up the blank or to use the check. In his testimony, petitioner asserted that he never
authorized nor approved the filling up of the blank checks. Gutierrez was only authorized to use the
check for business expenses; thus, he exceeded the authority when he used the check to pay the loan he
supposedly contracted for the construction of petitioner's house. This is a clear violation of the
petitioner's instruction to use the checks for the expenses of Slam Dunk. It cannot therefore be validly
concluded that the check was completed strictly in accordance with the authority given by the
petitioner.

2. No. Marasigan is not a Holder in Due Course. The Negotiable Instruments Law (NIL) defines a holder in
due course, thus:

Sec. 52 — A holder in due course is a holder who has taken the instrument under the following
conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been previously
dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect
in the title of the person negotiating it.(emphasis supplied)
Section 52(c) of the NIL states that a holder in due course is one who takes the instrument "in good faith
and for value." It also provides in Section 52(d) that in order that one may be a holder in due course, it is
necessary that at the time it was negotiated to him he had no notice of any infirmity in the instrument or
defect in the title of the person negotiating it. Acquisition in good faith means taking without knowledge
or notice of equities of any sort which could beset up against a prior holder of the instrument.18 It
means that he does not have any knowledge of fact which would render it dishonest for him to take a
negotiable paper. The absence of the defense, when the instrument was taken, is the essential element
of good faith.

The term ‘bad faith’ does not necessarily involve furtive motives, but means bad faith in a commercial
sense. The manner in which the defendants conducted their Liberty Loan department provided an easy
way for thieves to dispose of their plunder. It was a case of "no questions asked." Although gross
negligence does not of itself constitute bad faith, it is evidence from which bad faith may be inferred.
The circumstances thrust the duty upon the defendants to make further inquiries and they had no right
to shut their eyes deliberately to obvious facts. (emphasis supplied).

In the present case, Marasigan’s knowledge that the petitioner is not a party or a privy to the contract of
loan, and correspondingly had no obligation or liability to him, renders him dishonest, hence, in bad
faith.Since he knew that the underlying obligation was not actually for the petitioner, the rule that a
possessor of the instrument is prima facie a holder in due course is inapplicable. As correctly noted by
the CA, his inaction and failure to verify, despite knowledge of that the petitioner was not a party to the
loan, may be construed as gross negligence amounting to bad faith.

Yet, it does not follow that simply because he is not a holder in due course, Marasigan is already totally
barred from recovery. The NIL does not provide that a holder who is not a holder in due course may not
in any case recover on the instrument. The only disadvantage of a holder who is not in due course is that
the negotiable instrument is subject to defenses as if it were non-negotiable. Among such defenses is
the filling up blank not within the authority.

Considering that Marasigan is not a holder in due course, the petitioner can validly set up the personal
defense that the blanks were not filled up in accordance with the authority he gave. Consequently,
Marasigan has no right to enforce payment against the petitioner and the latter cannot be obliged to pay
the face value of the check.
Name: Eharra Christa B. Lasala

Subject: Negotiable Instruments Law

Topic: Liability of Depositary/Collecting Bank in Altered Checks

Title: Cesar Areza and Lolit Areza vs Express Savings Bank and Michael Potenciano

Citation: G.R. No. 176697 September 10, 2014

Facts:

Petitioners Cesar V. Areza and Lolita B. Areza maintained two bank deposits with respondent Express
Savings Bank’s Biñan branch. They were engaged in the business of "buy and sell" of brand new and
second-hand motor vehicles. They received an order from a certain Gerry Mambuay (Mambuay) for the
purchase of a second-hand Mitsubishi Pajero and a brand-new Honda CRV. Mambuay, paid petitioners
with nine (9) Philippine Veterans Affairs Office (PVAO) checks payable to different payees and drawn
against the Philippine Veterans Bank (drawee), each valued at Two Hundred Thousand Pesos
(₱200,000.00) for a total of One Million Eight Hundred Thousand Pesos (₱1,800,000.00).

Petitioners claimed that Michael Potenciano (Potenciano), the branch manager of respondent Express
Savings Bank (the Bank) was present during the transaction and immediately offered the services of the
Bank for the processing and eventual crediting of the said checks to petitioners’ account. On the other
hand, Potenciano countered that he was prevailed upon to accept the checks by way of accommodation
of petitioners who were valued clients of the Bank.

Petitioners deposited the said checks in their savings account with the Bank. The Bank, inturn, deposited
the checks with its depositary bank, Equitable-PCI Bank, in Biñan, Laguna. Equitable-PCI Bank presented
the checks to the drawee, the Philippine Veterans Bank, which honored the checks. Potenciano informed
petitioners that the checks they deposited with the Bank were honored. He allegedly warned petitioners
that the clearing of the checks pertained only to the availability of funds and did not mean that the
checks were not infirmed. Thus, the entire amount of ₱1,800,000.00 was credited to petitioners’ savings
account. Based on this information, petitioners released the two cars to the buyer.

