G.R. No.
92244 February 9, 1993 I
NATIVIDAD GEMPESAW, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS, respondents.
L.B. Camins for petitioner.
Angara, Abello, Concepcion, Regals & Cruz for private respondent
CAMPOS, JR., J.:
From the adverse decision * of the Court of Appeals (CA-G.R. CV No. 16447),
petitioner, Natividad Gempesaw, appealed to this Court in a Petition for
Review, on the issue of the right of the drawer to recover from the drawee
bank who pays a check with a forged indorsement of the payee, debiting the
same against the drawer's account.
The records show that on January 23, 1985, petitioner filed a Complaint
against the private respondent Philippine Bank of Communications
(respondent drawee Bank) for recovery of the money value of eighty-two
(82) checks charged against the petitioner's account with the respondent
drawee Bank on the ground that the payees' indorsements were forgeries.
The Regional Trial Court, Branch CXXVIII of Caloocan City, which tried the
case, rendered a decision on November 17, 1987 dismissing the complaint
as well as the respondent drawee Bank's counterclaim. On appeal, the Court
of Appeals in a decision rendered on February 22, 1990, affirmed the
decision of the RTC on two grounds, namely (1) that the plaintiff's
(petitioner herein) gross negligence in issuing the checks was the proximate
cause of the loss and (2) assuming that the bank was also negligent, the loss
must nevertheless be borne by the party whose negligence was the
proximate cause of the loss. On March 5, 1990, the petitioner filed this
petition under Rule 45 of the Rules of Court setting forth the following as
the alleged errors of the respondent Court:1
THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE
NEGLIGENCE OF THE DRAWER IS THE PROXIMATE CAUSE OF THE RESULTING
INJURY TO THE DRAWEE BANK, AND THE DRAWER IS PRECLUDED FROM
SETTING UP THE FORGERY OR WANT OF AUTHORITY.
II
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT FINDING AND
RULING THAT IT IS THE GROSS AND INEXCUSABLE NEGLIGENCE AND
FRAUDULENT ACTS OF THE OFFICIALS AND EMPLOYEES OF THE
RESPONDENT BANK IN FORGING THE SIGNATURE OF THE PAYEES AND THE
WRONG AND/OR ILLEGAL PAYMENTS MADE TO PERSONS, OTHER THAN TO
THE INTENDED PAYEES SPECIFIED IN THE CHECKS, IS THE DIRECT AND
PROXIMATE CAUSE OF THE DAMAGE TO PETITIONER WHOSE SAVING (SIC)
ACCOUNT WAS DEBITED.
III
THE RESPONDENT COURT OF APPEALS ALSO ERRED IN NOT ORDERING THE
RESPONDENT BANK TO RESTORE OR RE-CREDIT THE CHECKING ACCOUNT
OF THE PETITIONER IN THE CALOOCAN CITY BRANCH BY THE VALUE OF THE
EIGHTY-TWO (82) CHECKS WHICH IS IN THE AMOUNT OF P1,208,606.89
WITH LEGAL INTEREST.
From the records, the relevant facts are as follows:
Petitioner Natividad O. Gempesaw (petitioner) owns and operates four
grocery stores located at Rizal Avenue Extension and at Second Avenue,
Caloocan City. Among these groceries are D.G. Shopper's Mart and D.G.
Whole Sale Mart. Petitioner maintains a checking account numbered 13-
00038-1 with the Caloocan City Branch of the respondent drawee Bank. To
facilitate payment of debts to her suppliers, petitioner draws checks against
her checking account with the respondent bank as drawee. Her customary
practice of issuing checks in payment of her suppliers was as follows: the
checks were prepared and filled up as to all material particulars by her
trusted bookkeeper, Alicia Galang, an employee for more than eight (8)
years. After the bookkeeper prepared the checks, the completed checks
were submitted to the petitioner for her signature, together with the
corresponding invoice receipts which indicate the correct obligations due
and payable to her suppliers. Petitioner signed each and every check
without bothering to verify the accuracy of the checks against the
corresponding invoices because she reposed full and implicit trust and
confidence on her bookkeeper. The issuance and delivery of the checks to
the payees named therein were left to the bookkeeper. Petitioner admitted
that she did not make any verification as to whether or not the checks were
delivered to their respective payees. Although the respondent drawee Bank
notified her of all checks presented to and paid by the bank, petitioner did
not verify he correctness of the returned checks, much less check if the
payees actually received the checks in payment for the supplies she
received. In the course of her business operations covering a period of two
years, petitioner issued, following her usual practice stated above, a total of
eighty-two (82) checks in favor of several suppliers. These checks were all
presented by the indorsees as holders thereof to, and honored by, the
respondent drawee Bank. Respondent drawee Bank correspondingly
debited the amounts thereof against petitioner's checking account
numbered 30-00038-1. Most of the aforementioned checks were for
amounts in excess of her actual obligations to the various payees as shown
in their corresponding invoices. To mention a few:
. . . 1) in Check No. 621127, dated June 27, 1984 in the amount of
P11,895.23 in favor of Kawsek Inc. (Exh. A-60), appellant's actual obligation
to said payee was only P895.33 (Exh. A-83); (2) in Check No. 652282 issued
on September 18, 1984 in favor of Senson Enterprises in the amount of
P11,041.20 (Exh. A-67) appellant's actual obligation to said payee was only
P1,041.20 (Exh. 7); (3) in Check No. 589092 dated April 7, 1984 for the
amount of P11,672.47 in favor of Marchem (Exh. A-61) appellant's
obligation was only P1,672.47 (Exh. B); (4) in Check No. 620450 dated May
10, 1984 in favor of Knotberry for P11,677.10 (Exh. A-31) her actual
obligation was only P677.10 (Exhs. C and C-1); (5) in Check No. 651862
dated August 9, 1984 in favor of Malinta Exchange Mart for P11,107.16
(Exh. A-62), her obligation was only P1,107.16 (Exh. D-2); (6) in Check No.
651863 dated August 11, 1984 in favor of Grocer's International Food Corp.
in the amount of P11,335.60 (Exh. A-66), her obligation was only P1,335.60
(Exh. E and E-1); (7) in Check No. 589019 dated March 17, 1984 in favor of
Sophy Products in the amount of P11,648.00 (Exh. A-78), her obligation was
only P648.00 (Exh. G); (8) in Check No. 589028 dated March 10, 1984 for the
amount of P11,520.00 in favor of the Yakult Philippines (Exh. A-73), the
latter's invoice was only P520.00 (Exh. H-2); (9) in Check No. 62033 dated
May 23, 1984 in the amount of P11,504.00 in favor of Monde Denmark
Biscuit (Exh. A-34), her obligation was only P504.00 (Exhs. I-1 and I-2).2
Practically, all the checks issued and honored by the respondent drawee
bank were crossed checks.3 Aside from the daily notice given to the
petitioner by the respondent drawee Bank, the latter also furnished her
with a monthly statement of her transactions, attaching thereto all the
cancelled checks she had issued and which were debited against her current
account. It was only after the lapse of more two (2) years that petitioner
found out about the fraudulent manipulations of her bookkeeper.
All the eighty-two (82) checks with forged signatures of the payees were
brought to Ernest L. Boon, Chief Accountant of respondent drawee Bank at
the Buendia branch, who, without authority therefor, accepted them all for
deposit at the Buendia branch to the credit and/or in the accounts of
Alfredo Y. Romero and Benito Lam. Ernest L. Boon was a very close friend of
Alfredo Y. Romero. Sixty-three (63) out of the eighty-two (82) checks were
deposited in Savings Account No. 00844-5 of Alfredo Y. Romero at the
respondent drawee Bank's Buendia branch, and four (4) checks in his
Savings Account No. 32-81-9 at its Ongpin branch. The rest of the checks
were deposited in Account No. 0443-4, under the name of Benito Lam at
the Elcaño branch of the respondent drawee Bank.
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 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 on the matter. Had this been done, the discrepancies would
have been discovered, sooner or later. Petitioner's failure to make such
adequate inquiry constituted negligence which resulted in the bank's
honoring of the subsequent checks with forged indorsements. On the other
hand, since the record mentions nothing about such a complaint, the
possibility exists that the checks in question covered inexistent sales. But
even in such a case, considering the length of a period of two (2) years, it is
hard to believe that petitioner did not know or realize that she was paying
more than she should for the supplies she was actually getting. A depositor
may not sit idly by, after knowledge has come to her that her funds seem to
be disappearing or that there may be a leak in her business, and refrain
from taking the steps that a careful and prudent businessman would take in
such circumstances and if taken, would result in stopping the continuance of
the fraudulent scheme. If she fails to take steps, the facts may establish her
negligence, and in that event, she would be estopped from recovering from
the bank.9
One thing is clear from the records — that the petitioner failed to examine
her records with reasonable diligence whether before she signed the checks
or after receiving her bank statements. Had the petitioner examined her
records more carefully, particularly the invoice receipts, cancelled checks,
check book stubs, and had she compared the sums written as amounts
payable in the eighty-two (82) checks with the pertinent sales invoices, she
would have easily discovered that in some checks, the amounts did not tally
with those appearing in the sales invoices. Had she noticed these
discrepancies, she should not have signed those checks, and should have
conducted an inquiry as to the reason for the irregular entries. Likewise had
petitioner been more vigilant in going over her current account by taking
careful note of the daily reports made by respondent drawee Bank in her
issued checks, or at least made random scrutiny of cancelled checks
returned by respondent drawee Bank at the close of each month, she could
have easily discovered the fraud being perpetrated by Alicia Galang, and
could have reported the matter to the respondent drawee Bank. The
respondent drawee Bank then could have taken immediate steps to prevent
further commission of such fraud. Thus, petitioner's negligence was the
proximate cause of her loss. And since it was her negligence which caused
the respondent drawee Bank to honor the forged checks or prevented it
from recovering the amount it had already paid on the checks, petitioner
cannot now complain should the bank refuse to recredit her account with
the amount of such checks. 10 Under Section 23 of the NIL, she is now
precluded from using the forgery to prevent the bank's debiting of her
account.
The doctrine in the case of Great Eastern Life Insurance Co. vs. Hongkong &
Shanghai Bank 11 is not applicable to the case at bar because in said case,
the check was fraudulently taken and the signature of the payee was forged
not by an agent or employee of the drawer. The drawer was not found to be
negligent in the handling of its business affairs and the theft of the check by
a total stranger was not attributable to negligence of the drawer; neither
was the forging of the payee's indorsement due to the drawer's negligence.
Since the drawer was not negligent, the drawee was duty-bound to restore
to the drawer's account the amount theretofore paid under the check with
a forged payee's indorsement because the drawee did not pay as ordered
by the drawer.
Petitioner argues that respondent drawee Bank should not have honored
the checks because they were crossed checks. Issuing a crossed check
imposes no legal obligation on the drawee not to honor such a check. It is
more of a warning to the holder that the check cannot be presented to the
drawee bank for payment in cash. Instead, the check can only be deposited
with the payee's bank which in turn must present it for payment against the
drawee bank in the course of normal banking transactions between banks.
The crossed check cannot be presented for payment but it can only be
deposited and the drawee bank may only pay to another bank in the
payee's or indorser's account.
Petitioner likewise contends that banking rules prohibit the drawee bank
from having checks with more than one indorsement. The banking rule
banning acceptance of checks for deposit or cash payment with more than
one indorsement unless cleared by some bank officials does not invalidate
the instrument; neither does it invalidate the negotiation or transfer of the
said check. In effect, this rule destroys the negotiability of bills/checks by
limiting their negotiation by indorsement of only the payee. Under the NIL,
the only kind of indorsement which stops the further negotiation of an
instrument is a restrictive indorsement which prohibits the further
negotiation thereof.
Sec. 36. When indorsement restrictive. — An indorsement is restrictive
which either
(a) Prohibits further negotiation of the instrument; or
xxx xxx xxx
In this kind of restrictive indorsement, the prohibition to transfer or
negotiate must be written in express words at the back of the instrument,
so that any subsequent party may be forewarned that ceases to be
negotiable. However, the restrictive indorsee acquires the right to receive
payment and bring any action thereon as any indorser, but he can no longer
transfer his rights as such indorsee where the form of the indorsement does
not authorize him to do so. 12
Although the holder of a check cannot compel a drawee bank to honor it
because there is no privity between them, as far as the drawer-depositor is
concerned, such bank may not legally refuse to honor a negotiable bill of
exchange or a check drawn against it with more than one indorsement if
there is nothing irregular with the bill or check and the drawer has sufficient
funds. The drawee cannot be compelled to accept or pay the check by the
drawer or any holder because as a drawee, he incurs no liability on the
check unless he accepts it. But the drawee will make itself liable to a suit for
damages at the instance of the drawer for wrongful dishonor of the bill or
check.
Thus, it is clear that under the NIL, petitioner is precluded from raising the
defense of forgery by reason of her gross negligence. But under Section 196
of the NIL, any case not provided for in the Act shall be governed by the
provisions of existing legislation. Under the laws of quasi-delict, she cannot
point to the negligence of the respondent drawee Bank in the selection and
supervision of its employees as being the cause of the loss because
negligence is the proximate cause thereof and under Article 2179 of the Civil
Code, she may not be awarded damages. However, under Article 1170 of
the same Code the respondent drawee Bank may be held liable for
damages. The article provides —
Those who in the performance of their obligations are guilty of fraud,
negligence or delay, and those who in any manner contravene the tenor
thereof, are liable for damages.
There is no question that there is a contractual relation between petitioner
as depositor (obligee) and the respondent drawee bank as the obligor. In
the performance of its obligation, the drawee bank is bound by its internal
banking rules and regulations which form part of any contract it enters into
with any of its depositors. When it violated its internal rules that second
endorsements are not to be accepted without the approval of its branch
managers and it did accept the same upon the mere approval of Boon, a
chief accountant, it contravened the tenor of its obligation at the very least,
if it were not actually guilty of fraud or negligence.
Furthermore, the fact that the respondent drawee Bank did not discover the
irregularity with respect to the acceptance of checks with second
indorsement for deposit even without the approval of the branch manager
despite periodic inspection conducted by a team of auditors from the main
office constitutes negligence on the part of the bank in carrying out its
obligations to its depositors. Article 1173 provides —
The fault or negligence of the obligor consists in the omission of that
diligence which is required by the nature of the obligation and corresponds
with the circumstance of the persons, of the time and of the place. . . .
We hold that banking business is so impressed with public interest where
the trust and confidence of the public in general is of paramount
importance such that the appropriate standard of diligence must be a high
degree of diligence, if not the utmost diligence. Surely, respondent drawee
Bank cannot claim it exercised such a degree of diligence that is required of
it. There is no way We can allow it now to escape liability for such
negligence. Its liability as obligor is not merely vicarious but primary
wherein the defense of exercise of due diligence in the selection and
supervision of its employees is of no moment.
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.

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
G.R. No. 102967 February 10, 2000 The same day, petitioner discounted the promissory note with AYALA, for its
face value of P1,847,016.00, evidenced by a Deed of Assignment signed by
BIBIANO V. BAÑAS, JR., petitioner, the petitioner and AYALA. AYALA issued nine (9) checks to petitioner, all
vs. dated February 20, 1976, drawn against Bank of the Philippine Islands with
COURT OF APPEALS, AQUILINO T. LARIN, RODOLFO TUAZON AND the uniform amount of two hundred five thousand, two hundred twenty-
PROCOPIO TALON, respondents. four (P205,224.00) pesos.
QUISUMBING, J.: In his 1976 Income Tax Return, petitioner reported the P461,754 initial
For review is the Decision of the Court of Appeals in CA-C.R. CV No. 17251 payment as income from disposition of capital asset.2
promulgated on November 29, 1991. It affirmed in toto the judgment of the
Selling Price of Land P2,308,770.00
Regional Trial Court (RTC), Branch 39, Manila, in Civil Case No. 82-12107.
Said judgment disposed as follows:
3
Less Initial Payment 461,754.00
FOR ALL THE FOREGOING CONSIDERATIONS, this Court hereby renders
judgment DISMISSING the complaint against all the defendants and ordering
plaintiff [herein petitioner] to pay defendant Larin the amount of
P200,000.00 (Two Hundred Thousand Pesos) as actual and compensatory Unrealized Gain P1,847,016.00
damages; P200,000.00 as moral damages; and P50,000.00 as exemplary
damages and attorneys fees of P100,000.00.1

The facts, which we find supported by the records, have been summarized 1976 Declaration of Income on Disposition of Capital Asset subject
by the Court of Appeals as follows: to Tax:

On February 20, 1976, petitioner, Bibiano V. Bañas Jr. sold to Ayala

Initial Payment P461,754.00
Investment Corporation (AYALA), 128,265 square meters of land located at
Bayanan, Muntinlupa, for two million, three hundred eight thousand, seven
Less: Cost of land and other incidental Expenses ( 76,547.90)
hundred seventy (P2,308,770.00) pesos. The Deed of Sale provided that
upon the signing of the contract AYALA shall pay four hundred sixty-one
thousand, seven hundred fifty-four (P461,754.00) pesos. The balance of one
million, eight hundred forty-seven thousand and sixteen (P1,847,016.00)
Income P385,206.10
pesos was to be paid in four equal consecutive annual installments, with
twelve (12%) percent interest per annum on the outstanding balance.
AYALA issued one promissory note covering four equal annual installments.
Income subject to tax (P385,206. 10 x 50%)
Each periodic payment of P461,754.00 pesos shall be payable starting on P192,603.65
February 20, 1977, and every year thereafter, or until February 20, 1980.
 On June 8, 1981, the matter was endorsed to the Acting Chief of the Legal
Branch of the National Office of the BIR. The Chief of the Tax Fraud Unit
In the succeeding years, until 1979, petitioner reported a uniform income of recommended the prosecution of a criminal case for conspiring to file false
two hundred thirty thousand, eight hundred seventy-seven (P230,877.00) and fraudulent returns, in violation of Section 51 of the Tax Code against
pesos4 as gain from sale of capital asset. In his 1980 income tax amnesty petitioner and his accountants, Andres P. Alejandre and Conrado Bañas.
return, petitioner also reported the same amount of P230,877.00 as the
On June 17, 1981, Larin filed a criminal complaint for tax evasion against the
realized gain on disposition of capital asset for the year.
petitioner.
On April 11, 1978, then Revenue Director Mauro Calaguio authorized tax
On July 1, 1981, news items appeared in the now defunct Evening Express
examiners, Rodolfo Tuazon and Procopio Talon to examine the books and
with the headline: "BIR Charges Realtor" and another in the defunct Evening
records of petitioner for the year 1976. They discovered that petitioner had
Post with a news item: "BIR raps Realtor, 2 accountants." Another news
no outstanding receivable from the 1976 land sale to AYALA and concluded
item also appeared in the July 2, 1981, issue of the Bulletin Today entitled:
that the sale was cash and the entire profit should have been taxable in
"3-face P1-M tax evasion raps." All news items mentioned petitioner's false
1976 since the income was wholly derived in 1976.
income tax return concerning the sale of land to AYALA.
Tuazon and Talon filed their audit report and declared a discrepancy of two
On July 2, 1981, petitioner filed an Amnesty Tax Return under P.D. 1740 and
million, ninety-five thousand, nine hundred fifteen (P2,095,915.00) pesos in
paid the amount of forty-one thousand, seven hundred twenty-nine pesos
petitioner's 1976 net income. They recommended deficiency tax
and eighty-one centavos (P41,729.81). On November 2, 1981, petitioner
assessment for two million, four hundred seventy-three thousand, six
again filed an Amnesty Tax Return under P.D. 1840 and paid an additional
hundred seventy-three (P2,473,673.00) pesos.
amount of one thousand, five hundred twenty-five pesos and sixty-two
Meantime, Aquilino Larin succeeded Calaguio as Regional Director of Manila centavos (P1,525.62). In both, petitioner did not recognize that his sale of
Region IV-A. After reviewing the examiners' report, Larin directed the land to AYALA was on cash basis.
revision of the audit report, with instruction to consider the land as capital
Reacting to the complaint for tax evasion and the news reports, petitioner
asset. The tax due was only fifty (50%) percent of the total gain from sale of
filed with the RTC of Manila an action6 for damages against respondents
the property held by the taxpayer beyond twelve months pursuant to
Larin, Tuazon and Talon for extortion and malicious publication of the BIR's
Section 345 of the 1977 National Internal Revenue Code (NIRC). The
tax audit report. He claimed that the filing of criminal complaints against
deficiency tax assessment was reduced to nine hundred thirty six thousand,
him for violation of tax laws were improper because he had already availed
five hundred ninety-eight pesos and fifty centavos (P936,598.50), inclusive
of two tax amnesty decrees, Presidential Decree Nos. 1740 and 1840.
of surcharges and penalties for the year 1976.
The trial court decided in favor of the respondents and awarded Larin
On June 27, 1980, respondent Larin sent a letter to petitioner informing of
damages, as already stated. Petitioner seasonably appealed to the Court of
the income tax deficiency that must be settled him immediately.
Appeals. In its decision of November 29, 1991, the respondent court
On September 26, 1980, petitioner acknowledged receipt of the letter but affirmed the trial court's decision, thus:
insisted that the sale of his land to AYALA was on installment.
The finding of the court a quo that plaintiff-appellant's actions against
defendant-appellee Larin were unwarranted and baseless and as a result
thereof, defendant-appellee Larin was subjected to unnecessary anxiety and
humiliation is therefore supported by the evidence on record.1âwphi1.nêt
Defendant-appellee Larin acted only in pursuance of the authority granted
to him. In fact, the criminal charges filed against him in the Tanodbayan and
in the City Fiscal's Office were all dismissed.
WHEREFORE, the appealed judgment is hereby AFFIRMED in toto.7
Hence this petition, wherein petitioner raises before us the following
queries:
I. WHETHER THE COURT OF APPEALS ERRED IN ITS INTERPRETATION OF
PERTINENT TAX LAWS, THUS IT FAILED TO APPRECIATE THE CORRECTNESS
AND ACCURACY OF PETITIONER'S RETURN OF THE INCOME DERIVED FROM
THE SALE OF THE LAND TO AYALA.
II. WHETHER THE RESPONDENT COURT ERRED IN NOT FINDING THAT THERE
WAS AN ALLEGED ATTEMPT TO EXTORT [MONEY FROM] PETITIONER BY
PRIVATE RESPONDENTS.
III. WHETHER THE RESPONDENT COURT ERRED IN ITS INTERPRETATION OF
PRESIDENTIAL DECREE NOS. 1740 AND 1840, AMONG OTHERS,
PETITIONER'S IMMUNITY FROM CRIMINAL PROSECUTION.
IV. WHETHER THE RESPONDENT COURT ERRED IN ITS INTERPRETATION OF
WELL-ESTABLISHED DOCTRINES OF THIS HONORABLE COURT AS REGARDS
THE AWARD OF ACTUAL, MORAL AND EXEMPLARY DAMAGES IN FAVOR OF
RESPONDENT LARIN.
In essence, petitioner asks the Court to resolve seriatim the following issues:
1. Whether respondent court erred in ruling that there was no extortion
attempt by BIR officials;
2. Whether respondent court erred in holding that P.D. 1740 and 1840
granting tax amnesties did not grant immunity from tax suits;
3. Whether respondent court erred in finding that petitioner's income from
the sale of land in 1976 should be declared as a cash transaction in his tax
return for the same year (because the buyer discounted the promissory
note issued to the seller on future installment payments of the sale, on the
same day of the sale);
4. Whether respondent court erred and committed grave abuse of
discretion in awarding damages to respondent Larin.
The first issue, on whether the Court of Appeals erred in finding that there
was no extortion, involves a determination of fact. The Court of Appeals
observed,
The only evidence to establish the alleged extortion attempt by defendants-
appellees is the plaintiff-appellant's self serving declarations.
As found by the court a quo, "said attempt was known to plaintiff-
appellant's son-in-law and counsel on record, yet, said counsel did not take
the witness stand to corroborate the testimony of plaintiff."8
As repeatedly held, findings of fact by the Court of Appeals especially if they
affirm factual findings of the trial court will not be disturbed by this Court,
unless these findings are not supported by evidence.9 Similarly, neither
should we disturb a finding of the trial court and appellate court that an
allegation is not supported by evidence on record. Thus, we agree with the
conclusion of respondent court that herein private respondents, on the
basis of evidence, could not be held liable for extortion.
On the second issue of whether P.D. Nos. 1740 and 1840 which granted tax
amnesties also granted immunity from criminal prosecution against tax
offenses, the pertinent sections of these laws state:
P.D. No. 1740. CONDONING PENALTIES FOR CERTAIN VIOLATIONS OF THE
INCOME TAX LAW UPON VOLUNTARY DISCLOSURE OF UNDECLARED
INCOME FOR INCOME TAX PURPOSES AND REQUIRING PERIODIC
SUBMISSION OF NET WORTH STATEMENT.
xxx xxx xxx
Sec. 1. Voluntary Disclosure of Correct Taxable Income. — Any individual
who, for any or all of the taxable years 1974 to 1979, had failed to file a
return is hereby, allowed to file a return for each of the aforesaid taxable
years and accurately declare therein the true and correct income,
deductions and exemptions and pay the income tax due per return.
Likewise, any individual who filed a false or fraudulent return for any
taxable year in the period mentioned above may amend his return and pay
the correct amount of tax due after deducting the taxes already paid, if any,
in the original declaration. (emphasis ours)
xxx xxx xxx
Sec. 5. Immunity from Penalties. — Any individual who voluntarily files a
return under this Decree and pays the income tax due thereon shall be
immune from the penalties, civil or criminal, under the National Internal
Revenue Code arising from failure to pay the correct income tax with
respect to the taxable years from which an amended return was filed or for
which an original return was filed in cases where no return has been filed
for any of the taxable years 1974 to 1979: Provided, however, That these
immunities shall not apply in cases where the amount of net taxable income
declared under this Decree is understated to the extent of 25% or more of
the correct net taxable income. (emphasis ours)
P.D. NO. 1840 — GRANTING A TAX AMNESTY ON UNTAXED INCOME
AND/OR WEALTH EARNED OR ACQUIRED DURING THE TAXABLE YEARS 1974
TO 1980 AND REQUIRING THE FILING OF THE STATEMENT OF ASSETS,
LIABILITIES, AND NET WORTH.
Sec. 1. Coverage. — In case of voluntary disclosure of previously untaxed
income and/or wealth such as earnings, receipts, gifts, bequests or any
other acquisition from any source whatsoever, realized here or abroad, by
any individual taxpayer, which are taxable under the National Internal
Revenue Code, as amended, the assessment and collection of all internal
revenue taxes, including the increments or penalties on account of non-
payment, as well as all civil, criminal or administrative liabilities arising from
or incident thereto under the National Internal Revenue Code, are hereby
condoned provided that the individual taxpayer shall pay. (emphasis ours) . .
.
Sec. 2. Conditions for Immunity. — The immunity granted under Section one
of this Decree shall apply only under the following conditions:
a) Such previously untaxed income and/or wealth must have been earned or
realized in any of the years 1974 to 1980;
b) The taxpayer must file an amnesty return on or before November 30,
1981, and fully pay the tax due thereon;
c) The amnesty tax paid by the taxpayer under this Decree shall not be less
than P1,000.00 per taxable year; and
d) The taxpayer must file a statement of assets, liabilities and net worth as
of December 31, 1980, as required under Section 6 hereof. (emphasis ours)
It will be recalled that petitioner entered into a deed of sale purportedly on
installment. On the same day, he discounted the promissory note covering
the future installments. The discounting seems questionable because
ordinarily, when a bill is discounted, the lender (e.g. banks, financial
institution) charges or deducts a certain percentage from the principal value
as its compensation. Here, the discounting was done by the buyer. On July
2, 1981, two weeks after the filing of the tax evasion complaint against him
by respondent Larin on June 17, 1981, petitioner availed of the tax amnesty
under P.D. No. 1740. His amended tax return for the years 1974 - 1979 was
filed with the BIR office of Valenzuela, Bulacan, instead of Manila where the
petitioner's principal office was located. He again availed of the tax amnesty
under P.D. No. 1840. His disclosure, however, did not include the income
from his sale of land to AYALA on cash basis. Instead he insisted that such
sale was on installment. He did not amend his income tax return. He did not
pay the tax which was considerably increased by the income derived from
the discounting. He did not meet the twin requirements of P.D. 1740 and
1840, declaration of his untaxed income and full payment of tax due
thereon. Clearly, the petitioner is not entitled to the benefits of P.D. Nos.
1740 and 1840. The mere filing of tax amnesty return under P.D. 1740 and
1840 does not ipso facto shield him from immunity against prosecution. Tax
amnesty is a general pardon to taxpayers who want to start a clean tax
slate. It also gives the government a chance to collect uncollected tax from
tax evaders without having to go through the tedious process of a tax case.
To avail of a tax amnesty granted by the government, and to be immune
from suit on its delinquencies, the tax payer must have voluntarily disclosed
his previously untaxed income and must have paid the corresponding tax on
such previously untaxed income.10
It also bears noting that a tax amnesty, much like a tax exemption, is never
favored nor presumed in law and if granted by statute, the terms of the
amnesty like that of a tax exemption must be construed strictly against the
taxpayer and liberally in favor of the taxing authority.11 Hence, on this
matter, it is our view that petitioner's claim of immunity from prosecution
under the shield of availing tax amnesty is untenable.
On the third issue, petitioner asserts that his sale of the land to AYALA was
not on cash basis but on installment as clearly specified in the Deed of Sale
which states:
That for and in consideration of the sum of TWO MILLION THREE HUNDRED
EIGHT THOUSAND SEVEN HUNDRED SEVENTY (P2,308,770.00) PESOS
Philippine Currency, to be paid as follows:
1. P461,754.00, upon the signing of the Deed of Sale; and,
2. The balance of P1,847,016.00, to be paid in four (4) equal, consecutive,
annual installments with interest thereon at the rate of twelve percent
(12%) per annum, beginning on February 20, 1976, said installments to be
evidenced by four (4) negotiable promissory notes.12
Petitioner resorts to Section 43 of the NIRC and Sec. 175 of Revenue
Regulation No. 2 to support his claim.
Sec. 43 of the 1977 NIRC states,
Installment basis. — (a) Dealers in personal property. — . . .
(b) Sales of realty and casual sales of personalty — In the case (1) of a casual
sale or other casual disposition of personal property (other than property of
a kind which would properly be included in the inventory of the taxpayer if
on hand at the close of the taxable year), for a price exceeding one
thousand pesos, or (2) of a sale or other disposition of real property if in
either case the initial payments do not exceed twenty-five percentum of the
selling price, the income may, under regulations prescribed by the Minister
of Finance, be returned on the basis and in the manner above prescribed in
this section. As used in this section the term "initial payment" means the
payments received in cash or property other than evidences of
indebtedness of the purchaser during the taxable period in which the sale or
other disposition is made. . . . (emphasis ours)
Revenue Regulation No. 2, Section 175 provides,
Sale of real property involving deferred payments. — Under section 43
deferred-payment sales of real property include (1) agreements of purchase
and sale which contemplate that a conveyance is not to be made at the
outset, but only after all or a substantial portion of the selling price has
been paid, and (b) sales in which there is an immediate transfer of title, the
vendor being protected by a mortgage or other lien as to deferred
payments. Such sales either under (a) or (b), fall into two classes when
considered with respect to the terms of sale, as follows:
(1) Sales of property on the installment plan, that is, sales in which the
payments received in cash or property other than evidences of
indebtedness of the purchaser during the taxable year in which the sale is
made do not exceed 25 per cent of the selling price;
(2) Deferred-payment sales not on the installment plan, that is sales in
which the payments received in cash or property other than evidences of
indebtedness of the purchaser during the taxable year in which the sale is
made exceed 25 per cent of the selling price;
In the sale of mortgaged property the amount of the mortgage, whether the
property is merely taken subject to the mortgage or whether the mortgage
is assumed by the purchaser, shall be included as a part of the "selling price"
but the amount of the mortgage, to the extent it does not exceed the basis
to the vendor of the property sold, shall not be considered as a part of the
"initial payments" or of the "total contract price," as those terms are used in
section 43 of the Code, in sections 174 and 176 of these regulations, and in
this section. The term "initial payments" does not include amounts received
by the vendor in the year of sale from the disposition to a third person of
notes given by the vendee as part of the purchase price which are due and
payable in subsequent years. Commissions and other selling expenses paid
or incurred by the vendor are not to be deducted or taken into account in
determining the amount of the "initial payments," the "total contract price,"
or the "selling price." The term "initial payments" contemplates at least one
other payment in addition to the initial payment. If the entire purchase
price is to be paid in a lump sum in a later year, there being no payment
during the year, the income may not be returned on the installment basis.
Income may not be returned on the installment basis where no payment in
cash or property, other than evidences of indebtedness of the purchaser, is
received during the first year, the purchaser having promised to make two
or more payments, in later years.
Petitioner asserts that Sec. 43 allows him to return as income in the taxable
years involved, the respective installments as provided by the deed of sale
between him and AYALA. Consequently, he religiously reported his yearly
income from sale of capital asset, subject to tax, as follows:
Year 1977 (50% of P461,754) P230,877.00
1978 230,877.00
1979 230,877.00
1980 230,877.00
Petitioner says that his tax declarations are acceptable modes of payment
under Section 175 of the Revenue Regulations (RR) No. 2. The term "initial
payment", he argues, does not include amounts received by the vendor
which are part of the complete purchase price, still due and payable in
subsequent years. Thus, the proceeds of the promissory notes, not yet due
which he discounted to AYALA should not be included as income realized in
1976. Petitioner states that the original agreement in the Deed of Sale
should not be affected by the subsequent discounting of the bill.
On the other hand, respondents assert that taxation is a matter of
substance and not of form. Returns are scrutinized to determine if
transactions are what they are and not declared to evade taxes. Considering
the progressive nature of our income taxation, when income is spread over
several installment payments through the years, the taxable income goes
down and the tax due correspondingly decreases. When payment is in lump
sum the tax for the year proportionately increases. Ultimately, a declaration
that a sale is on installment diminishes government taxes for the year of
initial installment as against a declaration of cash sale where taxes to the
government is larger.
As a general rule, the whole profit accruing from a sale of property is
taxable as income in the year the sale is made. But, if not all of the sale price
is received during such year, and a statute provides that income shall be
taxable in the year in which it is "received," the profit from an installment
sale is to be apportioned between or among the years in which such
installments are paid and received.13
Sec. 43 and Sec. 175 says that among the entities who may use the above-
mentioned installment method is a seller of real property who disposes his
property on installment, provided that the initial payment does not exceed
25% of the selling price. They also state what may be regarded as
installment payment and what constitutes initial payment. Initial payment
means the payment received in cash or property excluding evidences of
indebtedness due and payable in subsequent years, like promissory notes or
mortgages, given of the purchaser during the taxable year of sale. Initial
payment does not include amounts received by the vendor in the year of
sale from the disposition to a third person of notes given by the vendee as
part of the purchase price which are due and payable in subsequent
years.14 Such disposition or discounting of receivable is material only as to
the computation of the initial payment. If the initial payment is within 25%
of total contract price, exclusive of the proceeds of discounted notes, the
sale qualifies as an installment sale, otherwise it is a deferred sale.15
Although the proceed of a discounted promissory note is not considered
part of the initial payment, it is still taxable income for the year it was
converted into cash. The subsequent payments or liquidation of certificates
of indebtedness is reported using the installment method in computing the
proportionate income16 to be returned, during the respective year it was
realized. Non-dealer sales of real or personal property may be reported as
income under the installment method provided that the obligation is still
outstanding at the close of that year. If the seller disposes the entire
installment obligation by discounting the bill or the promissory note, he
necessarily must report the balance of the income from the discounting not
only income from the initial installment payment.
Where an installment obligation is discounted at a bank or finance
company, a taxable disposition results, even if the seller guarantees its
payment, continues to collect on the installment obligation, or handles
repossession of merchandise in case of default.17 This rule prevails in the
United States.18 Since our income tax laws are of American
origin,19 interpretations by American courts an our parallel tax laws have
persuasive effect on the interpretation of these laws.20 Thus, by analogy, all
the more would a taxable disposition result when the discounting of the
promissory note is done by the seller himself. Clearly, the indebtedness of
the buyer is discharged, while the seller acquires money for the settlement
of his receivables. Logically then, the income should be reported at the time
of the actual gain. For income tax purposes, income is an actual gain or an
actual increase of wealth.21 Although the proceeds of a discounted
promissory note is not considered initial payment, still it must be included
as taxable income on the year it was converted to cash. When petitioner
had the promissory notes covering the succeeding installment payments of
the land issued by AYALA, discounted by AYALA itself, on the same day of
the sale, he lost entitlement to report the sale as a sale on installment since,
a taxable disposition resulted and petitioner was required by law to report
in his returns the income derived from the discounting. What petitioner did
is tantamount to an attempt to circumvent the rule on payment of income
taxes gained from the sale of the land to AYALA for the year 1976.
Lastly, petitioner questions the damages awarded to respondent Larin.
Any person who seeks to be awarded actual or compensatory damages due
to acts of another has the burden of proving said damages as well as the
amount thereof.22 Larin says the extortion cases filed against him hampered
his immediate promotion, caused him strong anxiety and social humiliation.
The trial court awarded him two hundred thousand (P200,000,00) pesos as
actual damages. However, the appellate court stated that, despite pendency
of this case, Larin was given a promotion at the BIR. Said respondent court:
We find nothing on record, aside from defendant-appellee Larin's
statements (TSN, pp. 6-7, 11 December 1985), to show that he suffered loss
of seniority that allegedly barred his promotion. In fact, he was promoted to
his present position despite the pendency of the instant case (TSN, pp. 35-
39, 04 November 1985).23
Moreover, the records of the case contain no statement whatsoever of the
amount of the actual damages sustained by the respondents. Actual
damages cannot be allowed unless supported by evidence on the
record.24 The court cannot rely on speculation, conjectures or guesswork as
to the fact and amount of damages.25 To justify a grant of actual or
compensatory damages, it is necessary to prove with a reasonable degree of
certainty, the actual amount of loss.26 Since we have no basis with which to
assess, with certainty, the actual or compensatory damages counter-
claimed by respondent Larin, the award of such damages should be deleted.
Moral damages may be recovered in cases involving acts referred to in
Article 2127 of the Civil Code.28 As a rule, a public official may not recover
damages for charges of falsehood related to his official conduct unless he
proves that the statement was made with actual malice.
In Babst, et. al. vs. National Intelligence Board, et. al., 132 SCRA 316, 330
(1984), we reiterated the test for actual malice as set forth in the landmark
American case of New York Times vs. Sullivan,29 which we have long
adopted, in defamation and libel cases, viz.:
. . . with knowledge that it was false or with reckless disregard of whether it
was false or not.
We appreciate petitioner's claim that he filed his 1976 return in good faith
and that he had honestly believed that the law allowed him to declare the
sale of the land, in installment. We can further grant that the pertinent tax
laws needed construction, as we have earlier done. That petitioner was
offended by the headlines alluding to him as tax evader is also fully
understandable. All these, however, do not justify what amounted to a
baseless prosecution of respondent Larin. Petitioner presented no evidence
to prove Larin extorted money from him. He even admitted that he never
met nor talked to respondent Larin. When the tax investigation against the
petitioner started, Larin was not yet the Regional Director of BIR Region IV-
A, Manila. On respondent Larin's instruction, petitioner's tax assessment
was considered one involving a sale of capital asset, the income from which
was subjected to only fifty percent (50%) assessment, thus reducing the
original tax assessment by half. These circumstances may be taken to show
that Larin's involvement in extortion was not indubitable. Yet, petitioner
went on to file the extortion cases against Larin in different fora. This is
where actual malice could attach on petitioner's part. Significantly, the trial
court did not err in dismissing petitioner's complaints, a ruling affirmed by
the Court of Appeals.
Keeping all these in mind, we are constrained to agree that there is
sufficient basis for the award of moral and exemplary damages in favor of
respondent Larin. The appellate court believed respondent Larin when he
said he suffered anxiety and humiliation because of the unfounded charges
against him. Petitioner's actions against Larin were found "unwarranted and
baseless," and the criminal charges filed against him in the Tanodbayan and
City Fiscal's Office were all dismissed.30 Hence, there is adequate support for
respondent court's conclusion that moral damages have been proved.
Now, however, what would be a fair amount to be paid as compensation for
moral damages also requires determination. Each case must be governed by
its own peculiar circumstances.31 On this score, Del Rosario vs. Court of
Appeals,32 cites several cases where no actual damages were adjudicated,
and where moral and exemplary damages were reduced for being "too
excessive," thus:
In the case of PNB v. C.A., [256 SCRA 309 (1996)], this Court quoted with
approval the following observation from RCPI v. Rodriguez, viz:
** **. Nevertheless, we find the award of P100,000.00 as moral damages in
favor of respondent Rodriguez excessive and unconscionable. In the case
of Prudenciado v. Alliance Transport System,Inc. (148 SCRA 440 [1987]) we
said: . . . [I]t is undisputed that the trial courts are given discretion to
determine the amount of moral damages (Alcantara v. Surro, 93 Phil. 472)
and that the Court of Appeals can only modify or change the amount
awarded when they are palpably and scandalously excessive "so as to
indicate that it was the result of passion, prejudice or corruption on the part
of the trial court" (Gellada v. Warner Barnes & Co., Inc., 57 O.G. [4] 7347,
7358; Sadie v. Bacharach Motors Co., Inc., 57 O.G. [4] 636 and Adone v.
Bacharach Motor Co., Inc., 57 O.G. 656). But in more recent cases where the
awards of moral and exemplary damages are far too excessive compared to
the actual loses sustained by the aggrieved party, this Court ruled that they
should be reduced to more reasonable amounts. . . . . (Emphasis ours.)
In other words, the moral damages awarded must be commensurate with
the loss or injury suffered.
In the same case (PNB v. CA), this Court found the amount of exemplary
damages required to be paid (P1,000,000,00) "too excessive" and reduced it
to an "equitable level" (P25,000.00).
It will be noted that in above cases, the parties who were awarded moral
damages were not public officials. Considering that here, the award is in
favor of a government official in connection with his official function, it is
with caution that we affirm granting moral damages, for it might open the
floodgates for government officials counter-claiming damages in suits filed
against them in connection with their functions. Moreover, we must be
careful lest the amounts awarded make citizens hesitate to expose
corruption in the government, for fear of lawsuits from vindictive
government officials. Thus, conformably with our declaration that moral
damages are not intended to enrich anyone,33 we hereby reduce the moral
damages award in this case from two hundred thousand (P200,000.00)
pesos to seventy five thousand (P75,000.00) pesos, while the exemplary
damage is set at P25,000.00 only.

The law allows the award of attorney's fees when exemplary damages are
awarded, and when the party to a suit was compelled to incur expenses to
protect his interest.34 Though government officers are usually represented
by the Solicitor General in cases connected with the performance of official
functions, considering the nature of the charges, herein respondent Larin
was compelled to hire a private lawyer for the conduct of his defense as
well as the successful pursuit of his counterclaims. In our view, given the
circumstances of this case, there is ample ground to award in his favor
P50,000,00 as reasonable attorney's fees.

WHEREFORE, the assailed decision of the Court of Appeals dated November

29, 1991, is hereby AFFIRMED with MODIFICATION so that the award of
actual damages are deleted; and that petitioner is hereby ORDERED to pay
to respondent Larin moral damages in the amount of P75,000.00, exemplary
damages in the amount of P25,000.00, and attorney's fees in the amount of
P50,000.00 only.1âwphi1.nêt

No pronouncement as to costs.