Sometime in July 2000, the subject checks were returned by PVAO to the drawee on the ground that the
amount on the face of the checks was altered from the original amount of ₱4,000.00 to ₱200,000.00.
The drawee returned the checks to Equitable-PCI Bank by way of Special Clearing Receipts. In August
2000, the Bank was informed by Equitable-PCI Bank that the drawee dishonored the checks onthe
ground of material alterations. Equitable-PCI Bank initially filed a protest with the Philippine Clearing
House. In February 2001, the latter ruled in favor of the drawee Philippine Veterans Bank. Equitable-PCI
Bank, in turn, debited the deposit account of the Bank in the amount of ₱1,800,000.00.

The Bank insisted that they informed petitioners of said development by furnishing them copies of the
documents given by its depositary bank. On the other hand, petitioners maintained that the Bank never
informed them of these developments.

Petitioners issued a check in the amount of ₱500,000.00. Said check was dishonored by the Bank for the
reason "Deposit Under Hold." Petitioners’ counsel sent a demand letter asking the Bank to honor their
check. The Bank refused to heed their request and instead, closed the Special Savings Account of the
petitioners with a balance of ₱1,179,659.69 and transferred said amount to their savings account. The
Bank then withdrew the amount of ₱1,800,000.00 representing the returned checks from petitioners’
savings account.

Acting on the alleged arbitrary and groundless dishonoring of their checks and the unlawful and
unilateral withdrawal from their savings account, petitioners filed a Complaint for Sum of Money with
Damages against the Bank and Potenciano with the RTC of Calamba.

On 15 January 2004, the RTC, through Judge Antonio S. Pozas, ruled in favor of petitioners. Respondents
filed a motion for reconsideration. On 22 April 2004, the RTC, through Pairing Judge Romeo C. De Leon
granted the motion for reconsideration, set aside the Pozas Decision, and dismissed the complaint. The
trial court awarded respondents their counterclaim of moral and exemplary damages of ₱100,000.00
each. The trial court first applied the principle of liberality when it disregarded the alleged absence of a
notice of hearing in respondents’ motion for reconsideration. On the merits, the trial court considered
the relationship of the Bank and petitioners with respect to their savings account deposits as a contract
of loan with the bank as the debtor and petitioners as creditors. As such, Article 1977 of the Civil Code
prohibiting the depository from making use of the thing deposited without the express permission of the
depositor is not applicable. Instead, the trial court applied Article 1980 which provides that fixed, savings
and current deposits of money in banks and similar institutions shall be governed by the provisions
governing simple loan. The trial court then opined that the Bank had all the right to set-off against
petitioners’ savings deposits the value of their nine checks that were returned. On appeal, the Court of
Appeals affirmed the ruling of the trial court but deleted the award of damages.

Issue:

Whether or not the Bank had the right to debit ₱1,800,000.00 from petitioners’ accounts

Ruling:

No. The fact that material alteration caused the eventual dishonor of the checks issued by PVAO is
undisputed. In this case, before the alteration was discovered, the checks were already cleared by the
drawee bank, the Philippine Veterans Bank. Three months had lapsed before the drawee dishonored the
checks and returned them to Equitable-PCI Bank, the respondents’ depositary bank. And it was not until
10 months later when petitioners’ accounts were debited.

LIABILITY OF DEPOSITARY BANK AND COLLECTING BANK

A depositary bank is the first bank to take an item even though it is also the payor bank, unless the item
is presented for immediate payment over the counter. It is also the bank to which a check is transferred
for deposit in an account at such bank, evenif the check is physically received and indorsed first by
another bank. A collecting bank is defined as any bank handling an item for collection except the bank on
which the check is drawn.
When petitioners deposited the check with the Bank, they were designating the latter as the collecting
bank. This is in consonance with the rule that a negotiable instrument, such as a check, whether a
manager's check or ordinary check, is not legal tender. As such, after receiving the deposit, under its own
rules, the Bank shall credit the amount in petitioners’ account or infuse value thereon only after the
drawee bank shall have paid the amount of the check or the check has been cleared for deposit.

The Bank and Equitable-PCI Bank are both depositary and collecting banks.

A depositary/collecting bank where a check is deposited, and which endorses the check upon
presentment with the drawee bank, is an endorser. Under Section 66 of the Negotiable Instruments Law,
an endorser warrants "that the instrument is genuine and in all respects what it purports to be; that he
has good title to it; that all prior parties had capacity to contract; and that the instrument is at the time
of his endorsement valid and subsisting." It has been repeatedly held that in check transactions, the
depositary/collecting bank or last endorser generally suffers the loss because it has the duty to ascertain
the genuineness of all prior endorsements considering that the act of presenting the check for payment
to the drawee is an assertion that the party making the presentment has done its duty to ascertain the
genuineness of the endorsements. If any of the warranties made by the depositary/collecting bank turns
out to be false, then the drawee bank may recover from it up to the amount of the check.

The law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it for the
purpose of determining their genuineness and regularity. The collecting bank being primarily engaged in
banking holds itself out to the public as the expert and the law holds it to a high standard of conduct. As
collecting banks, the Bank and Equitable-PCI Bank are both liable for the amount of the materially
altered checks. Since Equitable-PCI Bank is not a party to this case and the Bank allowed its account with
Equitable PCI Bank to be debited, it has the option to seek recourse against the latter in another forum.