SO ORDERED.
G.R. No. 109491 February 28, 2001
ATRIUM MANAGEMENT CORPORATION, petitioner,
vs.
COURT OF APPEALS, E.T. HENRY AND CO., LOURDES VICTORIA M. DE
LEON, RAFAEL DE LEON, JR., AND HI-CEMENT CORPORATION, respondents.
----------------------------------------
G.R. No. 121794 February 28, 2001
LOURDES M. DE LEON, petitioner,
vs.
COURT OF APPEALS, ATRIUM MANAGEMENT CORPORATION, AND HI-
CEMENT CORPORATION,respondents.
PARDO, J.:
What is before the Court are separate appeals from the decision of the
Court of Appeals,1 ruling that Hi-Cement Corporation is not liable for four
checks amounting to P2 million issued to E.T. Henry and Co. and discounted
to Atrium Management Corporation.
On January 3, 1983, Atrium Management Corporation filed with the
Regional Trial Court, Manila an action for collection of the proceeds of four
postdated checks in the total amount of P2 million. Hi-Cement Corporation
through its corporate signatories, petitioner Lourdes M. de Leon,2 treasurer,
and the late Antonio de las Alas, Chairman, issued checks in favor of E.T.
Henry and Co. Inc., as payee. E.T. Henry and Co., Inc., in turn, endorsed the
four checks to petitioner Atrium Management Corporation for valuable
consideration. Upon presentment for payment, the drawee bank
dishonored all four checks for the common reason "payment stopped".
Atrium, thus, instituted this action after its demand for payment of the
value of the checks was denied.3
After due proceedings, on July 20, 1989, the trial court rendered a decision
ordering Lourdes M. de Leon, her husband Rafael de Leon, E.T. Henry and
Co., Inc. and Hi-Cement Corporation to pay petitioner Atrium, jointly and
severally, the amount of P2 million corresponding to the value of the four
checks, plus interest and attorney's fees.4
On appeal to the Court of Appeals, on March 17, 1993, the Court of Appeals
promulgated its decision modifying the decision of the trial court, absolving
Hi-Cement Corporation from liability and dismissing the complaint as
against it. The appellate court ruled that: (1) Lourdes M. de Leon was not
authorized to issue the subject checks in favor of E.T. Henry, Inc.; (2) The
issuance of the subject checks by Lourdes M. de Leon and the late Antonio
de las Alas constituted ultra vires acts; and (3) The subject checks were not
issued for valuable consideration.5
At the trial, Atrium presented as its witness Carlos C. Syquia who testified
that in February 1981, Enrique Tan of E.T. Henry approached Atrium for
financial assistance, offering to discount four RCBC checks in the total
amount of P2 million, issued by Hi-Cement in favor of E.T. Henry. Atrium
agreed to discount the checks, provided it be allowed to confirm with Hi-
Cement the fact that the checks represented payment for petroleum
products which E.T. Henry delivered to Hi-Cement. Carlos C. Syquia
identified two letters, dated February 6, 1981 and February 9, 1981 issued
by Hi-Cement through Lourdes M. de Leon, as treasurer, confirming the
issuance of the four checks in favor of E.T. Henry in payment for petroleum
products.6
Respondent Hi-Cement presented as witness Ms. Erlinda Yap who testified
that she was once a secretary to the treasurer of Hi-Cement, Lourdes M. de
Leon, and as such she was familiar with the four RCBC checks as the
postdated checks issued by Hi-Cement to E.T. Henry upon instructions of
Ms. de Leon. She testified that E.T. Henry offered to give Hi-Cement a loan
which the subject checks would secure as collateral.7
On July 20, 1989, the Regional Trial Court, Manila, Branch 09 rendered a
decision, the dispositive portion of which reads:
"WHEREFORE, in view of the foregoing considerations, and plaintiff having
proved its cause of action by preponderance of evidence, judgment is
hereby rendered ordering all the defendants except defendant Antonio de
las Alas to pay plaintiff jointly and severally the amount of TWO MILLION
(P2,000,000.00) PESOS with the legal rate of interest from the filling of the
complaint until fully paid, plus the sum of TWENTY THOUSAND (P20,000.00)
PESOS as and for attorney's fees and the cost of suit."
All other claims are, for lack of merit dismissed.
SO ORDERED."8
In due time, both Lourdes M. de Leon and Hi-Cement appealed to the Court
of Appeals.9
Lourdes M. de Leon submitted that the trial court erred in ruling that she
was solidarilly liable with Hi-Cement for the amount of the check. Also, that
the trial court erred in ruling that Atrium was an ordinary holder, not a
holder in due course of the rediscounted checks.10
Hi-Cement on its part submitted that the trial court erred in ruling that even
if Hi-Cement did not authorize the issuance of the checks, it could still be
held liable for the checks. And assuming that the checks were issued with its
authorization, the same was without any consideration, which is a defense
against a holder in due course and that the liability shall be borne alone by
E.T. Henry.11
On March 17, 1993, the Court of Appeals promulgated its decision
modifying the ruling of the trial court, the dispositive portion of which
reads:
"Judgement is hereby rendered:
(1) dismissing the plaintiff's complaint as against defendants Hi-Cement
Corporation and Antonio De las Alas;
(2) ordering the defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon,
jointly and severally to pay the plaintiff the sum of TWO MILLION PESOS
(P2,000,000.00) with interest at the legal rate from the filling of the
complaint until fully paid, plus P20,000.00 for attorney's fees.
(3) Ordering the plaintiff and defendants E.T. Henry and Co., Inc. and
Lourdes M. de Leon, jointly and severally to pay defendant Hi-Cement
Corporation, the sum of P20,000.00 as and for attorney's fees.
With cost in this instance against the appellee Atrium Management
Corporation and appellant Lourdes Victoria M. de Leon.
So ordered."12
Hence, the recourse to this Court.13
The issues raised are the following:
In G. R. No. 109491 (Atrium, petitioner):
1. Whether the issuance of the questioned checks was an ultra vires act;
2. Whether Atrium was not a holder in due course and for value; and
3. Whether the Court of Appeals erred in dismissing the case against Hi-
Cement and ordering it to pay P20,000.00 as attorney's fees.14
In G. R. No. 121794 (de Leon, petitioner):
1. Whether the Court of Appeals erred in holding petitioner personally liable
for the Hi-Cement checks issued to E.T. Henry;
2. Whether the Court of Appeals erred in ruling that Atrium is a holder in
due course;
3. Whether the Court of Appeals erred in ruling that petitioner Lourdes M.
de Leon as signatory of the checks was personally liable for the value of the
checks, which were declared to be issued without consideration;
4. Whether the Court of Appeals erred in ordering petitioner to pay Hi-
Cement attorney's fees and costs.15
We affirm the decision of the Court of Appeals.
We first resolve the issue of whether the issuance of the checks was an ultra
vires act. The record reveals that Hi-Cement Corporation issued the four (4)
checks to extend financial assistance to E.T. Henry, not as payment of the
balance of the P30 million pesos cost of hydro oil delivered by E.T. Henry to
Hi-Cement. Why else would petitioner de Leon ask for counterpart checks
from E.T. Henry if the checks were in payment for hydro oil delivered by E.T.
Henry to Hi-Cement?
Hi-Cement, however, maintains that the checks were not issued for
consideration and that Lourdes and E.T. Henry engaged in a "kiting
operation" to raise funds for E.T. Henry, who admittedly was in need of
financial assistance. The Court finds that there was no sufficient evidence to
show that such is the case. Lourdes M. de Leon is the treasurer of the
corporation and is authorized to sign checks for the corporation. At the time
of the issuance of the checks, there were sufficient funds in the bank to
cover payment of the amount of P2 million pesos.
It is, however, our view that there is basis to rule that the act of issuing the
checks was well within the ambit of a valid corporate act, for it was for
securing a loan to finance the activities of the corporation, hence, not
an ultra viresact.
"An ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and
therefore beyond the power conferred upon it by law"16 The term "ultra
vires" is "distinguished from an illegal act for the former is merely voidable
which may be enforced by performance, ratification, or estoppel, while the
latter is void and cannot be validated."17
The next question to determine is whether Lourdes M. de Leon and Antonio
de las Alas were personally liable for the checks issued as corporate officers
and authorized signatories of the check.
"Personal liability of a corporate director, trustee or officer along (although
not necessarily) with the corporation may so validly attach, as a rule, only
when:
"1. He assents (a) to a patently unlawful act of the corporation, or (b) for
bad faith or gross negligence in directing its affairs, or (c) for conflict of
interest, resulting in damages to the corporation, its stockholders or other
persons;
"2. He consents to the issuance of watered down stocks or who, having
knowledge thereof, does not forthwith file with the corporate secretary his
written objection thereto;
"3. He agrees to hold himself personally and solidarily liable with the
corporation; or
"4. He is made, by a specific provision of law, to personally answer for his
corporate action."18
In the case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer
and Chairman of Hi-Cement were authorized to issue the checks. However,
Ms. de Leon was negligent when she signed the confirmation letter
requested by Mr. Yap of Atrium and Mr. Henry of E.T. Henry for the
rediscounting of the crossed checks issued in favor of E.T. Henry. She was
aware that the checks were strictly endorsed for deposit only to the payee's
account and not to be further negotiated. What is more, the confirmation
letter contained a clause that was not true, that is, "that the checks issued
to E.T. Henry were in payment of Hydro oil bought by Hi-Cement from E.T.
Henry". Her negligence resulted in damage to the corporation. Hence, Ms.
de Leon may be held personally liable therefor.1âwphi1.nêt
The next issue is whether or not petitioner Atrium was a holder of the
checks in due course. The Negotiable Instruments Law, Section 52 defines a
holder in due course, thus:
"A holder in due course is a holder who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon its face;

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

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

(d) That at the time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of the person negotiating it."

In the instant case, the checks were crossed checks and specifically indorsed
for deposit to payee's account only. From the beginning, Atrium was aware
of the fact that the checks were all for deposit only to payee's account,
meaning E.T. Henry. Clearly, then, Atrium could not be considered a holder
in due course.

However, it does not follow as a legal proposition that simply because

petitioner Atrium was not a holder in due course for having taken the
instruments in question with notice that the same was for deposit only to
the account of payee E.T. Henry that it was altogether precluded from
recovering on the instrument. The Negotiable Instruments Law does not
provide that a holder not in due course can not recover on the instrument.19

The disadvantage of Atrium in not being a holder in due course is that the
negotiable instrument is subject to defenses as if it were non-
negotiable.20 One such defense is absence or failure of consideration.21

We need not rule on the other issues raised, as they merely follow as a
consequence of the foregoing resolutions.

WHEREFORE, the petitions are hereby DENIED. The decision and resolution
of the Court of Appeals in CA-G. R. CV No. 26686, are hereby AFFIRMED in
toto.

No costs.

SO ORDERED.
G.R. No. 70145 November 13, 1986
MARCELO A. MESINA, petitioner,
vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT, HON. ARSENIO M.
GONONG, in his capacity as Judge of Regional Trial Court — Manila
(Branch VIII), JOSE GO, and ALBERT UY, respondents.
PARAS, J.:
This is an appeal by certiorari from the decision of the then Intermediate
Appellate Court (IAC for short), now the Court of Appeals (CA) in AC-G.R.
S.P. 04710, dated Jan. 22, 1985, which dismissed the petition for certiorari
and prohibition filed by Marcelo A. Mesina against the trial court in Civil
Case No. 84-22515. Said case (an Interpleader) was filed by Associated Bank
against Jose Go and Marcelo A. Mesina regarding their conflicting claims
over Associated Bank Cashier's Check No. 011302 for P800,000.00, dated
December 29, 1983.
Briefly, the facts and statement of the case are as follows:
Respondent Jose Go, on December 29, 1983, purchased from Associated
Bank Cashier's Check No. 011302 for P800,000.00. Unfortunately, Jose Go
left said check on the top of the desk of the bank manager when he left the
bank. The bank manager entrusted the check for safekeeping to a bank
official, a certain Albert Uy, who had then a visitor in the person of
Alexander Lim. Uy had to answer a phone call on a nearby telephone after
which he proceeded to the men's room. When he returned to his desk, his
visitor Lim was already gone. When Jose Go inquired for his cashier's check
from Albert Uy, the check was not in his folder and nowhere to be found.
The latter advised Jose Go to go to the bank to accomplish a "STOP
PAYMENT" order, which suggestion Jose Go immediately followed. He also
executed an affidavit of loss. Albert Uy went to the police to report the loss
of the check, pointing to the person of Alexander Lim as the one who could
shed light on it.
The records of the police show that Associated Bank received the lost check
for clearing on December 31, 1983, coming from Prudential Bank, Escolta
Branch. The check was immediately dishonored by Associated Bank by
sending it back to Prudential Bank, with the words "Payment Stopped"
stamped on it. However, the same was again returned to Associated Bank
on January 4, 1984 and for the second time it was dishonored. Several days
later, respondent Associated Bank received a letter, dated January 9, 1984,
from a certain Atty. Lorenzo Navarro demanding payment on the cashier's
check in question, which was being held by his client. He however refused
to reveal the name of his client and threatened to sue, if payment is not
made. Respondent bank, in its letter, dated January 20, 1984, replied saying
the check belonged to Jose Go who lost it in the bank and is laying claim to
it.
On February 1, 1984, police sent a letter to the Manager of the Prudential
Bank, Escolta Branch, requesting assistance in Identifying the person who
tried to encash the check but said bank refused saying that it had to protect
its client's interest and the Identity could only be revealed with the client's
conformity. Unsure of what to do on the matter, respondent Associated
Bank on February 2, 1984 filed an action for Interpleader naming as
respondent, Jose Go and one John Doe, Atty. Navarro's then unnamed
client. On even date, respondent bank received summons and copy of the
complaint for damages of a certain Marcelo A. Mesina from the Regional
Trial Court (RTC) of Caloocan City filed on January 23, 1984 bearing the
number C-11139. Respondent bank moved to amend its complaint, having
been notified for the first time of the name of Atty. Navarro's client and
substituted Marcelo A. Mesina for John Doe. Simultaneously, respondent
bank, thru representative Albert Uy, informed Cpl. Gimao of the Western
Police District that the lost check of Jose Go is in the possession of Marcelo
Mesina, herein petitioner. When Cpl. Gimao went to Marcelo Mesina to ask
how he came to possess the check, he said it was paid to him by Alexander
Lim in a "certain transaction" but refused to elucidate further. An
information for theft (Annex J) was instituted against Alexander Lim and the
corresponding warrant for his arrest was issued (Annex 6-A) which up to the
date of the filing of this instant petition remains unserved because of
Alexander Lim's successful evation thereof.
Meanwhile, Jose Go filed his answer on February 24, 1984 in the
Interpleader Case and moved to participate as intervenor in the complain
for damages. Albert Uy filed a motion of intervention and answer in the
complaint for Interpleader. On the Scheduled date of pretrial conference
inthe interpleader case, it was disclosed that the "John Doe" impleaded as
one of the defendants is actually petitioner Marcelo A. Mesina. Petitioner
instead of filing his answer to the complaint in the interpleader filed on May
17, 1984 an Omnibus Motion to Dismiss Ex Abudante Cautela alleging lack
of jurisdiction in view of the absence of an order to litigate, failure to state a
cause of action and lack of personality to sue. Respondent bank in the other
civil case (CC-11139) for damages moved to dismiss suit in view of the
existence already of the Interpleader case.
The trial court in the interpleader case issued an order dated July 13, 1984,
denying the motion to dismiss of petitioner Mesina and ruling that
respondent bank's complaint sufficiently pleaded a cause of action for
itnerpleader. Petitioner filed his motion for reconsideration which was
denied by the trial court on September 26, 1984. Upon motion for
respondent Jose Go dated October 31, 1984, respondent judge issued an
order on November 6, 1984, declaring petitioner in default since his period
to answer has already expirecd and set the ex-parte presentation of
respondent bank's evidence on November 7, 1984.
Petitioner Mesina filed a petition for certioari with preliminary injunction
with IAC to set aside 1) order of respondent court denying his omnibus
Motion to Dismiss 2) order of 3) the order of default against him.
On January 22, 1985, IAC rendered its decision dimissing the petition for
certiorari. Petitioner Mesina filed his Motion for Reconsideration which was
also denied by the same court in its resolution dated February 18, 1985.
Meanwhile, on same date (February 18, 1985), the trial court in Civil Case
#84-22515 (Interpleader) rendered a decisio, the dispositive portion reading
as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered
ordering plaintiff Associate Bank to replace Cashier's Check No. 011302 in
favor of Jose Go or its cas equivalent with legal rate of itnerest from date of
complaint, and with costs of suit against the latter.
SO ORDERED.
On March 29, 1985, the trial court in Civil Case No. C-11139, for damages,
issued an order, the pertinent portion of which states:
The records of this case show that on August 20, 1984 proceedings in this
case was (were) ordered suspended because the main issue in Civil Case No.
84-22515 and in this instant case are the same which is: who between
Marcelo Mesina and Jose Go is entitled to payment of Associated Bank's
Cashier's Check No. CC-011302? Said issue having been resolved already in
Civil casde No. 84-22515, really this instant case has become moot and
academic.
WHEREFORE, in view of the foregoing, the motion sholud be as it is hereby
granted and this case is ordered dismissed.
In view of the foregoing ruling no more action should be taken on the
"Motion For Reconsideration (of the order admitting the Intervention)"
dated June 21, 1984 as well as the Motion For Reconsideration dated
September 10, 1984.
SO ORDERED.
Petitioner now comes to Us, alleging that:
1. IAC erred in ruling that a cashier's check can be countermanded even in
the hands of a holder in due course.
2. IAC erred in countenancing the filing and maintenance of an interpleader
suit by a party who had earlier been sued on the same claim.
3. IAC erred in upholding the trial court's order declaring petitioner as in
default when there was no proper order for him to plead in the interpleader
complaint.
4. IAC went beyond the scope of its certiorari jurisdiction by making findings
of facts in advance of trial.
Petitioner now interposes the following prayer:
1. Reverse the decision of the IAC, dated January 22, 1985 and set aside the
February 18, 1985 resolution denying the Motion for Reconsideration.
2. Annul the orders of respondent Judge of RTC Manila giving due course to
the interpleader suit and declaring petitioner in default.
Petitioner's allegations hold no water. Theories and examples advanced by
petitioner on causes and effects of a cashier's check such as 1) it cannot be
countermanded in the hands of a holder in due course and 2) a cashier's
check is a bill of exchange drawn by the bank against itself-are general
principles which cannot be aptly applied to the case at bar, without
considering other things. Petitioner failed to substantiate his claim that he is
a holder in due course and for consideration or value as shown by the
established facts of the case. Admittedly, petitioner became the holder of
the cashier's check as endorsed by Alexander Lim who stole the check. He
refused to say how and why it was passed to him. He had therefore notice
of the defect of his title over the check from the start. The holder of a
cashier's check who is not a holder in due course cannot enforce such check
against the issuing bank which dishonors the same. If a payee of a cashier's
check obtained it from the issuing bank by fraud, or if there is some other
reason why the payee is not entitled to collect the check, the respondent
bank would, of course, have the right to refuse payment of the check when
presented by the payee, since respondent bank was aware of the facts
surrounding the loss of the check in question. Moreover, there is no
similarity in the cases cited by petitioner since respondent bank did not
issue the cashier's check in payment of its obligation. Jose Go bought it from
respondent bank for purposes of transferring his funds from respondent
bank to another bank near his establishment realizing that carrying money
in this form is safer than if it were in cash. The check was Jose Go's property
when it was misplaced or stolen, hence he stopped its payment. At the
outset, respondent bank knew it was Jose Go's check and no one else since
Go had not paid or indorsed it to anyone. The bank was therefore liable to
nobody on the check but Jose Go. The bank had no intention to issue it to
petitioner but only to buyer Jose Go. When payment on it was therefore
stopped, respondent bank was not the one who did it but Jose Go, the
owner of the check. Respondent bank could not be drawer and drawee for
clearly, Jose Go owns the money it represents and he is therefore the
drawer and the drawee in the same manner as if he has a current account
and he issued a check against it; and from the moment said cashier's check
was lost and/or stolen no one outside of Jose Go can be termed a holder in
due course because Jose Go had not indorsed it in due course. The check in
question suffers from the infirmity of not having been properly negotiated
and for value by respondent Jose Go who as already been said is the real
owner of said instrument.
In his second assignment of error, petitioner stubbornly insists that there is
no showing of conflicting claims and interpleader is out of the question.
There is enough evidence to establish the contrary. Considering the
aforementioned facts and circumstances, respondent bank merely took the
necessary precaution not to make a mistake as to whom to pay and
therefore interpleader was its proper remedy. It has been shown that the
interpleader suit was filed by respondent bank because petitioner and Jose
Go were both laying their claims on the check, petitioner asking payment
thereon and Jose Go as the purchaser or owner. The allegation of petitioner
that respondent bank had effectively relieved itself of its primary liability
under the check by simply filing a complaint for interpleader is belied by the
willingness of respondent bank to issue a certificate of time deposit in the
amount of P800,000 representing the cashier's check in question in the
name of the Clerk of Court of Manila to be awarded to whoever wig be
found by the court as validly entitled to it. Said validity will depend on the
strength of the parties' respective rights and titles thereto. Bank filed the these non-issues." Respondent IAC cannot rule on whether respondent RTC
interpleader suit not because petitioner sued it but because petitioner is committed an abuse of discretion or not, without being apprised of the facts
laying claim to the same check that Go is claiming. On the very day that the and reasons why respondent Associated Bank instituted the Interpleader
bank instituted the case in interpleader, it was not aware of any suit for case. Both parties were given an opportunity to present their sides.
damages filed by petitioner against it as supported by the fact that the Petitioner chose to withhold substantial facts. Respondents were not
interpleader case was first entitled Associated Bank vs. Jose Go and John forbidden to present their side-this is the purpose of the Comment of
Doe, but later on changed to Marcelo A. Mesina for John Doe when his respondent to the petition. IAC decided the question by considering both
name became known to respondent bank. the facts submitted by petitioner and those given by respondents. IAC did
not act therefore beyond the scope of the remedy sought in the petition.
In his third assignment of error, petitioner assails the then respondent IAC
in upholding the trial court's order declaring petitioner in default when WHEREFORE, finding that the instant petition is merely dilatory, the same is
there was no proper order for him to plead in the interpleader case. Again, hereby denied and the assailed orders of the respondent court are hereby
such contention is untenable. The trial court issued an order, compelling AFFIRMED in toto.
petitioner and respondent Jose Go to file their Answers setting forth their
respective claims. Subsequently, a Pre-Trial Conference was set with notice SO ORDERED.
to parties to submit position papers. Petitioner argues in his memorandum
that this order requiring petitioner to file his answer was issued without
jurisdiction alleging that since he is presumably a holder in due course and
for value, how can he be compelled to litigate against Jose Go who is not
even a party to the check? Such argument is trite and ridiculous if we have
to consider that neither his name or Jose Go's name appears on the check.
Following such line of argument, petitioner is not a party to the check either
and therefore has no valid claim to the Check. Furthermore, the Order of
the trial court requiring the parties to file their answers is to all intents and
purposes an order to interplead, substantially and essentially and therefore
in compliance with the provisions of Rule 63 of the Rules of Court. What
else is the purpose of a law suit but to litigate?

The records of the case show that respondent bank had to resort to details
in support of its action for Interpleader. Before it resorted to Interpleader,
respondent bank took an precautionary and necessary measures to bring
out the truth. On the other hand, petitioner concealed the circumstances
known to him and now that private respondent bank brought these
circumstances out in court (which eventually rendered its decision in the
light of these facts), petitioner charges it with "gratuitous excursions into
CELY YANG, petitioner, vs. HON. COURT OF APPEALS, PHILIPPINE
COMMERCIAL INTERNATIONAL BANK, FAR EAST BANK & TRUST
CO., EQUITABLE BANKING CORPORATION, PREM CHANDIRAMANI and
FERNANDO DAVID, respondents.
DECISION
QUISUMBING, J.:
For review on certiorari is the decision[1] of the Court of Appeals, dated
March 25, 1999, in CA-G.R. CV No. 52398, which affirmed with modification
the joint decision of the Regional Trial Court (RTC) of Pasay City, Branch 117,
dated July 4, 1995, in Civil Cases Nos. 5479[2] and 5492.[3] The trial court
dismissed the complaint against herein respondents Far East Bank & Trust
Company (FEBTC), Equitable Banking Corporation (Equitable), and Philippine
Commercial International Bank (PCIB) and ruled in favor of respondent
Fernando David as to the proceeds of the two cashiers checks, including the
earnings thereof pendente lite. Petitioner Cely Yang was ordered to pay
David moral damages of P100,000.00 and attorneys fees also in the amount
of P100,000.00.
The facts of this case are not disputed, to wit:
On or before December 22, 1987, petitioner Cely Yang and private
respondent Prem Chandiramani entered into an agreement whereby the
latter was to give Yang a PCIB managers check in the amount of P4.2 million
in exchange for two (2) of Yangs managers checks, each in the amount
of P2.087 million, both payable to the order of private respondent Fernando
David. Yang and Chandiramani agreed that the difference of P26,000.00 in
the exchange would be their profit to be divided equally between them.
Yang and Chandiramani also further agreed that the former would
secure from FEBTC a dollar draft in the amount of US$200,000.00, payable
to PCIB FCDU Account No. 4195-01165-2, which Chandiramani would
exchange for another dollar draft in the same amount to be issued by Hang
Seng Bank Ltd. of Hong Kong.
Accordingly, on December 22, 1987, Yang procured the following:
a) Equitable Cashiers Check No. CCPS 14-009467 in the sum
of P2,087,000.00, dated December 22, 1987, payable to the
order of Fernando David;
b) FEBTC Cashiers Check No. 287078, in the amount
of P2,087,000.00, dated December 22, 1987, likewise
payable to the order of Fernando David; and
c) FEBTC Dollar Draft No. 4771, drawn on Chemical Bank, New
York, in the amount of US$200,000.00, dated December 22,
1987, payable to PCIB FCDU Account No. 4195-01165-2.
At about one oclock in the afternoon of the same day, Yang gave the
aforementioned cashiers checks and dollar drafts to her business associate,
Albert Liong, to be delivered to Chandiramani by Liongs messenger, Danilo
Ranigo. Ranigo was to meet Chandiramani at Philippine Trust Bank, Ayala
Avenue, Makati City, Metro Manila where he would turn over Yangs
cashiers checks and dollar draft to Chandiramani who, in turn, would deliver
to Ranigo a PCIB managers check in the sum of P4.2 million and a Hang Seng
Bank dollar draft for US$200,000.00 in exchange.
Chandiramani did not appear at the rendezvous and Ranigo allegedly
lost the two cashiers checks and the dollar draft bought by petitioner.
Ranigo reported the alleged loss of the checks and the dollar draft to Liong
at half past four in the afternoon of December 22, 1987. Liong, in turn,
informed Yang, and the loss was then reported to the police.
It transpired, however, that the checks and the dollar draft were not
lost, for Chandiramani was able to get hold of said instruments, without
delivering the exchange consideration consisting of the PCIB managers
check and the Hang Seng Bank dollar draft.
At three oclock in the afternoon or some two (2) hours after
Chandiramani and Ranigo were to meet in Makati City, Chandiramani
delivered to respondent Fernando David at China Banking Corporation
branch in San Fernando City, Pampanga, the following: (a) FEBTC Cashiers
Check No. 287078, dated December 22, 1987, in the sum of P2.087 million;
and (b) Equitable Cashiers Check No. CCPS 14-009467, dated December 22,
1987, also in the amount of P2.087 million. In exchange, Chandiramani got
US$360,000.00 from David, which Chandiramani deposited in the savings
account of his wife, Pushpa Chandiramani; and his mother, Rani Reynandas,
who held FCDU Account No. 124 with the United Coconut Planters Bank
branch in Greenhills, San Juan, Metro Manila. Chandiramani also deposited
FEBTC Dollar Draft No. 4771, dated December 22, 1987, drawn upon the
Chemical Bank, New York for US$200,000.00 in PCIB FCDU Account No.
4195-01165-2 on the same date.
Meanwhile, Yang requested FEBTC and Equitable to stop payment on
the instruments she believed to be lost. Both banks complied with her
request, but upon the representation of PCIB, FEBTC subsequently lifted the
stop payment order on FEBTC Dollar Draft No. 4771, thus enabling the
holder of PCIB FCDU Account No. 4195-01165-2 to receive the amount of
US$200,000.00.
On December 28, 1987, herein petitioner Yang lodged a
Complaint[4] for injunction and damages against Equitable, Chandiramani,
and David, with prayer for a temporary restraining order, with the Regional
Trial Court of Pasay City. The Complaint was docketed as Civil Case No.
5479. The Complaint was subsequently amended to include a prayer for
Equitable to return to Yang the amount of P2.087 million, with interest
thereon until fully paid.[5]
On January 12, 1988, Yang filed a separate case for injunction and
damages, with prayer for a writ of preliminary injunction against FEBTC,
PCIB, Chandiramani and David, with the RTC of Pasay City, docketed as Civil
Case No. 5492. This complaint was later amended to include a prayer that
defendants therein return to Yang the amount of P2.087 million, the value
of FEBTC Dollar Draft No. 4771, with interest at 18% annually until fully
paid.[6]
On February 9, 1988, upon the filing of a bond by Yang, the trial court
issued a writ of preliminary injunction in Civil Case No. 5479. A writ of
preliminary injunction was subsequently issued in Civil Case No. 5492 also.
Meanwhile, herein respondent David moved for dismissal of the cases
against him and for reconsideration of the Orders granting the writ of
preliminary injunction, but these motions were denied. David then elevated
the matter to the Court of Appeals in a special civil action for certiorari
docketed as CA-G.R. SP No. 14843, which was dismissed by the appellate
court.
As Civil Cases Nos. 5479 and 5492 arose from the same set of facts, the
two cases were consolidated. The trial court then conducted pre-trial and
trial of the two cases, but the proceedings had to be suspended after a fire
gutted the Pasay City Hall and destroyed the records of the courts.
After the records were reconstituted, the proceedings resumed and the
parties agreed that the money in dispute be invested in Treasury Bills to be
awarded in favor of the prevailing side. It was also agreed by the parties to
limit the issues at the trial to the following:
1. Who, between David and Yang, is legally entitled to the
proceeds of Equitable Banking Corporation (EBC) Cashiers
Check No. CCPS 14-009467 in the sum of P2,087,000.00 dated
December 22, 1987, and Far East Bank and Trust Company
(FEBTC) Cashiers Check No. 287078 in the sum
of P2,087,000.00 dated December 22, 1987, together with the
earnings derived therefrom pendente lite?
2. Are the defendants FEBTC and PCIB solidarily liable to Yang for
having allowed the encashment of FEBTC Dollar Draft No. 4771,
in the sum of US$200,000.00 plus interest thereon despite the
stop payment order of Cely Yang?[7]
On July 4, 1995, the trial court handed down its decision in Civil Cases
Nos. 5479 and 5492, to wit:
WHEREFORE, the Court renders judgment in favor of defendant Fernando
David against the plaintiff Cely Yang and declaring the former entitled to the
proceeds of the two (2) cashiers checks, together with the earnings derived
therefrom pendente lite; ordering the plaintiff to pay the defendant
Fernando David moral damages in the amount of P100,000.00; attorneys
fees in the amount of P100,000.00 and to pay the costs. The complaint
against Far East Bank and Trust Company (FEBTC), Philippine Commercial
International Bank (PCIB) and Equitable Banking Corporation (EBC) is
dismissed. The decision is without prejudice to whatever action plaintiff Cely
Yang will file against defendant Prem Chandiramani for reimbursement of
the amounts received by him from defendant Fernando David.
SO ORDERED.[8]
In finding for David, the trial court ratiocinated:
The evidence shows that defendant David was a holder in due course for
the reason that the cashiers checks were complete on their face when they
were negotiated to him. They were not yet overdue when he became the
holder thereof and he had no notice that said checks were previously
dishonored; he took the cashiers checks in good faith and for value. He who at the time the checks were delivered to David, was acting as Yangs
parted some $200,000.00 for the two (2) cashiers checks which were given agent.
to defendant Chandiramani; he had also no notice of any infirmity in the
cashiers checks or defect in the title of the drawer. As a matter of fact, he David had no notice, real or constructive, cogent for him to make further
asked the manager of the China Banking Corporation to inquire as to the inquiry as to any infirmity in the instrument(s) and defect of title of the
genuineness of the cashiers checks (tsn, February 5, 1988, p. 21, September holder. To mandate that each holder inquire about every aspect on how the
20, 1991, pp. 13-14). Another proof that defendant David is a holder in due instrument came about will unduly impede commercial transactions,
course is the fact that the stop payment order on [the] FEBTC cashiers check Although negotiable instruments do not constitute legal tender, they often
was lifted upon his inquiry at the head office (tsn, September 20, 1991, pp. take the place of money as a means of payment.
24-25). The apparent reason for lifting the stop payment order was because
of the fact that FEBTC realized that the checks were not actually lost but The mere fact that David and Chandiramani knew one another for a long
indeed reached the payee defendant David.[9] time is not sufficient to establish that they connived with each other to
defraud Yang. There was no concrete proof presented by Yang to support
Yang then moved for reconsideration of the RTC judgment, but the trial her theory.[11]
court denied her motion in its Order of September 20, 1995.
The appellate court awarded P25,000.00 in attorneys fees to PCIB as it
In the belief that the trial court misunderstood the concept of a holder
found the action filed by Yang against said bank to be clearly unfounded and
in due course and misapprehended the factual milieu, Yang seasonably filed
baseless. Since PCIB was compelled to litigate to protect itself, then it was
an appeal with the Court of Appeals, docketed as CA-G.R. CV No. 52398.
entitled under Article 2208[12] of the Civil Code to attorneys fees and
On March 25, 1999, the appellate court decided CA-G.R. CV No. 52398 litigation expenses.
in this wise:
Hence, the instant recourse wherein petitioner submits the following
issues for resolution:
WHEREFORE, this court AFFIRMS the judgment of the lower court with
modification and hereby orders the plaintiff-appellant to pay defendant-
a - WHETHER THE CHECKS WERE ISSUED TO PREM
appellant PCIB the amount of Twenty-Five Thousand Pesos (P25,000.00).
CHANDIRAMANI BY PETITIONER;
SO ORDERED.[10]
b - WHETHER THE ALLEGED TRANSACTION BETWEEN PREM
CHANDIRAMANI AND FERNANDO DAVID IS LEGITIMATE OR
In affirming the trial courts judgment with respect to herein
A SCHEME BY BOTH PRIVATE RESPONDENTS TO SWINDLE
respondent David, the appellate court found that:
PETITIONER;
In this case, defendant-appellee had taken the necessary precautions to
c - WHETHER FERNANDO DAVID GAVE PREM CHANDIRAMANI
verify, through his bank, China Banking Corporation, the genuineness of
US$360,000.00 OR JUST A FRACTION OF THE AMOUNT
whether (sic) the cashiers checks he received from Chandiramani. As no
REPRESENTING HIS SHARE OF THE LOOT;
stop payment order was made yet (at) the time of the inquiry, defendant-
appellee had no notice of what had transpired earlier between the plaintiff-
d - WHETHER PRIVATE RESPONDENTS FERNANDO DAVID AND
appellant and Chandiramani. All he knew was that the checks were issued to
PCIB ARE ENTITLED TO DAMAGES AND ATTORNEYS FEES.[13]
Chandiramani with whom he was he had (sic) a transaction. Further on,
David received the checks in question in due course because Chandiramani,
 At the outset, we must stress that this is a petition for review under
Rule 45 of the 1997 Rules of Civil Procedure. It is basic that in petitions for
review under Rule 45, the jurisdiction of this Court is limited to reviewing
questions of law, questions of fact are not entertained absent a showing
that the factual findings complained of are totally devoid of support in the
record or are glaringly erroneous.[14] Given the facts in the instant case,
despite petitioners formulation, we find that the following are the pertinent
issues to be resolved:
a) Whether the Court of Appeals erred in holding herein
respondent Fernando David to be a holder in due course;
and
b) Whether the appellate court committed a reversible error in
awarding damages and attorneys fees to David and PCIB.
On the first issue, petitioner Yang contends that private respondent
Fernando David is not a holder in due course of the checks in question.
While it is true that he was named the payee thereof, David failed to inquire
from Chandiramani about how the latter acquired possession of said checks.
Given his failure to do so, it cannot be said that David was unaware of any
defect or infirmity in the title of Chandiramani to the checks at the time of
their negotiation. Moreover, inasmuch as the checks were crossed, then
David should have, pursuant to our ruling in Bataan Cigar & Cigarette
Factory, Inc. v. Court of Appeals, G.R. No. 93048, March 3, 1994, 230 SCRA
643, been put on guard that the checks were issued for a definite purpose
and accordingly, made inquiries to determine if he received the checks
pursuant to that purpose. His failure to do so negates the finding in the
proceedings below that he was a holder in due course.
Finally, the petitioner argues that there is no showing whatsoever that
David gave Chandiramani any consideration of value in exchange for the
aforementioned checks.
Private respondent Fernando David counters that the evidence on
record shows that when he received the checks, he verified their
genuineness with his bank, and only after said verification did he deposit
them. David stresses that he had no notice of previous dishonor or any
infirmity that would have aroused his suspicions, the instruments being
complete and regular upon their face. David stresses that the checks in
question were cashiers checks. From the very nature of cashiers checks, it is
highly unlikely that he would have suspected that something was amiss.
David also stresses negotiable instruments are presumed to have been
issued for valuable consideration, and he who alleges otherwise must
controvert the presumption with sufficient evidence. The petitioner failed
to discharge this burden, according to David. He points out that the checks
were delivered to him as the payee, and he took them as holder and payee
thereof. Clearly, he concludes, he should be deemed to be their holder in
due course.
We shall now resolve the first issue.
Every holder of a negotiable instrument is deemed prima facie a holder
in due course. However, this presumption arises only in favor of a person
who is a holder as defined in Section 191 of the Negotiable Instruments
Law,[15] meaning a payee or indorsee of a bill or note, who is in possession of
it, or the bearer thereof.
In the present case, it is not disputed that David was the payee of the
checks in question. The weight of authority sustains the view that a payee
may be a holder in due course.[16]Hence, the presumption that he is a prima
facie holder in due course applies in his favor. However, said presumption
may be rebutted. Hence, what is vital to the resolution of this issue is
whether David took possession of the checks under the conditions provided
for in Section 52[17] of the Negotiable Instruments Law. All the requisites
provided for in Section 52 must concur in Davids case, otherwise he cannot
be deemed a holder in due course.
We find that the petitioners challenge to Davids status as a holder in
due course hinges on two arguments: (1) the lack of proof to show that
David tendered any valuable consideration for the disputed checks; and (2)
Davids failure to inquire from Chandiramani as to how the latter acquired
possession of the checks, thus resulting in Davids intentional ignorance
tantamount to bad faith. In sum, petitioner posits that the last two
requisites of Section 52 are missing, thereby preventing David from being
considered a holder in due course. Unfortunately for the petitioner, her
arguments on this score are less than meritorious and far from persuasive.
First, with respect to consideration, Section 24[18] of the Negotiable
Instruments Law creates a presumption that every party to an instrument
acquired the same for a consideration[19] or for value.[20] Thus, the law itself
creates a presumption in Davids favor that he gave valuable consideration
for the checks in question. In alleging otherwise, the petitioner has the onus
to prove that David got hold of the checks absent said consideration. In
other words, the petitioner must present convincing evidence to overthrow
the presumption. Our scrutiny of the records, however, shows that the
petitioner failed to discharge her burden of proof. The petitioners averment
that David did not give valuable consideration when he took possession of
the checks is unsupported, devoid of any concrete proof to sustain it. Note
that both the trial court and the appellate court found that David did not
receive the checks gratis, but instead gave Chandiramani US$360,000.00 as
consideration for the said instruments. Factual findings of the Court of
Appeals are conclusive on the parties and not reviewable by this Court; they
carry great weight when the factual findings of the trial court are affirmed
by the appellate court.[21]
Second, petitioner fails to point any circumstance which should have
put David on inquiry as to the why and wherefore of the possession of the
checks by Chandiramani. David was not privy to the transaction between
petitioner and Chandiramani. Instead, Chandiramani and David had a
separate dealing in which it was precisely Chandiramanis duty to deliver the
checks to David as payee. The evidence shows that Chandiramani
performed said task to the letter. Petitioner admits that David took the step
of asking the manager of his bank to verify from FEBTC and Equitable as to
the genuineness of the checks and only accepted the same after being
assured that there was nothing wrong with said checks. At that time, David
was not aware of any stop payment order. Under these circumstances,
David thus had no obligation to ascertain from Chandiramani what the
nature of the latters title to the checks was, if any, or the nature of his
possession. Thus, we cannot hold him guilty of gross neglect amounting to
legal absence of good faith, absent any showing that there was something
amiss about Chandiramanis acquisition or possession of the checks. David
did not close his eyes deliberately to the nature or the particulars of a fraud
allegedly committed by Chandiramani upon the petitioner, absent any
knowledge on his part that the action in taking the instruments amounted
to bad faith.[22]
Belatedly, and we say belatedly since petitioner did not raise this
matter in the proceedings below, petitioner now claims that David should
have been put on alert as the instruments in question were crossed checks.
Pursuant to Bataan Cigar & Cigarette Factory, Inc. v. Court of Appeals, David
should at least have inquired as to whether he was acquiring said checks for
the purpose for which they were issued, according to petitioners
submission.
Petitioners reliance on the Bataan Cigar case, however, is misplaced.
The facts in the present case are not on all fours with Bataan Cigar. In the
latter case, the crossed checks were negotiated and sold at a discount by
the payee, while in the instant case, the payee did not negotiate further the
checks in question but promptly deposited them in his bank account.
The Negotiable Instruments Law is silent with respect to crossed
checks, although the Code of Commerce[23] makes reference to such
instruments. Nonetheless, this Court has taken judicial cognizance of the
practice that a check with two parallel lines in the upper left hand corner
means that it could only be deposited and not converted into cash.[24] The
effects of crossing a check, thus, relates to the mode of payment, meaning
that the drawer had intended the check for deposit only by the rightful
person, i.e., the payee named therein. In Bataan Cigar, the rediscounting of
the check by the payee knowingly violated the avowed intention of crossing
the check. Thus, in accepting the cross checks and paying cash for them,
despite the warning of the crossing, the subsequent holder could not be
considered in good faith and thus, not a holder in due course. Our ruling
in Bataan Cigar reiterates that in De Ocampo & Co. v. Gatchalian.[25]
The factual circumstances in De Ocampo and in Bataan Cigar are not
present in this case. For here, there is no dispute that the crossed checks
were delivered and duly deposited by David, the payee named therein, in
his bank account. In other words, the purpose behind the crossing of the
checks was satisfied by the payee.
Proceeding to the issue of damages, petitioner merely argues that
respondents David and PCIB are not entitled to damages, attorneys fees,
and costs of suit as both acted in bad faith towards her, as shown by her
version of the facts which gave rise to the instant case.
Respondent David counters that he was maliciously and
unceremoniously dragged into this suit for reasons which have nothing to
do with him at all, but which arose from petitioners failure to receive her
share of the profit promised her by Chandiramani. Moreover, in filing this
suit which has lasted for over a decade now, the petitioner deprived David
of the rightful enjoyment of the two checks, to which he is entitled, under
the law, compelled him to hire the services of counsel to vindicate his rights,
and subjected him to social humiliation and besmirched reputation, thus
harming his standing as a person of good repute in the business community
of Pampanga. David thus contends that it is but proper that moral damages,
attorneys fees, and costs of suit be awarded him.
 For its part, respondent PCIB stresses that it was established by both SO ORDERED.
the trial court and the appellate court that it was needlessly dragged into
this case. Hence, no error was committed by the appellate court in declaring
PCIB entitled to attorneys fees as it was compelled to litigate to protect
itself.
We have thoroughly perused the records of this case and find no
reason to disagree with the finding of the trial court, as affirmed by the
appellate court, that:

[D]efendant David is entitled to [the] award of moral damages as he has

been needlessly and unceremoniously dragged into this case which should
have been brought only between the plaintiff and defendant
Chandiramani.[26]