The Bank cannot debit the savings account of petitioners. A depositary/collecting bank may resist or
defend against a claim for breach of warranty if the drawer, the payee, or either the drawee bank or
depositary bank was negligent and such negligence substantially contributed tothe loss from alteration.
In the instant case, no negligence can be attributed to petitioners. We lend credence to their claim that
at the time of the sales transaction, the Bank’s branch manager was present and even offered the Bank’s
services for the processing and eventual crediting of the checks. True to the branch manager’s words,
the checks were cleared three days later when deposited by petitioners and the entire amount ofthe
checks was credited to their savings account.
Name: Eharra Christa B. Lasala

Subject: Negotiable Instruments Law

Topic: Promissory Notes and Checks

Title: Metropolitan Waterworks and Sewerage System vs Court of Appeals and PNB

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

Facts:

Metropolitan Waterworks and Sewerage System (hereinafter referred to as MWSS) is a government

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

During the months of March, April and May 1969, twenty-three (23) checks were prepared, processed,
issued and released by NWSA, all of which were paid and cleared by PNB and debited by PNB against
NWSA Account No. 6. During the same months of March, April and May 1969, twenty-three (23) checks
bearing the same numbers as the aforementioned NWSA checks were likewise paid and cleared by PNB
and debited against NWSA Account No. 6. The foregoing checks were deposited by the payees Raul
Dizon, Arturo Sison and Antonio Mendoza in their respective current accounts with the Philippine
Commercial and Industrial Bank (PCIB) and Philippine Bank of Commerce (PBC) in the months of March,
April and May 1969. Thru the Central Bank Clearing, these checks were presented for payment by PBC
and PCIB to the defendant PNB, and paid, also in the months of March, April and May 1969. At the time
of their presentation to PNB these checks bear the standard indorsement which reads 'all prior
indorsement and/or lack of endorsement guaranteed.'
Subsequent investigation however, conducted by the NBI showed that Raul Dizon, Arturo Sison and
Antonio Mendoza were all fictitious persons. On June 11, 1969, NWSA addressed a letter to PNB
requesting the immediate restoration to its Account No. 6, of the total sum of P3,457,903.00
corresponding to the total amount of these twenty-three (23) checks claimed by NWSA to be forged
and/or spurious checks. "In view of the refusal of PNB to credit back to Account No. 6 the said total sum
of P3,457,903.00 MWSS filed the instant complaint on November 10, 1972 before the Court of First
Instance of Manila.

On February 6, 1976, the Court of First Instance of Manila rendered judgment in favor of the MWSS. The
respondent Court of Appeals reversed the decision of the Court of First Instance of Manila and rendered
judgment in favor of the respondent Philippine National Bank. motion for reconsideration filed by the
petitioner MWSS was denied by the respondent court in a resolution dated January 3, 1983.

Issue:

Whether or not PNB should restore the said amount

Ruling:

No. There is no express and categorical finding in these documents that the twenty-three (23)
questioned checks were indeed signed by persons other than the authorized MWSS signatories. On the
contrary, the findings of the National Bureau of Investigation in its Report dated November 2, 1970 show
that the MWSS fraud was an "inside job" and that the petitioner's delay in the reconciliation of bank
statements and the laxity and loose records control in the printing of its personalized checks facilitated
the fraud. Forgery cannot be presumed (Siasat, et al. v. Intermediate Appellate Court, et al, 139 SCRA
238). It must be established by clear, positive, and convincing evidence. This was not done in the present
case.

Considering the absence of sufficient security in the printing of the checks coupled with the very close
similarities between the genuine signatures and the alleged forgeries, the twenty-three (23) checks in
question could have been presented to the petitioner's signatories without their knowing that they were
bogus checks. Indeed, the cashier of the petitioner whose signatures were allegedly forged was unable
to ten the difference between the allegedly forged signature and his own genuine signature. On the
other hand, the MWSS officials admitted that these checks could easily be passed on as genuine.
Moreover, the petitioner is barred from setting up the defense of forgery under Section 23 of the
Negotiable Instruments Law which provides that:

SEC. 23. FORGED SIGNATURE; EFFECT OF.- When the signature is forged or made without authority
of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto can
be acquired through or under such signature unless the party against whom it is sought to enforce such
right is precluded from setting up the forgery or want of authority.

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

(1) The petitioner failed to give its printer, Mesina Enterprises, specific instructions relative to the
safekeeping and disposition of excess forms, check vouchers, and safety papers;(2) The petitioner failed
to retrieve from its printer all spoiled check forms; (3) The petitioner failed to provide any control
regarding the paper used in the printing of said checks; (4) The petitioner failed to furnish the
respondent drawee bank with samples of typewriting, cheek writing, and print used by its printer in the
printing of its checks and of the inks and pens used in signing the same; and (5) The petitioner failed to
send a representative to the printing office during the printing of said checks.

Even if the twenty-three (23) checks in question are considered forgeries, considering the petitioner's
gross negligence, it is barred from setting up the defense of forgery under Section 23 of the Negotiable
Instruments Law.