A careful reading of the findings of facts made by both the trial court
and appellate court clearly shows that the petitioner, in including David as a
party in these proceedings, is barking up the wrong tree. It is apparent from
the factual findings that David had no dealings with the petitioner and was
not privy to the agreement of the latter with Chandiramani. Moreover, any
loss which the petitioner incurred was apparently due to the acts or
omissions of Chandiramani, and hence, her recourse should have been
against him and not against David. By needlessly dragging David into this
case all because he and Chandiramani knew each other, the petitioner not
only unduly delayed David from obtaining the value of the checks, but also
caused him anxiety and injured his business reputation while waiting for its
outcome. Recall that under Article 2217[27] of the Civil Code, moral damages
include mental anguish, serious anxiety, besmirched reputation, wounded
feelings, social humiliation, and similar injury. Hence, we find the award of
moral damages to be in order.
The appellate court likewise found that like David, PCIB was dragged
into this case on unfounded and baseless grounds. Both were thus
compelled to litigate to protect their interests, which makes an award of
attorneys fees justified under Article 2208 (2)[28] of the Civil Code. Hence, we
rule that the award of attorneys fees to David and PCIB was proper.
WHEREFORE, the instant petition is DENIED. The assailed decision of
the Court of Appeals, dated March 25, 1999, in CA-G.R. CV No. 52398 is
AFFIRMED. Costs against the petitioner.
G.R. No. 93048 March 3, 1994
BATAAN CIGAR AND CIGARETTE FACTORY, INC., petitioner,
vs.
THE COURT OF APPEALS and STATE INVESTMENT HOUSE,
INC., respondents.
Teresita Gandiongco Oledan for petitioner.
Acaban & Sabado for private respondent.
NOCON, J.:
For our review is the decision of the Court of Appeals in the case entitled
"State Investment House, Inc. v. Bataan Cigar & Cigarette Factory
Inc.,"1 affirming the decision of the Regional Trial Court2 in a complaint filed
by the State Investment House, Inc. (hereinafter referred to as SIHI) for
collection on three unpaid checks issued by Bataan Cigar & Cigarette
Factory, Inc. (hereinafter referred to as BCCFI). The foregoing decisions
unanimously ruled in favor of SIHI, the private respondent in this case.
Emanating from the records are the following facts. Petitioner, Bataan Cigar
& Cigarette Factory, Inc. (BCCFI), a corporation involved in the
manufacturing of cigarettes, engaged one of its suppliers, King Tim Pua
George (herein after referred to as George King), to deliver 2,000 bales of
tobacco leaf starting October 1978. In consideration thereof, BCCFI, on July
13, 1978 issued crossed checks post dated sometime in March 1979 in the
total amount of P820,000.00.3
Relying on the supplier's representation that he would complete delivery
within three months from December 5, 1978, petitioner agreed to purchase
additional 2,500 bales of tobacco leaves, despite the supplier's failure to
deliver in accordance with their earlier agreement. Again petitioner issued
post dated crossed checks in the total amount of P1,100,000.00, payable
sometime in September 1979.4
During these times, George King was simultaneously dealing with private
respondent SIHI. On July 19, 1978, he sold at a discount check TCBT
5518265 bearing an amount of P164,000.00, post dated March 31, 1979,
drawn by petitioner, naming George King as payee to SIHI. On December 19
and 26, 1978, he again sold to respondent checks TCBT Nos. 608967 &
608968,6 both in the amount of P100,000.00, post dated September 15 &
30, 1979 respectively, drawn by petitioner in favor of George King.
In as much as George King failed to deliver the bales of tobacco leaf as
agreed despite petitioner's demand, BCCFI issued on March 30, 1979, a stop
payment order on all checks payable to George King, including check TCBT
551826. Subsequently, stop payment was also ordered on checks TCBT Nos.
608967 & 608968 on September 14 & 28, 1979, respectively, due to George
King's failure to deliver the tobacco leaves.
Efforts of SIHI to collect from BCCFI having failed, it instituted the present
case, naming only BCCFI as party defendant. The trial court pronounced SIHI
as having a valid claim being a holder in due course. It further said that the
non-inclusion of King Tim Pua George as party defendant is immaterial in
this case, since he, as payee, is not an indispensable party.
The main issue then is whether SIHI, a second indorser, a holder of crossed
checks, is a holder in due course, to be able to collect from the drawer,
BCCFI.
The Negotiable Instruments Law states what constitutes a holder in due
course, thus:
Sec. 52 — A holder in due course is a holder who has taken the instrument
under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without
notice that it had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of the person negotiating it.
Section 59 of the NIL further states that every holder is deemed prima
facie a holder in due course. However, when it is shown that the title of any
person who has negotiated the instrument was defective, the burden is on
the holder to prove that he or some person under whom he claims,
acquired the title as holder in due course.
The facts in this present case are on all fours to the case of State Investment
House, Inc. (the very respondent in this case) v. Intermediate Appellate
Court 7 wherein we made a discourse on the effects of crossing of checks.
As preliminary, a check is defined by law as a bill of exchange drawn on a
bank payable on demand. 8 There are a variety of checks, the more popular
of which are the memorandum check, cashier's check, traveler's check and
crossed check. Crossed check is one where two parallel lines are drawn
across its face or across a corner thereof. It may be crossed generally or
specially.
A check is crossed specially when the name of a particular banker or a
company is written between the parallel lines drawn. It is crossed generally
when only the words "and company" are written or nothing is written at all
between the parallel lines. It may be issued so that the presentment can be
made only by a bank. Veritably the Negotiable Instruments Law (NIL) does
not mention "crossed checks," although Article 541 9 of the Code of
Commerce refers to such instruments.
According to commentators, the negotiability of a check is not affected by
its being crossed, whether specially or generally. It may legally be
negotiated from one person to another as long as the one who encashes the
check with the drawee bank is another bank, or if it is specially crossed, by
the bank mentioned between the parallel lines. 10This is specially true in
England where the Negotiable Instrument Law originated.
In the Philippine business setting, however, we used to be beset with
bouncing checks, forging of checks, and so forth that banks have become
quite guarded in encashing checks, particularly those which name a specific
payee. Unless one is a valued client, a bank will not even accept second
indorsements on checks.
In order to preserve the credit worthiness of checks, jurisprudence has
pronounced that crossing of a check should have the following effects: (a)
the check may not be encashed but only deposited in the bank; (b) the
check may be negotiated only once — to one who has an account with a
bank; (c) and the act of crossing the check serves as warning to the holder
that the check has been issued for a definite purpose so that he must
inquire if he has received the check pursuant to that purpose, otherwise, he
is not a holder in due course. 11
The foregoing was adopted in the case of SIHI v. IAC, supra. In that case,
New Sikatuna Wood Industries, Inc. also sold at a discount to SIHI three post
dated crossed checks, issued by Anita Peña Chua naming as payee New
Sikatuna Wood Industries, Inc. Ruling that SIHI was not a holder in due
course, we then said:
The three checks in the case at bar had been crossed generally and issued
payable to New Sikatuna Wood Industries, Inc. which could only mean that
the drawer had intended the same for deposit only by the rightful person,
i.e. the payee named therein. Apparently, it was not the payee who
presented the same for payment and therefore, there was no proper
presentment, and the liability did not attach to the drawer. Thus, in the
absence of due presentment, the drawer did not become liable.
Consequently, no right of recourse is available to petitioner (SIHI) against
the drawer of the subject checks, private respondent wife (Anita),
considering that petitioner is not the proper party authorized to make
presentment of the checks in question.
xxx xxx xxx
That the subject checks had been issued subject to the condition that
private respondents (Anita and her husband) on due date would make the
back up deposit for said checks but which condition apparently was not
made, thus resulting in the non-consummation of the loan intended to be
granted by private respondents to New Sikatuna Wood Industries, Inc.,
constitutes a good defense against petitioner who is not a holder in due
course. 12

It is then settled that crossing of checks should put the holder on inquiry
and upon him devolves the duty to ascertain the indorser's title to the check
or the nature of his possession. Failing in this respect, the holder is declared
guilty of gross negligence amounting to legal absence of good faith, contrary
to Sec. 52(c) of the Negotiable Instruments Law, 13 and as such the
consensus of authority is to the effect that the holder of the check is not a
holder in due course.

In the present case, BCCFI's defense in stopping payment is as good to SIHI

as it is to George King. Because, really, the checks were issued with the
intention that George King would supply BCCFI with the bales of tobacco
leaf. There being failure of consideration, SIHI is not a holder in due course.
Consequently, BCCFI cannot be obliged to pay the checks.

The foregoing does not mean, however, that respondent could not recover
from the checks. The only disadvantage of a holder who is not a holder in
due course is that the instrument is subject to defenses as if it were
non-negotiable. 14 Hence, respondent can collect from the immediate
indorser, in this case, George King.

WHEREFORE, finding that the court a quo erred in the application of law,
the instant petition is hereby GRANTED. The decision of the Regional Trial
Court as affirmed by the Court of Appeals is hereby REVERSED. Cost against
private respondent.

SO ORDERED.

Narvasa, C.J., Regalado and Puno, JJ., concur.

Padilla, J., took no part.

G.R. No. 96160 June 17, 1992
STELCO MARKETING CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and STEELWELD CORPORATION OF THE
PHILIPPINES, INC., respondent.
NARVASA, c.J.:
Stelco Marketing Corporation is engaged in the distribution and sale to the
public of structural steel bars. 1 On seven (7) different occasions in
September and October, 1980, it sold to RYL Construction, Inc. quantities of
steels bars of various sizes and rolls of G.I. wire. These bars and wire were
delivered at different places at the indication of RYL Construction, Inc. The
aggregate price for the purchases was P126,859.61.
Although the corresponding invoices issued by STELCO stipulated that RYL
pay "COD" (cash on delivery), the latter made no payments for the
construction materials thus ordered and delivered despite insistent
demands for payment by the former.
On April 4, 1981, RYL gave to Armstrong, Industries — described by STELCO
as its "sister corporation" and "manufacturing arm" 2 — a check drawn
against Metrobank in the amount of P126,129.86, numbered 765380 and
dated April 4, 1981. That check was a company check of another
corporation, Steelweld Corporation of the Philippines, signed by its
President, Peter Rafael Limson, and its Vice-President, Artemio Torres.
The check was issued by Limson at the behest of his friend, Romeo Y. Lim,
President of RYL. Romeo Lim had asked Limson, for financial assistance, and
the latter had agreed to give Lim a check only by way of accommodation,
"only as guaranty but not to pay for anything." 3 Why the check was made
out in the amount of P126,129.86 is not explained. Anyway, the check was
actually issued in said amount of P126, 129.86, and as already stated, was
given by R.Y. Lim to Armstrong Industries, 4 in payment of an obligation.
When the latter deposited the check at its bank, it was dishonored because
"drawn against insufficient funds." 5 When so deposited, the check bore
two(2) endorsements, that of "RYL Construction," followed by that of
"Armstrong Industries." 6
On account of the dishonor of Metrobank Check No. 765380, and on
complaint of Armstrong Industries (through a Mr. Young), Rafael Limson and
Artemio Torres were charged in the Regional Trial Court of Manila with a
violation of Batas Pambansa Bilang 22. 7 They were acquitted in a decision
rendered on June 28, 1984 "on the ground that the check in question was
not issued by the drawer "to apply on account for value," it being merely for
accommodation purposes. 8 The judgment however conditioned the
acquittal with the following pronouncement:
This is not however to release Steelweld Corporation from its liability under
Sec. 29 of the Negotiable Instruments Law for having issued it for the
accommodation of Romeo Lim.
Eleven months or so later — and some four (4) years after issuance of the
check in question — in May, 1985, STELCO filed with the Regional Trial
Court at Caloocan City a civil complaint 9 against both RYL and STEELWELD
for the recovery of the valued of the steel bars and wire sold to and
delivered to RYL (as already narrated) in the amount of P126,129.86, "plus
18% interest from August 20, 1980 . . . (and) 25% of the total amount sought
to be recovered as and by way of attorney's fees . . . ." 10 Among the
allegations of its complaint was that Metrobank Check No. 765380 above
mentioned had been given to it in payment of RYL's indebtedness, duly
indorsed by R.Y. Lim. 11 A preliminary attachment was issued by the trial
court on the basis of the averments of the complaint but was shortly
dissolved upon the filing of a counter-bond by STEELWELD.
RYL could no longer be located and could not be served with
summons. 12 It never appeared. Only STEELWELD filed an answer, under
date of July 16, 1985. 13 In said pleading, it specifically denied the facts
alleged in the complaint, the truth, according to Steelweld, being basically
that —
1) STELCO "is a complete stranger to it;" it had "not entered into any
transaction or business dealing of any kind" with STELCO, the transactions
described in the complaint having been solely and exclusively between the
plaintiff and RYL Construction;
2) the check in question was "only given to a certain R. Lim to be used as
collateral for another obligation . . . (but) in breach of his agreement (Lim)
utilized and negotiated the check for another purpose. . . .;
3) nevertheless, the check "is wholly inoperative since . . . Steelweld
. . . did not issue it for any valuable consideration either to R. Lim or to the
plaintiff not to mention also the fact that the said plaintiff failed to comply
with the requirements of the law to hold the said defendant (STEELWELD)
liable
. . ."
Trial ensued upon these issues, after which judgment was rendered on June
26, 1986. 14 The judgment sentenced "the defendant Steelweld Corporation
to pay to . . . (Stelco Marketing Corporation) the amount of P126,129.86
with legal rate of interest from May 9, 1985, when this case was instituted
until fully paid, plus another sum equivalent to 25% of the total amount due
as and for attorney's fees . . . 15 That disposition was justified in the
judgment as follows:16
There is no question, then, that as far as any commercial transaction is
concerned between plaintiff and defendant Steelweld no such transaction
ever occurred. Ordinarily, under civil law rules, there having been no
transaction between them involving the purchase of certain merchandise
there would be no privity of contract between them, and plaintiff will have
no right to sue the defendant for payment of said merchandise for the
simple reason that the defendant did not order them, such less receive
them.
But we have here a case where the defendant Steelweld thru its President
Peter Rafael Limson admitted to have issued a check payable to cash in
favor of his friend Romeo Lim who was the President of RYL Construction by
way of accommodation. Under the Negotiable Instruments Law an
accommodation party is liable.
Sec. 29. Liability of an accommodation party. — An accommodation party is
one who has signed the instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of lending his name to
some other person. Such a person is liable on the instrument to a holder for
value notwithstanding such holder at the time of taking the instrument
knew him to be only an accommodation party.
From this adverse judgment STEELWELD appealed to the Court of
Appeals 17 and there succeeded in reversing the judgment. By Decision
promulgated on May 29, 1990, 18 the Court of Appeals 19 ordered "the
complaint against appellant (STEELWELD) DISMISSED; (and the appellee,
STELCO) to pay appellant the sum of P15,000.00 as attorney's fees and cost
of litigation, the suit . . . (being) a baseless one that dragged appellant in
court and caused it to incur attorney's fees and expense of litigation.
STELCO's motion for reconsideration was denied by the Appellate Tribunal's
resolution dated November 13, 1990. 20 The Court stressed that —
. . . as far as Steelweld is concerned, there was no commercial transaction
between said appellant and appellee. Moreover, there is no evidence that
appellee Stelco Marketing became a holder for value. Nowhere in the check
itself does the name of Stelco Marketing appear as payee, indorsee or
depositor thereof. Finally, appellee's complaint is for the collection of the
unpaid accounts for delivery of steels bars and construction materials. It
having been established that appellee had no commercial transaction with
appellant Stelco, appellee had no cause of action against said appellant.
STELCO appealed to this Court in accordance with Rule 45 of the Rules of
Court. In this Court it seeks to make the following points in connection with
its plea for the overthrow of the Appellate Tribunal's aforesaid decision, viz.:
1) said decision is "not in accord with law and jurisprudence;"
2) "STELCO is a "holder" within the meaning of the Negotiable Instruments
Law;"
3) "STELCO is a holder in due course of Metrobank Check No. 765380 . . .
(and hence) holds the same free from personal or equitable defense;" and
4) "Negotiation in breach of faith is a personal defense . . . (and hence) not
effective as against a holder in due course."
The points are not well taken.
The crucial question is whether or not STELCO ever became a holder in due
course of Check No. 765380, a bearer instrument, within the contemplation
of the Negotiable Instruments Law. It never did.
STELCO evidently places much reliance on the pronouncement of the
Regional Trial Court in Criminal Case No. 66571, 21 that the acquittal of the
two (2) accused (Limson and Torres) did not operate "to release Steelweld
Corporation from its liability under Sec. 29 of the Negotiable Instruments
Law for having issued . . . (the check) for the accommodation of Romeo
Lim." The cited provision reads as follows:
Sec. 29. Liability of accommodation party. — An accommodation party is
one who has singed the instrument as maker, drawer, acceptor, or indorser,
without receiving valued therefor, and for the purpose of lending his name
to some other person. Such a person is liable on the instrument to a holder
for value, notwithstanding such holder, at the time of taking the instrument,
knew him to be only an accommodation party.
It is noteworthy that the Trial Court's pronouncement containing reference
to said Section 29 did not specify to whom STEELWELD, as accommodation
party, is supposed to be liable; and certain it is that neither said
pronouncement nor any other part of the judgment of acquittal declared it
liable to STELCO.
"A holder in due course," says the law, 22 "is a holder who has taken the
instrument under the following conditions:
(a) That is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without
notice that it had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any
infirmity in the instrument or defect in the title of the persons negotiating it.
To be sure, as regards an accommodation party (such as STEELWELD), the
fourth condition, i.e., lack of notice of any infirmity in the instruments or
defect in title of the persons negotiating it, has no application. This is
because Section 29 of the law above quoted preserves the right of recourse
of a "holder for value" against the accommodation party notwithstanding
that "such holder, at the time of taking the instrument, knew him to be only
an accommodation
23
party."
Now, STELCO theorizes that it should be deemed a "holder for value" of
STEELWELD's Check No. 765380 because the record shows it to have been in
"actual possession" thereof; otherwise, it "could not have presented,
marked and introduced (said check) in evidence . . . before the court a quo."
"Besides," it adds, the check in question was presented by STELCO to the
drawee bank for payment through Armstrong Industries, the manufacturing
arm of STELCO and its sister company." 24
The trouble is, there is no evidence whatever that STELCO's possession of
Check No. 765380 ever dated back to nay time before the instrument's
presentment and dishonor. There is no evidence whatsoever that the check
was ever given to it, or indorsed to it in any manner or form in payment of
an obligation or as security for an obligation, or for any other purpose
before it was presented for payment. On the contrary, the factual finding of
the Court of Appeals, which by traditional precept is normally conclusive on
this Court, is that STELCO never became a holder for value and that
"(n)owhere in the check itself does the name of Stelco Marketing appear as
payee, indorsee or depositor thereof." 25
What the record shows is that: (1) the STEELWELD company check in
question was given by its president to R.Y. Lim; (2) it was given only by way
of accommodation, to be "used as collateral for another obligation;" (3) in
breach of the agreement, however, R.Y. Lim indorsed the check to
Armstrong in payment of obligation; (4) Armstrong deposited the check to
its account, after indorsing it; (5) the check was dishonored. The record
does not show any intervention or participation by STELCO in any manner of
form whatsoever in these transactions, or any communication of any sort
between STEELWELD and STELCO, or between either of them and
Armstrong Industries, at any time before the dishonor of the check.
The petitioner has failed to show any sufficient cause for modification or
reversal of the challenged judgment of the Court of Appeals which, on the
contrary, appears to be entirely in accord with the facts and the applicable
law.
WHEREFORE, the petition is DENIED and the Decision of the Court of
Appeals in CA-G.R. CV No. 13418 is AFFIRMED in toto. Costs against
petitioner.
SO ORDERED

The record does show that after the check had been deposited and
dishonored, STELCO came into possession of it in some way, and was able,
several years after the dishonor of the check, to give it in evidence at the
trial of the civil case it had instituted against the drawers of the check
(Limson and Torres) and RYL. But, as already pointed out, possession of a
negotiable instrument after presentment and dishonor, or payment, is
utterly inconsequential; it does not make the possessor a holder for value
within the meaning of the law; it gives rise to no liability on the part of the
maker or drawer and indorsers.

It is clear from the relevant circumstances that STELCO cannot be deemed a

holder of the check for value. It does not meet two of the essential
requisites prescribed by the statute. It did not become "the holder of it
before it was overdue, and without notice that it had been previously
dishonored," and it did not take the check "in good faith and for value." 26

Neither is there any evidence whatever that Armstrong Industries, to whom

R.Y. Lim negotiated the check accepted the instrument and attempted to
encash it in behalf, and as agent of STELCO. On the contrary, the indications
are that Armstrong was really the intended payee of the check and was the
party actually injured by its dishonor; it was after all its representative (a
Mr. Young) who instituted the criminal prosecution of the drawers, Limson
and Torres, albeit unsuccessfully.
G.R. No. 76788 January 22, 1990 In its decision dated September 10, 1982, the trial court held, thus:

JUANITA SALAS, petitioner, WHEREFORE, and in view of all the foregoing, judgment is hereby rendered
vs. ordering the defendant to pay the plaintiff the sum of P28,414.40 with
HON. COURT OF APPEALS and FIRST FINANCE & LEASING interest thereon at the rate of 14% from October 2, 1980 until the said sum
CORPORATION, respondents. is fully paid; and the further amount of P1,000.00 as attorney's fees.

Arsenio C. Villalon, Jr. for petitioner. The counterclaim of defendant is dismissed.

Labaguis, Loyola, Angara & Associates for private respondent.
With costs against defendant. 1

Both petitioner and private respondent appealed the aforesaid decision to

FERNAN, C.J.:
Assailed in this petition for review on certiorari is the decision of the Court
of Appeals in C.A.-G.R. CV No. 00757 entitled "Filinvest Finance & Leasing
Corporation v. Salas", which modified the decision of the Regional Trial
Court of San Fernando, Pampanga in Civil Case No. 5915, a collection suit
between the same parties.
Records disclose that on February 6, 1980, Juanita Salas (hereinafter
referred to as petitioner) bought a motor vehicle from the Violago Motor
Sales Corporation (VMS for brevity) for P58,138.20 as evidenced by a
promissory note. This note was subsequently endorsed to Filinvest Finance
& Leasing Corporation (hereinafter referred to as private respondent) which
financed the purchase.
Petitioner defaulted in her installments beginning May 21, 1980 allegedly
due to a discrepancy in the engine and chassis numbers of the vehicle
delivered to her and those indicated in the sales invoice, certificate of
registration and deed of chattel mortgage, which fact she discovered when
the vehicle figured in an accident on 9 May 1980.
This failure to pay prompted private respondent to initiate Civil Case No.
5915 for a sum of money against petitioner before the Regional Trial Court
of San Fernando, Pampanga.
the Court of Appeals.
Imputing fraud, bad faith and misrepresentation against VMS for having
delivered a different vehicle to petitioner, the latter prayed for a reversal of
the trial court's decision so that she may be absolved from the obligation
under the contract.
On October 27, 1986, the Court of Appeals rendered its assailed decision,
the pertinent portion of which is quoted hereunder:
The allegations, statements, or admissions contained in a pleading are
conclusive as against the pleader. A party cannot subsequently take a
position contradictory of, or inconsistent with his pleadings (Cunanan vs.
Amparo, 80 Phil. 227). Admissions made by the parties in the pleadings, or
in the course of the trial or other proceedings, do not require proof and
cannot be contradicted unless previously shown to have been made
through palpable mistake (Sec. 2, Rule 129, Revised Rules of Court; Sta. Ana
vs. Maliwat, L-23023, Aug. 31, 1968, 24 SCRA 1018).
When an action or defense is founded upon a written instrument, copied in
or attached to the corresponding pleading as provided in the preceding
section, the genuineness and due execution of the instrument shall be
deemed admitted unless the adverse party, under oath, specifically denied
them, and sets forth what he claims to be the facts (Sec. 8, Rule 8, Revised
Rules of Court; Hibbered vs. Rohde and McMillian, 32 Phil. 476).
A perusal of the evidence shows that the amount of P58,138.20 stated in
the promissory note is the amount assumed by the plaintiff in financing the
purchase of defendant's motor vehicle from the Violago Motor Sales Corp.,
the monthly amortization of winch is Pl,614.95 for 36 months. Considering
that the defendant was able to pay twice (as admitted by the plaintiff,
defendant's account became delinquent only beginning May, 1980) or in the
total sum of P3,229.90, she is therefore liable to pay the remaining balance
of P54,908.30 at l4% per annum from October 2, 1980 until full payment.
WHEREFORE, considering the foregoing, the appealed decision is hereby
modified ordering the defendant to pay the plaintiff the sum of P54,908.30
at 14% per annum from October 2, 1980 until full payment. The decision is
AFFIRMED in all other respects. With costs to defendant. 2
Petitioner's motion for reconsideration was denied; hence, the present
recourse.
In the petition before us, petitioner assigns twelve (12) errors which focus
on the alleged fraud, bad faith and misrepresentation of Violago Motor
Sales Corporation in the conduct of its business and which fraud, bad faith
and misrepresentation supposedly released petitioner from any liability to
private respondent who should instead proceed against VMS. 3
Petitioner argues that in the light of the provision of the law on sales by
description 4 which she alleges is applicable here, no contract ever existed
between her and VMS and therefore none had been assigned in favor of
private respondent.
She contends that it is not necessary, as opined by the appellate court, to
implead VMS as a party to the case before it can be made to answer for
damages because VMS was earlier sued by her for "breach of contract with
damages" before the Regional Trial Court of Olongapo City, Branch LXXII,
docketed as Civil Case No. 2916-0. She cites as authority the decision
therein where the court originally ordered petitioner to pay the remaining
balance of the motor vehicle installments in the amount of P31,644.30
representing the difference between the agreed consideration of
P49,000.00 as shown in the sales invoice and petitioner's initial
downpayment of P17,855.70 allegedly evidenced by a receipt. Said decision
was however reversed later on, with the same court ordering defendant
VMS instead to return to petitioner the sum of P17,855.70. Parenthetically,
said decision is still pending consideration by the First Civil Case Division of
the Court of Appeals, upon an appeal by VMS, docketed as AC-G.R. No.
02922. 5
Private respondent in its comment, prays for the dismissal of the petition
and counters that the issues raised and the allegations adduced therein are
a mere rehash of those presented and already passed upon in the court
below, and that the judgment in the "breach of contract" suit cannot be
invoked as an authority as the same is still pending determination in the
appellate court.
We see no cogent reason to disturb the challenged decision.
The pivotal issue in this case is whether the promissory note in question is a
negotiable instrument which will bar completely all the available defenses
of the petitioner against private respondent.
Petitioner's liability on the promissory note, the due execution and
genuineness of which she never denied under oath is, under the foregoing
factual milieu, as inevitable as it is clearly established.
The records reveal that involved herein is not a simple case of assignment of
credit as petitioner would have it appear, where the assignee merely steps
into the shoes of, is open to all defenses available against and can enforce
payment only to the same extent as, the assignor-vendor.
Recently, in the case of Consolidated Plywood Industries Inc. v. IFC Leasing
and Acceptance Corp., 6 this Court had the occasion to clearly distinguish
between a negotiable and a non-negotiable instrument.
Among others, the instrument in order to be considered negotiable must
contain the so-called "words of negotiability — i.e., must be payable to
"order" or "bearer"". Under Section 8 of the Negotiable Instruments Law,
there are only two ways by which an instrument may be made payable to monthly for ______ months due and payable on the ______ day of each
order. There must always be a specified person named in the instrument month starting _____198__ thru and inclusive of _____, 198________
and the bill or note is to be paid to the person designated in the instrument provided that interest at 14% per annum shall be added on each unpaid
or to any person to whom he has indorsed and delivered the same. Without installment from maturity hereof until fully paid.
the words "or order or "to the order of", the instrument is payable only to
the person designated therein and is therefore non-negotiable. Any xxx xxx xxx
subsequent purchaser thereof will not enjoy the advantages of being a Maker; Co-Maker:
holder of a negotiable instrument, but will merely "step into the shoes" of
the person designated in the instrument and will thus be open to all (SIGNED) JUANITA SALAS _________________
defenses available against the latter. Such being the situation in the above-
Address:
cited case, it was held that therein private respondent is not a holder in due
course but a mere assignee against whom all defenses available to the ____________________ ____________________
assignor may be raised. 7
WITNESSES
In the case at bar, however, the situation is different. Indubitably, the basis
of private respondent's claim against petitioner is a promissory note which SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE
bears all the earmarks of negotiability. TAN # TAN #

The pertinent portion of the note reads: PAY TO THE ORDER OF

FILINVEST FINANCE AND LEASING CORPORATION
PROMISSORY NOTE
(MONTHLY) VIOLAGO MOTOR SALES CORPORATION
BY: (SIGNED) GENEVEVA V. BALTAZAR
P58,138.20 Cash Manager 8
San Fernando, Pampanga, Philippines
Feb. 11, 1980 A careful study of the questioned promissory note shows that it is a
negotiable instrument, having complied with the requisites under the law as
For value received, I/We jointly and severally, promise to pay Violago Motor follows: [a] it is in writing and signed by the maker Juanita Salas; [b] it
Sales Corporation or order, at its office in San Fernando, Pampanga, the sum contains an unconditional promise to pay the amount of P58,138.20; [c] it is
of FIFTY EIGHT THOUSAND ONE HUNDRED THIRTY EIGHT & 201/100 ONLY payable at a fixed or determinable future time which is "P1,614.95 monthly
(P58,138.20) Philippine currency, which amount includes interest at 14% per for 36 months due and payable on the 21 st day of each month starting
annum based on the diminishing balance, the said principal sum, to be March 21, 1980 thru and inclusive of Feb. 21, 1983;" [d] it is payable to
payable, without need of notice or demand, in installments of the amounts Violago Motor Sales Corporation, or order and as such, [e] the drawee is
following and at the dates hereinafter set forth, to wit: P1,614.95 monthly named or indicated with certainty. 9
for "36" months due and payable on the 21st day of each month starting
March 21, 1980 thru and inclusive of February 21, 1983. P_________
It was negotiated by indorsement in writing on the instrument itself payable IN VIEW OF THE FOREGOING, the assailed decision is hereby AFFIRMED.
to the Order of Filinvest Finance and Leasing Corporation 10 and it is an With costs against petitioner.
indorsement of the entire instrument. 11
SO ORDERED.
Under the circumstances, there appears to be no question that Filinvest is a
holder in due course, having taken the instrument under the following
conditions: [a] it is complete and regular upon its face; [b] it became the
holder thereof before it was overdue, and without notice that it had
previously been dishonored; [c] it took the same in good faith and for value;
and [d] when it was negotiated to Filinvest, the latter had no notice of any
infirmity in the instrument or defect in the title of VMS Corporation. 12

Accordingly, respondent corporation holds the instrument free from any

defect of title of prior parties, and free from defenses available to prior
parties among themselves, and may enforce payment of the instrument for
the full amount thereof. 13 This being so, petitioner cannot set up against
respondent the defense of nullity of the contract of sale between her and
VMS.

Even assuming for the sake of argument that there is an iota of truth in
petitioner's allegation that there was in fact deception made upon her in
that the vehicle she purchased was different from that actually delivered to
her, this matter cannot be passed upon in the case before us, where the
VMS was never impleaded as a party.

Whatever issue is raised or claim presented against VMS must be resolved

in the "breach of contract" case.

Hence, we reach a similar opinion as did respondent court when it held:

We can only extend our sympathies to the defendant (herein petitioner) in

this unfortunate incident. Indeed, there is nothing We can do as far as the
Violago Motor Sales Corporation is concerned since it is not a party in this
case. To even discuss the issue as to whether or not the Violago Motor Sales
Corporation is liable in the transaction in question would amount, to denial
of due process, hence, improper and unconstitutional. She should have
impleaded Violago Motor Sales.14
G.R. No. 107382/G.R. No. 107612 January 31, 1996 are drawn to the order of "Concepcion Emergency Hospital, Concepcion,
Tarlac" or "The Chief, Concepcion Emergency Hospital, Concepcion, Tarlac."
ASSOCIATED BANK, petitioner, The checks are released by the Office of the Provincial Treasurer and
vs. received for the hospital by its administrative officer and cashier.
HON. COURT OF APPEALS, PROVINCE OF TARLAC and PHILIPPINE
NATIONAL BANK, respondents. In January 1981, the books of account of the Provincial Treasurer were post-
audited by the Provincial Auditor. It was then discovered that the hospital
xxxxxxxxxxxxxxxxxxxxx did not receive several allotment checks drawn by the Province.
G.R. No. 107612 January 31, 1996 On February 19, 1981, the Provincial Treasurer requested the manager of
PHILIPPINE NATIONAL BANK, petitioner, the PNB to return all of its cleared checks which were issued from 1977 to
vs. 1980 in order to verify the regularity of their encashment. After the checks
HONORABLE COURT OF APPEALS, PROVINCE OF TARLAC, and ASSOCIATED were examined, the Provincial Treasurer learned that 30 checks amounting
BANK, respondents. to P203,300.00 were encashed by one Fausto Pangilinan, with the
Associated Bank acting as collecting bank.
DECISION
It turned out that Fausto Pangilinan, who was the administrative officer and
ROMERO, J.: cashier of payee hospital until his retirement on February 28, 1978,
collected the questioned checks from the office of the Provincial Treasurer.
Where thirty checks bearing forged endorsements are paid, who bears the
He claimed to be assisting or helping the hospital follow up the release of
loss, the drawer, the drawee bank or the collecting bank?
the checks and had official receipts. 3Pangilinan sought to encash the first
This is the main issue in these consolidated petitions for review assailing the check 4 with Associated Bank. However, the manager of Associated Bank
decision of the Court of Appeals in "Province of Tarlac v. Philippine National refused and suggested that Pangilinan deposit the check in his personal
Bank v. Associated Bank v. Fausto Pangilinan, et. al." (CA-G.R. No. CV No. savings account with the same bank. Pangilinan was able to withdraw the
17962). 1 money when the check was cleared and paid by the drawee bank, PNB.

The facts of the case are as follows:
The Province of Tarlac maintains a current account with the Philippine
National Bank (PNB) Tarlac Branch where the provincial funds are
deposited. Checks issued by the Province are signed by the Provincial
Treasurer and countersigned by the Provincial Auditor or the Secretary of
the Sangguniang Bayan.
After forging the signature of Dr. Adena Canlas who was chief of the payee
hospital, Pangilinan followed the same procedure for the second check, in
the amount of P5,000.00 and dated April 20, 1978, 5 as well as for twenty-
eight other checks of various amounts and on various dates. The last check
negotiated by Pangilinan was for f8,000.00 and dated February 10,
1981. 6 All the checks bore the stamp of Associated Bank which reads "All
prior endorsements guaranteed ASSOCIATED BANK."

A portion of the funds of the province is allocated to the Concepcion Jesus David, the manager of Associated Bank testified that Pangilinan made
Emergency Hospital. 2 The allotment checks for said government hospital it appear that the checks were paid to him for certain projects with the
hospital. 7 He did not find as irregular the fact that the checks were not
payable to Pangilinan but to the Concepcion Emergency Hospital. While he
admitted that his wife and Pangilinan's wife are first cousins, the manager
denied having given Pangilinan preferential treatment on this account. 8
On February 26, 1981, the Provincial Treasurer wrote the manager of the
PNB seeking the restoration of the various amounts debited from the
current account of the Province. 9
In turn, the PNB manager demanded reimbursement from the Associated
Bank on May 15, 1981. 10
As both banks resisted payment, the Province of Tarlac brought suit against
PNB which, in turn, impleaded Associated Bank as third-party defendant.
The latter then filed a fourth-party complaint against Adena Canlas and
Fausto Pangilinan. 11
After trial on the merits, the lower court rendered its decision on March 21,
1988, disposing as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. On the basic complaint, in favor of plaintiff Province of Tarlac and against
defendant Philippine National Bank (PNB), ordering the latter to pay to the
former, the sum of Two Hundred Three Thousand Three Hundred
(P203,300.00) Pesos with legal interest thereon from March 20, 1981 until
fully paid;
2. On the third-party complaint, in favor of defendant/third-party plaintiff
Philippine National Bank (PNB) and against third-party defendant/fourth-
party plaintiff Associated Bank ordering the latter to reimburse to the
former the amount of Two Hundred Three Thousand Three Hundred
(P203,300.00) Pesos with legal interests thereon from March 20, 1981 until
fully paid;.
3. On the fourth-party complaint, the same is hereby ordered dismissed for
lack of cause of action as against fourth-party defendant Adena Canlas and
lack of jurisdiction over the person of fourth-party defendant Fausto
Pangilinan as against the latter.
4. On the counterclaims on the complaint, third-party complaint and fourth-
party complaint, the same are hereby ordered dismissed for lack of merit.
SO ORDERED. 12
PNB and Associated Bank appealed to the Court of Appeals. 13 Respondent
court affirmed the trial court's decision in toto on September 30, 1992.
Hence these consolidated petitions which seek a reversal of respondent
appellate court's decision.
PNB assigned two errors. First, the bank contends that respondent court
erred in exempting the Province of Tarlac from liability when, in fact, the
latter was negligent because it delivered and released the questioned
checks to Fausto Pangilinan who was then already retired as the hospital's
cashier and administrative officer. PNB also maintains its innocence and
alleges that as between two innocent persons, the one whose act was the
cause of the loss, in this case the Province of Tarlac, bears the loss.
Next, PNB asserts that it was error for the court to order it to pay the
province and then seek reimbursement from Associated Bank. According to
petitioner bank, respondent appellate Court should have directed
Associated Bank to pay the adjudged liability directly to the Province of
Tarlac to avoid circuity. 14
Associated Bank, on the other hand, argues that the order of liability should
be totally reversed, with the drawee bank (PNB) solely and ultimately
bearing the loss.
Respondent court allegedly erred in applying Section 23 of the Philippine
Clearing House Rules instead of Central Bank Circular No. 580, which, being
an administrative regulation issued pursuant to law, has the force and effect
of law. 15 The PCHC Rules are merely contractual stipulations among and
between member-banks. As such, they cannot prevail over the aforesaid CB
Circular.
It likewise contends that PNB, the drawee bank, is estopped from asserting
the defense of guarantee of prior indorsements against Associated Bank,
the collecting bank. In stamping the guarantee (for all prior indorsements),
it merely followed a mandatory requirement for clearing and had no choice
but to place the stamp of guarantee; otherwise, there would be no clearing.
The bank will be in a "no-win" situation and will always bear the loss as
against the drawee bank. 16
Associated Bank also claims that since PNB already cleared and paid the
value of the forged checks in question, it is now estopped from asserting the
defense that Associated Bank guaranteed prior indorsements. The drawee
bank allegedly has the primary duty to verify the genuineness of payee's
indorsement before paying the check. 17
While both banks are innocent of the forgery, Associated Bank claims that
PNB was at fault and should solely bear the loss because it cleared and paid
the forged checks.
xxx xxx xxx
The case at bench concerns checks payable to the order of Concepcion
Emergency Hospital or its Chief. They were properly issued and bear the
genuine signatures of the drawer, the Province of Tarlac. The infirmity in the
questioned checks lies in the payee's (Concepcion Emergency Hospital)
indorsements which are forgeries. At the time of their indorsement, the
checks were order instruments.
Checks having forged indorsements should be differentiated from forged
checks or checks bearing the forged signature of the drawer.
Section 23 of the Negotiable Instruments Law (NIL) provides:
Sec. 23. FORGED SIGNATURE, EFFECT OF. — When a signature is forged or
made without authority of the person whose signature it purports to be, it is
wholly inoperative, and no right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any party
thereto, can be acquired through or under such signature unless the party
against whom it is sought to enforce such right is precluded from setting up
the forgery or want of authority.
A forged signature, whether it be that of the drawer or the payee, is wholly
inoperative and no one can gain title to the instrument through it. A person
whose signature to an instrument was forged was never a party and never
consented to the contract which allegedly gave rise to such
instrument. 18 Section 23 does not avoid the instrument but only the forged
signature. 19 Thus, a forged indorsement does not operate as the payee's
indorsement.
The exception to the general rule in Section 23 is where "a party against
whom it is sought to enforce a right is precluded from setting up the forgery
or want of authority." Parties who warrant or admit the genuineness of the
signature in question and those who, by their acts, silence or negligence are
estopped from setting up the defense of forgery, are precluded from using
this defense. Indorsers, persons negotiating by delivery and acceptors are
warrantors of the genuineness of the signatures on the instrument. 20
In bearer instruments, the signature of the payee or holder is unnecessary
to pass title to the instrument. Hence, when the indorsement is a forgery,
only the person whose signature is forged can raise the defense of forgery
against a holder in due course. 21
The checks involved in this case are order instruments, hence, the following
discussion is made with reference to the effects of a forged indorsement on
an instrument payable to order.
Where the instrument is payable to order at the time of the forgery, such as
the checks in this case, the signature of its rightful holder (here, the payee
hospital) is essential to transfer title to the same instrument. When the
holder's indorsement is forged, all parties prior to the forgery may raise the
real defense of forgery against all parties subsequent thereto. 22
An indorser of an order instrument warrants "that the instrument is genuine
and in all respects what it purports to be; that he has a good title to it; that
all prior parties had capacity to contract; and that the instrument is at the
time of his indorsement valid and subsisting." 23 He cannot interpose the
defense that signatures prior to him are forged.
A collecting bank where a check is deposited and which indorses the check
upon presentment with the drawee bank, is such an indorser. So even if the
indorsement on the check deposited by the banks's client is forged, the
collecting bank is bound by his warranties as an indorser and cannot set up
the defense of forgery as against the drawee bank.
The bank on which a check is drawn, known as the drawee bank, is under
strict liability to pay the check to the order of the payee. The drawer's
instructions are reflected on the face and by the terms of the check.
Payment under a forged indorsement is not to the drawer's order. When
the drawee bank pays a person other than the payee, it does not comply
with the terms of the check and violates its duty to charge its customer's
(the drawer) account only for properly payable items. Since the drawee
bank did not pay a holder or other person entitled to receive payment, it
has no right to reimbursement from the drawer. 24 The general rule then is
that the drawee bank may not debit the drawer's account and is not entitled
to indemnification from the drawer. 25 The risk of loss must perforce fall on
the drawee bank.
However, if the drawee bank can prove a failure by the customer/drawer to
exercise ordinary care that substantially contributed to the making of the
forged signature, the drawer is precluded from asserting the forgery.
If at the same time the drawee bank was also negligent to the point of
substantially contributing to the loss, then such loss from the forgery can be
apportioned between the negligent drawer and the negligent bank. 26
In cases involving a forged check, where the drawer's signature is forged,
the drawer can recover from the drawee bank. No drawee bank has a right
to pay a forged check. If it does, it shall have to recredit the amount of the
check to the account of the drawer. The liability chain ends with the drawee
bank whose responsibility it is to know the drawer's signature since the
latter is its customer. 27
In cases involving checks with forged indorsements, such as the present
petition, the chain of liability does not end with the drawee bank. The
drawee bank may not debit the account of the drawer but may generally
pass liability back through the collection chain to the party who took from
the forger and, of course, to the forger himself, if available. 28 In other
words, the drawee bank canseek reimbursement or a return of the amount
it paid from the presentor bank or person. 29 Theoretically, the latter can
demand reimbursement from the person who indorsed the check to it and
so on. The loss falls on the party who took the check from the forger, or on
the forger himself.
In this case, the checks were indorsed by the collecting bank (Associated
Bank) to the drawee bank (PNB). The former will necessarily be liable to the
latter for the checks bearing forged indorsements. If the forgery is that of
the payee's or holder's indorsement, the collecting bank is held liable,
without prejudice to the latter proceeding against the forger.
Since a forged indorsement is inoperative, the collecting bank had no right
to be paid by the drawee bank. The former must necessarily return the
money paid by the latter because it was paid wrongfully. 30
More importantly, by reason of the statutory warranty of a general indorser
in section 66 of the Negotiable Instruments Law, a collecting bank which
indorses a check bearing a forged indorsement and presents it to the
drawee bank guarantees all prior indorsements, including the forged
indorsement. It warrants that the instrument is genuine, and that it is valid
and subsisting at the time of his indorsement. Because the indorsement is a
forgery, the collecting bank commits a breach of this warranty and will be
accountable to the drawee bank. This liability scheme operates without
regard to fault on the part of the collecting/presenting bank. Even if the
latter bank was not negligent, it would still be liable to the drawee bank
because of its indorsement.
The Court has consistently ruled that "the collecting bank or last endorser
generally suffers the loss because it has the duty to ascertain the
genuineness of all prior endorsements considering that the act of presenting
the check for payment to the drawee is an assertion that the party making
the presentment has done its duty to ascertain the genuineness of the
endorsements." 31
The drawee bank is not similarly situated as the collecting bank because the
former makes no warranty as to the genuineness. of any
indorsement. 32 The drawee bank's duty is but to verify the genuineness of
the drawer's signature and not of the indorsement because the drawer is its
client.
Moreover, the collecting bank is made liable because it is privy to the
depositor who negotiated the check. The bank knows him, his address and
history because he is a client. It has taken a risk on his deposit. The bank is
also in a better position to detect forgery, fraud or irregularity in the
indorsement.
Hence, the drawee bank can recover the amount paid on the check bearing
a forged indorsement from the collecting bank. However, a drawee bank
has the duty to promptly inform the presentor of the forgery upon
discovery. If the drawee bank delays in informing the presentor of the
forgery, thereby depriving said presentor of the right to recover from the
forger, the former is deemed negligent and can no longer recover from the
presentor. 33
Applying these rules to the case at bench, PNB, the drawee bank, cannot
debit the current account of the Province of Tarlac because it paid checks
which bore forged indorsements. However, if the Province of Tarlac as
drawer was negligent to the point of substantially contributing to the loss,
then the drawee bank PNB can charge its account. If both drawee bank-PNB
and drawer-Province of Tarlac were negligent, the loss should be properly
apportioned between them.
The loss incurred by drawee bank-PNB can be passed on to the collecting
bank-Associated Bank which presented and indorsed the checks to it.
Associated Bank can, in turn, hold the forger, Fausto Pangilinan, liable.
If PNB negligently delayed in informing Associated Bank of the forgery, thus
depriving the latter of the opportunity to recover from the forger, it forfeits
its right to reimbursement and will be made to bear the loss.
After careful examination of the records, the Court finds that the Province
of Tarlac was equally negligent and should, therefore, share the burden of
loss from the checks bearing a forged indorsement.
The Province of Tarlac permitted Fausto Pangilinan to collect the checks
when the latter, having already retired from government service, was no
longer connected with the hospital. With the exception of the first check
(dated January 17, 1978), all the checks were issued and released after
Pangilinan's retirement on February 28, 1978. After nearly three years, the
Treasurer's office was still releasing the checks to the retired cashier. In
addition, some of the aid allotment checks were released to Pangilinan and
the others to Elizabeth Juco, the new cashier. The fact that there were now
two persons collecting the checks for the hospital is an unmistakable sign of
an irregularity which should have alerted employees in the Treasurer's
office of the fraud being committed. There is also evidence indicating that
the provincial employees were aware of Pangilinan's retirement and
consequent dissociation from the hospital. Jose Meru, the Provincial
Treasurer, testified:.
ATTY. MORGA:
Q Now, is it true that for a given month there were two releases of checks,
one went to Mr. Pangilinan and one went to Miss Juco?
JOSE MERU:
A Yes, sir.
Q Will you please tell us how at the time (sic) when the authorized
representative of Concepcion Emergency Hospital is and was supposed to
be Miss Juco?
A Well, as far as my investigation show (sic) the assistant cashier told me
that Pangilinan represented himself as also authorized to help in the release
of these checks and we were apparently misled because they accepted the
representation of Pangilinan that he was helping them in the release of the
checks and besides according to them they were, Pangilinan, like the rest,
was able to present an official receipt to acknowledge these receipts and
according to them since this is a government check and believed that it will
eventually go to the hospital following the standard procedure of
negotiating government checks, they released the checks to Pangilinan
aside from Miss Juco.34
The failure of the Province of Tarlac to exercise due care contributed to a
significant degree to the loss tantamount to negligence. Hence, the Province
of Tarlac should be liable for part of the total amount paid on the
questioned checks.
The drawee bank PNB also breached its duty to pay only according to the
terms of the check. Hence, it cannot escape liability and should also bear
part of the loss.
As earlier stated, PNB can recover from the collecting bank.
In the case of Associated Bank v. CA, 35 six crossed checks with forged
indorsements were deposited in the forger's account with the collecting
bank and were later paid by four different drawee banks. The Court found
the collecting bank (Associated) to be negligent and held:
The Bank should have first verified his right to endorse the crossed checks,
of which he was not the payee, and to deposit the proceeds of the checks to
his own account. The Bank was by reason of the nature of the checks put
upon notice that they were issued for deposit only to the private
respondent's account. . . .
The situation in the case at bench is analogous to the above case, for it was
not the payee who deposited the checks with the collecting bank. Here, the
checks were all payable to Concepcion Emergency Hospital but it was Fausto
Pangilinan who deposited the checks in his personal savings account.
Although Associated Bank claims that the guarantee stamped on the checks
(All prior and/or lack of endorsements guaranteed) is merely a requirement
forced upon it by clearing house rules, it cannot but remain liable. The
stamp guaranteeing prior indorsements is not an empty rubric which a bank
must fulfill for the sake of convenience. A bank is not required to accept all
the checks negotiated to it. It is within the bank's discretion to receive a
check for no banking institution would consciously or deliberately accept a
check bearing a forged indorsement. When a check is deposited with the
collecting bank, it takes a risk on its depositor. It is only logical that this bank
be held accountable for checks deposited by its customers.
A delay in informing the collecting bank (Associated Bank) of the forgery,
which deprives it of the opportunity to go after the forger, signifies
negligence on the part of the drawee bank (PNB) and will preclude it from
claiming reimbursement.
It is here that Associated Bank's assignment of error concerning C.B. Circular
No. 580 and Section 23 of the Philippine Clearing House Corporation Rules
comes to fore. Under Section 4(c) of CB Circular No. 580, items bearing a
forged endorsement shall be returned within twenty-Sour (24) hours after
discovery of the forgery but in no event beyond the period fixed or provided
by law for filing of a legal action by the returning bank. Section 23 of the
PCHC Rules deleted the requirement that items bearing a forged
endorsement should be returned within twenty-four hours. Associated Bank
now argues that the aforementioned Central Bank Circular is applicable.
Since PNB did not return the questioned checks within twenty-four hours,
but several days later, Associated Bank alleges that PNB should be
considered negligent and not entitled to reimbursement of the amount it
paid on the checks.
The Court deems it unnecessary to discuss Associated Bank's assertions that
CB Circular No. 580 is an administrative regulation issued pursuant to law
and as such, must prevail over the PCHC rule. The Central Bank circular was
in force for all banks until June 1980 when the Philippine Clearing House
Corporation (PCHC) was set up and commenced operations. Banks in Metro
Manila were covered by the PCHC while banks located elsewhere still had to
go through Central Bank Clearing. In any event, the twenty-four-hour return
rule was adopted by the PCHC until it was changed in 1982. The contending
banks herein, which are both branches in Tarlac province, are therefore not
covered by PCHC Rules but by CB Circular No. 580. Clearly then, the CB
circular was applicable when the forgery of the checks was discovered in
1981.
The rule mandates that the checks be returned within twenty-four hours
after discovery of the forgery but in no event beyond the period fixed by law
for filing a legal action. The rationale of the rule is to give the collecting bank
(which indorsed the check) adequate opportunity to proceed against the
forger. If prompt notice is not given, the collecting bank maybe prejudiced
and lose the opportunity to go after its depositor.
The Court finds that even if PNB did not return the questioned checks to
Associated Bank within twenty-four hours, as mandated by the rule, PNB did
not commit negligent delay. Under the circumstances, PNB gave prompt
notice to Associated Bank and the latter bank was not prejudiced in going
after Fausto Pangilinan. After the Province of Tarlac informed PNB of the
forgeries, PNB necessarily had to inspect the checks and conduct its own
investigation. Thereafter, it requested the Provincial Treasurer's office on
March 31, 1981 to return the checks for verification. The Province of Tarlac
returned the checks only on April 22, 1981. Two days later, Associated Bank
received the checks from PNB. 36
Associated Bank was also furnished a copy of the Province's letter of
demand to PNB dated March 20, 1981, thus giving it notice of the forgeries.
At this time, however, Pangilinan's account with Associated had only P24.63
in it. 37Had Associated Bank decided to debit Pangilinan's account, it could
not have recovered the amounts paid on the questioned checks. In addition,
while Associated Bank filed a fourth-party complaint against Fausto
Pangilinan, it did not present evidence against Pangilinan and even
presented him as its rebuttal witness. 38 Hence, Associated Bank was not
prejudiced by PNB's failure to comply with the twenty-four-hour return rule.
Next, Associated Bank contends that PNB is estopped from requiring
reimbursement because the latter paid and cleared the checks. The Court
finds this contention unmeritorious. Even if PNB cleared and paid the
checks, it can still recover from Associated Bank. This is true even if the
payee's Chief Officer who was supposed to have indorsed the checks is also
a customer of the drawee bank. 39 PNB's duty was to verify the genuineness
of the drawer's signature and not the genuineness of payee's indorsement.
Associated Bank, as the collecting bank, is the entity with the duty to verify
the genuineness of the payee's indorsement.
PNB also avers that respondent court erred in adjudging circuitous liability
by directing PNB to return to the Province of Tarlac the amount of the
checks and then directing Associated Bank to reimburse PNB. The Court
finds nothing wrong with the mode of the award. The drawer, Province of
Tarlac, is a clientor customer of the PNB, not of Associated Bank. There is no
privity of contract between the drawer and the collecting bank.
The trial court made PNB and Associated Bank liable with legal interest from
March 20, 1981, the date of extrajudicial demand made by the Province of
Tarlac on PNB. The payments to be made in this case stem from the
deposits of the Province of Tarlac in its current account with the PNB. Bank
deposits are considered under the law as loans. 40 Central Bank Circular No.
416 prescribes a twelve percent (12%) interest per annum for loans,
forebearance of money, goods or credits in the absence of express
stipulation. Normally, current accounts are likewise interest-bearing, by
express contract, thus excluding them from the coverage of CB Circular No.
416. In this case, however, the actual interest rate, if any, for the current
account opened by the Province of Tarlac with PNB was not given in
evidence. Hence, the Court deems it wise to affirm the trial court's use of
the legal interest rate, or six percent (6%) per annum. The interest rate shall
be computed from the date of default, or the date of judicial or extrajudicial
demand. 41 The trial court did not err in granting legal interest from March
20, 1981, the date of extrajudicial demand.

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

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

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

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

SO ORDERED.

\
MYRON C. PAPA, Administrator of the Testate Estate of Angela M.
Butte, petitioner, vs. A. U. VALENCIA and CO. INC., FELIX PEARROYO, SPS.
ARSENIO B. REYES & AMANDA SANTOS, and DELFIN JAO, respondents.
DECISION
KAPUNAN, J.:
In this petition for review on certiorari under Rule 45 of the Rules of Court,
petitioner Myron C. Papa seeks to reverse and set aside 1) the Decision
dated 27 January 1992 of the Court of Appeals which affirmed with
modification the decision of the trial court; and, 2) the Resolution dated 22
April 1992 of the same court, which denied petitioners motion for
reconsideration of the above decision.
The antecedent facts of this case are as follows:
Sometime in June 1982, herein private respondents A.U. Valencia and Co.,
Inc. (hereinafter referred to as respondent Valencia, for brevity) and Felix
Pearroyo (hereinafter called respondent Pearroyo), filed with the Regional
Trial Court of Pasig, Branch 151, a complaint for specific performance
against herein petitioner Myron C. Papa, in his capacity as administrator of
the Testate Estate of one Angela M. Butte.
The complaint alleged that on 15 June 1973, petitioner Myron C. Papa,
acting as attorney-in-fact of Angela M. Butte, sold to respondent Pearroyo,
through respondent Valencia, a parcel of land, consisting of 286.60 square
meters, located at corner Retiro and Cadiz Streets, La Loma, Quezon City,
and covered by Transfer Certificate of Title No. 28993 of the Register of
Deeds of Quezon City; that prior to the alleged sale, the said property,
together with several other parcels of land likewise owned by Angela M.
Butte, had been mortgaged by her to the Associated Banking Corporation
(now Associated Citizens Bank); that after the alleged sale, but before the
title to the subject property had been released, Angela M. Butte passed
away; that despite representations made by herein respondents to the bank
to release the title to the property sold to respondent Pearroyo, the bank
refused to release it unless and until all the mortgaged properties of the late
Angela M. Butte were also redeemed; that in order to protect his rights and
interests over the property, respondent Pearroyo caused the annotation on
the title of an adverse claim as evidenced by Entry No. P.E. - 6118/T-28993,
inscribed on 18 January 1977.
The complaint further alleged that it was only upon the release of the title
to the property, sometime in April 1977, that respondents Valencia and
Pearroyo discovered that the mortgage rights of the bank had been
assigned to one Tomas L. Parpana (now deceased), as special administrator
of the Estate of Ramon Papa, Jr., on 12 April 1977; that since then, herein
petitioner had been collecting monthly rentals in the amount of P800.00
from the tenants of the property, knowing that said property had already
been sold to private respondents on 15 June 1973; that despite repeated
demands from said respondents, petitioner refused and failed to deliver the
title to the property. Thereupon, respondents Valencia and Pearroyo filed a
complaint for specific performance, praying that petitioner be ordered to
deliver to respondent Pearroyo the title to the subject property (TCT
28993); to turn over to the latter the sum of P72,000.00 as accrued rentals
as of April 1982, and the monthly rental of P800.00 until the property is
delivered to respondent Pearroyo; to pay respondents the sum
of P20,000.00 as attorneys fees; and to pay the costs of the suit.
In his Answer, petitioner admitted that the lot had been mortgaged to the
Associated Banking Corporation (now Associated Citizens Bank). He
contended, however, that the complaint did not state a cause of action; that
the real property in interest was the Testate Estate of Angela M. Butte,
which should have been joined as a party defendant; that the case
amounted to a claim against the Estate of Angela M. Butte and should have
been filed in Special Proceedings No. A-17910 before the Probate Court in
Quezon City; and that, if as alleged in the complaint, the property had been
assigned to Tomas L. Parpana, as special administrator of the Estate of
Ramon Papa, Jr., said estate should be impleaded. Petitioner, likewise,
claimed that he could not recall in detail the transaction which allegedly
occurred in 1973; that he did not have TCT No. 28993 in his possession; that
he could not be held personally liable as he signed the deed merely as
attorney-in-fact of said Angela M. Butte. Finally, petitioner asseverated that
as a result of the filing of the case, he was compelled to hire the services of
counsel for a fee of P20,000.00, for which respondents should be held
liable.
Upon his motion, herein private respondent Delfin Jao was allowed to
intervene in the case. Making common cause with respondents Valencia
and Pearroyo, respondent Jao alleged that the subject lot which had been
sold to respondent Pearroyo through respondent Valencia was in turn sold
to him on 20 August 1973 for the sum of P71,500.00, upon his paying
earnest money in the amount of P5,000.00. He, therefore, prayed that
judgment be rendered in favor of respondents Valencia and Pearroyo; and,
that after the delivery of the title to said respondents, the latter in turn be
ordered to execute in his favor the appropriate deed of conveyance
covering the property in question and to turn over to him the rentals which
aforesaid respondents sought to collect from petitioner Myron C. Papa.
Respondent Jao, likewise, averred that as a result of petitioners refusal to
deliver the title to the property to respondents Valencia and Pearroyo, who
in turn failed to deliver the said title to him, he suffered mental anguish and
serious anxiety for which he sought payment of moral damages; and,
additionally, the payment of attorneys fees and costs.
For his part, petitioner, as administrator of the Testate Estate of Angela M.
Butte, filed a third-party complaint against herein private respondents,
spouses Arsenio B. Reyes and Amanda Santos (respondent Reyes spouses,
for short). He averred, among others, that the late Angela M. Butte was the
owner of the subject property; that due to non-payment of real estate tax
said property was sold at public auction by the City Treasurer of Quezon City
to the respondent Reyes spouses on 21 January 1980 for the sum
of P14,000.00; that the one-year period of redemption had expired; that
respondents Valencia and Pearroyo had sued petitioner Papa as
administrator of the estate of Angela M. Butte, for the delivery of the title
to the property; that the same aforenamed respondents had acknowledged
that the price paid by them was insufficient, and that they were willing to
add a reasonable amount or a minimum of P55,000.00 to the price upon
delivery of the property, considering that the same was estimated to be
worth P143,000.00; that petitioner was willing to reimburse respondent
Reyes spouses whatever amount they might have paid for taxes and other
charges, since the subject property was still registered in the name of the
late Angela M. Butte; that it was inequitable to allow respondent Reyes
spouses to acquire property estimated to be worth P143,000.00, for a
measly sum of P14,000.00. Petitioner prayed that judgment be rendered
cancelling the tax sale to respondent Reyes spouses; restoring the subject
property to him upon payment by him to said respondent Reyes spouses of
the amount of P14,000.00, plus legal interest; and, ordering
respondents Valencia and Pearroyo to pay him at least P55,000.00 plus
everything they might have to pay the Reyes spouses in recovering the
property.
Respondent Reyes spouses in their Answer raised the defense of
prescription of petitioners right to redeem the property.
At the trial, only respondent Pearroyo testified. All the other parties only
submitted documentary proof.
On 29 June 1987, the trial court rendered a decision, the dispositive portion
of which reads:
WHEREUPON, judgment is hereby rendered as follows:
1) Allowing defendant to redeem from third-party defendants and ordering
the latter to allow the former to redeem the property in question, by paying
the sum of P14,000.00 plus legal interest of 12% thereon from January 21,
1980;
2) Ordering defendant to execute a Deed of Absolute Sale in favor of
plaintiff Felix Pearroyo covering the property in question and to deliver
peaceful possession and enjoyment of the said property to the said plaintiff,
free from any liens and encumbrances;
Should this not be possible, for any reason not attributable to defendant,
said defendant is ordered to pay to plaintiff Felix Pearroyo the sum
of P45,000.00 plus legal interest of 12% from June 15, 1973;
3) Ordering plaintiff Felix Pearroyo to execute and deliver to intervenor a
deed of absolute sale over the same property, upon the latters payment to
the former of the balance of the purchase price of P71,500.00;
Should this not be possible, plaintiff Felix Pearroyo is ordered to pay
intervenor the sum of P5,000.00 plus legal interest of 12% from August 23,
1973; and
4) Ordering defendant to pay plaintiffs the amount of P5,000.00 for and as
attorneys fees and litigation expenses.
SO ORDERED.[1]
Petitioner appealed the aforesaid decision of the trial court to the Court of
Appeals, alleging among others that the sale was never consummated as he
did not encash the check (in the amount of P40,000.00) given by
respondents Valencia and Pearroyo in payment of the full purchase price of
the subject lot. He maintained that what said respondents had actually paid
was only the amount of P5,000.00 (in cash) as earnest money.
Respondent Reyes spouses, likewise, appealed the above
decision. However, their appeal was dismissed because of failure to file their
appellants brief.
On 27 January 1992, the Court of Appeals rendered a decision, affirming
with modification the trial courts decision, thus:
WHEREFORE, the second paragraph of the dispositive portion of the
appealed decision is MODIFIED, by ordering the defendant-appellant to
deliver to plaintiff-appellees the owners duplicate of TCT No. 28993 of
Angela M. Butte and the peaceful possession and enjoyment of the lot in
question or, if the owners duplicate certificate cannot be produced, to
authorize the Register of Deeds to cancel it and issue a certificate of title in
the name of Felix Pearroyo. In all other respects, the decision appealed from
is AFFIRMED. Costs against defendant-appellant Myron C. Papa.
SO ORDERED.[2]
In affirming the trial courts decision, respondent court held that contrary to
petitioners claim that he did not encash the aforesaid check, and therefore,
the sale was not consummated, there was no evidence at all that petitioner
did not, in fact, encash said check. On the other hand, respondent Pearroyo
testified in court that petitioner Papa had received the amount
of P45,000.00 and issued receipts therefor. According to respondent court,
the presumption is that the check was encashed, especially since the
payment by check was not denied by defendant-appellant (herein
petitioner) who, in his Answer, merely alleged that he can no longer recall
the transaction which is supposed to have happened 10 years ago.[3]
On petitioners claim that he cannot be held personally liable as he had
acted merely as attorney-in-fact of the owner, Angela M. Butte, respondent
court held that such contention is without merit. This action was not
brought against him in his personal capacity, but in his capacity as the
administrator of the Testate Estate of Angela M. Butte.[4]
On petitioners contention that the estate of Angela M. Butte should have
been joined in the action as the real party in interest, respondent court held
that pursuant to Rule 3, Section 3 of the Rules of Court, the estate of Angela
M. Butte does not have to be joined in the action. Likewise, the estate of
Ramon Papa, Jr., is not an indispensable party under Rule 3, Section 7 of the
same Rules. For the fact is that Ramon Papa, Jr., or his estate, was not a
party to the Deed of Absolute Sale, and it is basic law that contracts bind
only those who are parties thereto.[5]
Respondent court observed that the conditions under which the mortgage
rights of the bank were assigned are not clear. In any case, any obligation
which the estate of Angela M. Butte might have to the estate of Ramon
Papa, Jr. is strictly between them. Respondents Valencia and Pearroyo are
not bound by any such obligation.
Petitioner filed a motion for reconsideration of the above decision, which
motion was denied by respondent Court of Appeals.
Hence, this petition wherein petitioner raises the following issues:
I. THE CONCLUSION OR FINDING OF THE COURT OF APPEALS THAT THE SALE
IN QUESTION WAS CONSUMMATED IS GROUNDED ON SPECULATION OR
CONJECTURE, AND IS CONTRARY TO THE APPLICABLE LEGAL PRINCIPLE.
II. THE COURT OF APPEALS, IN MODIFYING THE DECISION OF THE TRIAL
COURT, ERRED BECAUSE IT, IN EFFECT, CANCELLED OR NULLIFIED AN
ASSIGNMENT OF THE SUBJECT PROPERTY IN FAVOR OF THE ESTATE OF
RAMON PAPA, JR. WHICH IS NOT A PARTY IN THIS CASE.
III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE ESTATE OF
ANGELA M. BUTTE AND THE ESTATE OF RAMON PAPA, JR. ARE
INDISPENSABLE PARTIES IN THIS CASE.[6]
Petitioner argues that respondent Court of Appeals erred in concluding that
the alleged sale of the subject property had been consummated. He
contends that such a conclusion is based on the erroneous presumption
that the check (in the amount of P40,000.00) had been cashed, citing Art.
1249 of the Civil Code, which provides, in part, that payment by checks shall
produce the effect of payment only when they have been cashed or when
through the fault of the creditor they have been impaired.[7] Petitioner
insists that he never cashed said check; and, such being the case, its delivery
never produced the effect of payment. Petitioner, while admitting that he
had issued receipts for the payments, asserts that said receipts, particularly
the receipt of PCIB Check No. 761025 in the amount of P40,000.00, do not
prove payment. He avers that there must be a showing that said check had
been encashed. If, according to petitioner, the check had been encashed,
respondent Pearroyo should have presented PCIB Check No. 761025 duly
stamped received by the payee, or at least its microfilm copy.
Petitioner finally avers that, in fact, the consideration for the sale was still in
the hands of respondents Valencia and Pearroyo, as evidenced by a letter
addressed to him in which saidrespondents wrote, in part:
x x x. Please be informed that I had been authorized by Dr. Ramon Papa, Jr.,
heir of Mrs. Angela M. Butte to pay you the aforementioned amount
of P75,000.00 for the release and cancellation of subject propertys
mortgage. The money is with me and if it is alright with you, I would like to
tender the payment as soon as possible. x x x.[8]
We find no merit in petitioners arguments.
It is an undisputed fact that respondents Valencia and Pearroyo had given
petitioner Myron C. Papa the amounts of Five Thousand Pesos (P5,000.00)
in cash on 24 May 1973, and Forty Thousand Pesos (P40,000.00) in
check on 15 June 1973, in payment of the purchase price of the subject
lot. Petitioner himself admits having received said amounts,[9] and having
issued receipts therefor.[10] Petitioners assertion that he never encashed the
aforesaid check is not subtantiated and is at odds with his statement in his
answer that he can no longer recall the transaction which is supposed to
have happened 10 years ago. After more than ten (10) years from the
payment in part by cash and in part by check, the presumption is that the
check had been encashed. As already stated, he even waived the
presentation of oral evidence.
Granting that petitioner had never encashed the check, his failure to do so
for more than ten (10) years undoubtedly resulted in the impairment of the
check through his unreasonable and unexplained delay.
While it is true that the delivery of a check produces the effect of payment
only when it is cashed, pursuant to Art. 1249 of the Civil Code, the rule is
otherwise if the debtor is prejudiced by the creditors unreasonable delay in
presentment. The acceptance of a check implies an undertaking of due
diligence in presenting it for payment, and if he from whom it is received
sustains loss by want of such diligence, it will be held to operate as actual
payment of the debt or obligation for which it was given.[11] It has, likewise,
been held that if no presentment is made at all, the drawer cannot be held
liable irrespective of loss or injury[12] unless presentment is otherwise
excused. This is in harmony with Article 1249 of the Civil Code under which
payment by way of check or other negotiable instrument is conditioned on
its being cashed, except when through the fault of the creditor, the
instrument is impaired. The payee of a check would be a creditor under this
provision and if its non-payment is caused by his negligence, payment will
be deemed effected and the obligation for which the check was given as
conditional payment will be discharged.[13]
Considering that respondents Valencia and Pearroyo had fulfilled their part
of the contract of sale by delivering the payment of the purchase price,
said respondents, therefore, had the right to compel petitioner to deliver to
them the owners duplicate of TCT No. 28993 of Angela M. Butte and the
peaceful possession and enjoyment of the lot in question.
sue or be sued without joining the party for whose benefit the action is
presented or defended, thus:
Sec. 3. Representative parties. - A trustee of an express trust, a guardian,
executor or administrator, or a party authorized by statute, may sue or be
sued without joining the party for whose benefit the action is presented or
defended; but the court may, at any stage of the proceedings, order such
beneficiary to be made a party. An agent acting in his own name and for the
benefit of an undisclosed principal may sue or be sued without joining the
principal except when the contract involves things belonging to the
principal.[16]

With regard to the alleged assignment of mortgage rights, respondent Court Neither is the estate of Ramon Papa, Jr. an indispensable party without
of Appeals has found that the conditions under which said mortgage rights whom, no final determination of the action can be had. Whatever prior and
of the bank were assigned are not clear. Indeed, a perusal of the original subsisting mortgage rights the estate of Ramon Papa, Jr. has over the
records of the case would show that there is nothing there that could shed property may still be enforced regardless of the change in ownership
light on the transactions leading to the said assignment of rights; nor is thereof.
there any evidence on record of the conditions under which said mortgage
rights were assigned. What is certain is that despite the said assignment of WHEREFORE, the petition for review is hereby DENIED and the Decision of
mortgage rights, the title to the subject property has remained in the name the Court of Appeals, dated 27 January 1992 is AFFIRMED.
of the late Angela M. Butte.[14] This much is admitted by petitioner himself SO ORDERED.
in his answer to respondents complaint as well as in the third-party
complaint that petitioner filed against respondent-spouses Arsenio B. Reyes
and Amanda Santos.[15] Assuming arquendo that the mortgage rights of the
Associated Citizens Bank had been assigned to the estate of Ramon Papa,
Jr., and granting that the assigned mortgage rights validly exist and
constitute a lien on the property, the estate may file the appropriate action
toenforce such lien. The cause of action for specific performance which
respondents Valencia and Pearroyo have against petitioner is different from
the cause of action which the estate of Ramon Papa, Jr. may have to enforce
whatever rights or liens it has on the property by reason of its being an
alleged assignee of the banks rights of mortgage.

Finally, the estate of Angela M. Butte is not an indispensable party. Under

Section 3 of Rule 3 of the Rules of Court, an executor or administrator may
G.R. No. 105774 April 25, 2002
GREAT ASIAN SALES CENTER CORPORATION and TAN CHONG
LIN, petitioners,
vs.
THE COURT OF APPEALS and BANCASIA FINANCE AND INVESTMENT
CORPORATION, respondents.
CARPIO, J.:
The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the Revised
Rules on Civil Procedure assailing the June 9, 1992 Decision1 of the Court of
Appeals2 in CA-G.R. CV No. 20167. The Court of Appeals affirmed the
January 26, 1988 Decision3 of the Regional Trial Court of Manila, Branch
52,4 ordering petitioners Great Asian Sales Center Corporation ("Great
Asian" for brevity) and Tan Chong Lin to pay, solidarily, respondent Bancasia
Finance and Investment Corporation ("Bancasia" for brevity) the amount of
P1,042,005.00. The Court of Appeals affirmed the trial court’s award of
interest and costs of suit but deleted the award of attorney’s fees.
The Facts
Great Asian is engaged in the business of buying and selling general
merchandise, in particular household appliances. On March 17, 1981, the
board of directors of Great Asian approved a resolution authorizing its
Treasurer and General Manager, Arsenio Lim Piat, Jr. ("Arsenio" for brevity)
to secure a loan from Bancasia in an amount not to exceed P1.0 million. The
board resolution also authorized Arsenio to sign all papers, documents or
promissory notes necessary to secure the loan. On February 10, 1982, the
board of directors of Great Asian approved a second resolution authorizing
Great Asian to secure a discounting line with Bancasia in an amount not
exceeding P2.0 million. The second board resolution also designated Arsenio
as the authorized signatory to sign all instruments, documents and checks
necessary to secure the discounting line.
On March 4, 1981, Tan Chong Lin signed a Surety Agreement in favor of
Bancasia to guarantee, solidarily, the debts of Great Asian to Bancasia. On
January 29, 1982, Tan Chong Lin signed a Comprehensive and Continuing
Surety Agreement in favor of Bancasia to guarantee, solidarily, the debts of
Great Asian to Bancasia. Thus, Tan Chong Lin signed two surety agreements
("Surety Agreements" for brevity) in favor of Bancasia.
Great Asian, through its Treasurer and General Manager Arsenio, signed
four (4) Deeds of Assignment of Receivables ("Deeds of Assignment" for
brevity), assigning to Bancasia fifteen (15) postdated checks. Nine of the
checks were payable to Great Asian, three were payable to "New Asian
Emp.", and the last three were payable to cash. Various customers of Great
Asian issued these postdated checks in payment for appliances and other
merchandise.
Great Asian and Bancasia signed the first Deed of Assignment on January 12,
1982 covering four postdated checks with a total face value of P244,225.82,
with maturity dates not later than March 17, 1982. Of these four postdated
checks, two were dishonored. Great Asian and Bancasia signed the second
Deed of Assignment also on January 12, 1982 covering four postdated
checks with a total face value of P312,819.00, with maturity dates not later
than April 1, 1982. All these four checks were dishonored. Great Asian and
Bancasia signed the third Deed of Assignment on February 11, 1982
covering eight postdated checks with a total face value of P344,475.00, with
maturity dates not later than April 30, 1982. All these eight checks were
dishonored. Great Asian and Bancasia signed the fourth Deed of Assignment
on March 5, 1982 covering one postdated check with a face value of
P200,000.00, with maturity date on March 18, 1982. This last check was also
dishonored. Great Asian assigned the postdated checks to Bancasia at a
discount rate of less than 24% of the face value of the checks.
Arsenio endorsed all the fifteen dishonored checks by signing his name at
the back of the checks. Eight of the dishonored checks bore the
endorsement of Arsenio below the stamped name of "Great Asian Sales
Center", while the rest of the dishonored checks just bore the signature of
Arsenio. The drawee banks dishonored the fifteen checks on maturity when
deposited for collection by Bancasia, with any of the following as reason for
the dishonor: "account closed", "payment stopped", "account under
garnishment", and "insufficiency of funds". The total amount of the fifteen
dishonored checks is P1,042,005.00. Below is a table of the fifteen
dishonored checks:
 him of the dishonor and demanding payment from him. Subsequently,
Bancasia sent by personal delivery a letter dated June 16, 1982 to Tan
Chong Lin, notifying him of the dishonor of the fifteen checks and
demanding payment from him. Neither Great Asian nor Tan Chong Lin paid
Bancasia the dishonored checks.
Drawee Bank Check No. Amount Maturity Date
1st Deed On May 21, 1982, Great Asian filed with the then Court of First Instance of
Manila a petition for insolvency, verified under oath by its Corporate
Solid Bank C-A097480 P137,500.00 March 16, 1982 Secretary, Mario Tan. Attached to the verified petition was a "Schedule and
Pacific Banking Corp. 23950 P47,211.00 March 17, 1982 Inventory of Liabilities and Creditors of Great Asian Sales Center
Corporation," listing Bancasia as one of the creditors of Great Asian in the
2nd Deed amount of P1,243,632.00.
Metrobank 030925 P68,722.00 March 19, 1982
On June 23, 1982, Bancasia filed a complaint for collection of a sum of
030926 P45,230.00 March 19, 1982 money against Great Asian and Tan Chong Lin. Bancasia impleaded Tan
Solidbank C-A097478 P140,000.00 March 23, 1982 Chong Lin because of the Surety Agreements he signed in favor of Bancasia.
In its answer, Great Asian denied the material allegations of the complaint
Pacific Banking Corp. CC 769910 P58,867.00 April 1, 1982 claiming it was unfounded, malicious, baseless, and unlawfully instituted
3rd Deed since there was already a pending insolvency proceedings, although Great
Asian subsequently withdrew its petition for voluntary insolvency. Great
Phil. Trust Company 060835 P21,228.00 April 21, 1982 Asian further raised the alleged lack of authority of Arsenio to sign the
060836 P22,187.00 April 28, 1982 Deeds of Assignment as well as the absence of consideration and consent of
all the parties to the Surety Agreements signed by Tan Chong Lin.
Allied Banking Corp. 11251624 P41,773.00 April 22, 1982
11251625 P38,592.00 April 29, 1982 Ruling of the Trial Court
Pacific Banking Corp. 237984 P37,886.00 April 23, 1982
The trial court rendered its decision on January 26, 1988 with the following
237988 P47,385.00 April 28, 1982 findings and conclusions:
237985 P46,748.00 April 30, 1982
"From the foregoing facts and circumstances, the Court finds that
Security Bank & Trust Co. 22061 P88,676.00 April 30, 1982 the plaintiff has established its causes of action against the
defendants. The Board Resolution (Exh. "T"), dated March 17, 1981,
4th Deed
authorizing Arsenio Lim Piat, Jr., general manager and treasurer of
Pacific Banking Corp. 860178 P200,000.00 March 18, 1982 the defendant Great Asian to apply and negotiate for a loan
accommodation or credit line with the plaintiff Bancasia in an
amount not exceeding One Million Pesos (P1,000,000.00), and the
After the drawee bank dishonored Check No. 097480 dated March 16, 1982, other Board Resolution approved on February 10, 1982, authorizing
Bancasia referred the matter to its lawyer, Atty. Eladia Reyes, who sent by Arsenio Lim Piat, Jr., to obtain for defendant Asian Center a
registered mail to Tan Chong Lin a letter dated March 18, 1982, notifying discounting line with Bancasia at prevailing discounting rates in an
amount not to exceed Two Million Pesos (P2,000,000.00), both of
 which were intended to secure money from the plaintiff financing
firm to finance the business operations of defendant Great Asian,
and pursuant to which Arsenio Lim Piat, Jr. was able to have the
aforementioned fifteen (15) checks totaling P1,042,005.00
discounted with the plaintiff, which transactions were obviously
known by the beneficiary thereof, defendant Great Asian, as in fact,
in its aforementioned Schedule and Inventory of Liabilities and
Creditors (Exh. DD, DD-1) attached to its Verified Petition for
Insolvency, dated May 12, 1982 (pp. 50-56), the defendant Great
Asian admitted an existing liability to the plaintiff, in the amount of
P1,243,632.00, secured by it, by way of ‘financing accommodation,’
from the said financing institution Bancasia Finance and Investment
Corporation, plaintiff herein, sufficiently establish the liability of the
defendant Great Asian to the plaintiff for the amount of
P1,042,005.00 sought to be recovered by the latter in this case.5
xxx
WHEREFORE, judgment is hereby rendered in favor of the plaintiff
and against the two (2) defendants ordering the latter, jointly and
severally, to pay the former:
(a) The amount of P1,042,005.00, plus interest thereon at the legal
rate from the filing of the complaint until the same is fully paid;
(b) Attorney’s fees equivalent to twenty per cent (20%) of the total
amount due; and
(c) The costs of suit.
SO ORDERED."6
Ruling of the Court of Appeals
On appeal, the Court of Appeals sustained the decision of the lower court,
deleting only the award of attorney’s fees, as follows:
"As against appellants’ bare denial of it, the Court is more inclined
to accept the appellee’s version, to the effect that the subject deeds
of assignment are but individual transactions which -- being
collectively evidentiary of the loan accommodation and/or credit
line it granted the appellant corporation -- should not be taken
singly and distinct therefrom. In addition to its plausibility, the
proposition is, more importantly, adequately backed by the
documentary evidence on record. Aside from the aforesaid Deeds of
Assignment (Exhs. "A", "D", "I", and "R") and the Board Resolutions
of the appellant corporation’s Board of Directors (Exhs. "T", "U" and
"V"), the appellee -- consistent with its theory -- interposed the
Surety Agreements the appellant Tan Chong Lin executed (Exhs.
"W" and "X"), as well as the demand letters it served upon the latter
as surety (Exhs. "Y" and "Z"). It bears emphasis that the second
Resolution of the appellant corporation’s Board of Directors (Exh.
"V") even closely coincides with the execution of the February 11,
1982 and March 5, 1982 Deeds of Assignment (Exhs. "I" and "R").
Were the appellants’ posturings true, it seems rather strange that
the appellant Tan Chong Lin did not even protest or, at least, make
known to the appellee what he -- together with the appellant
corporation -- represented to be a corporate larceny to which all of
them supposedly fell prey. In the petition for voluntary insolvency it
filed, the appellant corporation, instead, indirectly acknowledged its
indebtedness in terms of financing accommodations to the
appellee, in an amount which, while not exactly matching the sum
herein sought to be collected, approximates the same (Exhs. "CC",
"DD" and "DD-1").7
xxx
The appellants contend that the foregoing warranties enlarged or
increased the surety’s risk, such that appellant Tan Chong Lin should
be released from his liabilities (pp. 37-44, Appellant’s Brief).
Without saying more, the appellants’ position is, however, soundly
debunked by the undertaking expressed in the Comprehensive and
Continuing Surety Agreements (Exhs. "W" and "X"), to the effect
that the "xxx surety/ies, jointly and severally among themselves and
likewise with the principal, hereby agree/s and bind/s himself to pay
at maturity all the notes, drafts, bills of exchange, overdrafts and
other obligations which the principal may now or may hereafter
owe the creditor xxx." With the possible exception of the fixed
ceiling for the amount of loan obtainable, the surety undertaking in
 the case at bar is so comprehensive as to contemplate each and
every condition, term or warranty which the principal parties may
have or may be minded to agree on. Having affixed his signature
thereto, the appellant Tan Chong Lin is expected to have, at least,
read and understood the same.
xxx
With the foregoing disquisition, the Court sees little or no reason to
go into the appellants’ remaining assignments of error, save the
matter of attorney’s fees. For want of a statement of the rationale
therefore in the body of the challenged decision, the trial court’s
award of attorney’s fees should be deleted and disallowed (Abrogar
vs. Intermediate Appellate Court, 157 SCRA 57).
WHEREFORE, the decision appealed from is MODIFIED, to delete the
trial court’s award of attorney’s fees. The rest is AFFIRMED in toto.
SO ORDERED."8
The Issues
The petition is anchored on the following assigned errors:
"1. The respondent Court erred in not holding that the proper
parties against whom this action for collection should be brought
are the drawers and indorser of the checks in question, being the
real parties in interest, and not the herein petitioners.
2. The respondent Court erred in not holding that the petitioner-
corporation is discharged from liability for failure of the private
respondent to comply with the provisions of the Negotiable
Instruments Law on the dishonor of the checks.
3. The respondent Court erred in its appreciation and interpretation
of the effect and legal consequences of the signing of the deeds of
assignment and the subsequent indorsement of the checks by
Arsenio Lim Piat, Jr. in his individual and personal capacity and
without stating or indicating the name of his supposed principal.
4. The respondent Court erred in holding that the assignment of the
checks is a loan accommodation or credit line accorded by the
private respondent to petitioner-corporation, and not a purchase
and sale thereof.
5. The respondent Court erred in not holding that there was a
material alteration of the risk assumed by the petitioner-surety
under his surety agreement by the terms, conditions, warranties
and obligations assumed by the assignor Arsenio Lim Piat, Jr. under
the deeds of assignment or receivables.
6. The respondent Court erred in holding that the petitioner-
corporation impliedly admitted its liability to private respondent
when the former included the latter as one of its creditors in its
petition for voluntary insolvency, although no claim was filed and
proved by the private respondent in the insolvency court.
7. The respondent Court erred in holding the petitioners liable to
private respondent on the transactions in question."9
The issues to be resolved in this petition can be summarized into three:
1. WHETHER ARSENIO HAD AUTHORITY TO EXECUTE THE DEEDS OF
ASSIGNMENT AND THUS BIND GREAT ASIAN;
2. WHETHER GREAT ASIAN IS LIABLE TO BANCASIA UNDER THE
DEEDS OF ASSIGNMENT FOR BREACH OF CONTRACT PURSUANT TO
THE CIVIL CODE, INDEPENDENT OF THE NEGOTIABLE INSTRUMENTS
LAW;
3. WHETHER TAN CHONG LIN IS LIABLE TO GREAT ASIAN UNDER
THE SURETY AGREEMENTS.
The Court’s Ruling
The petition is bereft of merit.
First Issue: Authority of Arsenio to Sign the Deeds of Assignment
Great Asian asserts that Arsenio signed the Deeds of Assignment and Second Board Resolution
indorsed the checks in his personal capacity. The primordial question that
must be resolved is whether Great Asian authorized Arsenio to sign the "RESOLVED that Great Asian Sales Center Corp. obtain a discounting
Deeds of Assignment. If Great Asian so authorized Arsenio, then Great Asian line with BANCASIA FINANCE & INVESTMENT CORPORATION, at
is bound by the Deeds of Assignment and must honor its terms. prevailing discounting rates, in an amount not to exceed** TWO
MILLION PESOS ONLY (P2,000,000),** Philippine Currency.
The Corporation Code of the Philippines vests in the board of directors the
exercise of the corporate powers of the corporation, save in those instances RESOLVED FURTHER, that the corporation secure such other forms
where the Code requires stockholders’ approval for certain specific acts. of credit lines with BANCASIA FINANCE & INVESTMENT
Section 23 of the Code provides: CORPORATION in an amount not to exceed** TWO MILLION PESOS
ONLY (P2,000,000.00),** PESOS, under such terms and conditions
"SEC. 23. The Board of Directors or Trustees. Unless otherwise as the signatories may deem fit and proper.
provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business conducted RESOLVED FURTHER, that the following persons be authorized
and all property of such corporations controlled and held by the individually, jointly or collectively to sign, execute and deliver any
board of directors or trustees x x x." and all instruments, documents, checks, sureties, etc. necessary or
incidental to secure any of the foregoing obligation:
In the ordinary course of business, a corporation can borrow funds or
dispose of assets of the corporation only on authority of the board of (signed)
directors. The board of directors normally designates one or more corporate Specimen Signature
officers to sign loan documents or deeds of assignment for the corporation.
1. ARSENIO LIM PIAT, JR.
To secure a credit accommodation from Bancasia, the board of directors of
Great Asian adopted two board resolutions on different dates, the first on
2. _______________________
March 17, 1981, and the second on February 10, 1982. These two board
resolutions, as certified under oath by Great Asian’s Corporate Secretary
3. _______________________
Mario K. Tan, state:
4. _______________________
First Board Resolution
PROVIDED FINALLY that this authority shall be valid, binding and
"RESOLVED, that the Treasurer of the corporation, Mr. Arsenio Lim
effective until revoked by the Board of Directors in the manner
Piat, Jr., be authorized as he is authorized to apply for and negotiate
prescribed by law, and that BANCASIA FINANCE & INVESTMENT
for a loan accommodation or credit line in the amount not to exceed
CORPORATION shall not be bound by any such revocation until such
ONE MILLION PESOS (P1,000,000.00), with Bancasia Finance and
time as it is noticed in writing of such revocation."11(Emphasis
Investment Corporation, and likewise to sign any and all papers,
supplied)
documents, and/or promissory notes in connection with said loan
accommodation or credit line, including the power to mortgage
The first board resolution expressly authorizes Arsenio, as Treasurer of
such properties of the corporation as may be needed to effectuate
Great Asian, to apply for a "loan accommodation or credit line" with
the same."10 (Emphasis supplied)
Bancasia for not more than P1.0 million. Also, the first resolution explicitly
authorizes Arsenio to sign any document, paper or promissory note,
including mortgage deeds over properties of Great Asian, to secure the loan
or credit line from Bancasia.
The second board resolution expressly authorizes Great Asian to secure a
"discounting line" from Bancasia for not more than P2.0 million. The second
board resolution also expressly empowers Arsenio, as the authorized
signatory of Great Asian, "to sign, execute and deliver any and all
documents, checks x x x necessary or incidental to secure" the discounting
line. The second board resolution specifically authorizes Arsenio to secure
the discounting line "under such terms and conditions as (he) x x x may
deem fit and proper."
As plain as daylight, the two board resolutions clearly authorize Great Asian
to secure a loan or discounting linefrom Bancasia. The two board resolutions
also categorically designate Arsenio as the authorized signatory to sign and
deliver all the implementing documents, including checks, for Great Asian.
There is no iota of doubt whatsoever about the purpose of the two board
resolutions, and about the authority of Arsenio to act and sign for Great
Asian. The second board resolution even gave Arsenio full authority to agree
with Bancasia on the terms and conditions of the discounting line. Great
Asian adopted the correct and proper board resolutions to secure a loan or
discounting line from Bancasia, and Bancasia had a right to rely on the two
board resolutions of Great Asian. Significantly, the two board resolutions
specifically refer to Bancasia as the financing institution from whom Great
Asian will secure the loan accommodation or discounting line.
Armed with the two board resolutions, Arsenio signed the Deeds of
Assignment selling, and endorsing, the fifteen checks of Great Asian to
Bancasia. On the face of the Deeds of Assignment, the contracting parties
are indisputably Great Asian and Bancasia as the names of these entities are
expressly mentioned therein as the assignor and assignee, respectively.
Great Asian claims that Arsenio signed the Deeds of Assignment in his
personal capacity because Arsenio signed above his printed name, below
which was the word "Assignor", thereby making Arsenio the assignor. Great
Asian conveniently omits to state that the first paragraph of the Deeds
expressly contains the following words: "the ASSIGNOR, Great Asian Sales
Center, a domestic corporation x x x herein represented by its Treasurer
Arsenio Lim Piat, Jr." The assignor is undoubtedly Great Asian, represented
by its Treasurer, Arsenio. The only issue to determine is whether the Deeds
of Assignment are indeed the transactions the board of directors of Great
Asian authorized Arsenio to sign under the two board resolutions.
Under the Deeds of Assignment, Great Asian sold fifteen postdated checks
at a discount, over three months, to Bancasia. The Deeds of Assignment
uniformly state that Great Asian, –
"x x x for valuable consideration received, does hereby SELL,
TRANSFER, CONVEY, and ASSIGN, unto the ASSIGNEE, BANCASIA
FINANCE & INVESTMENT CORP., a domestic corporation x x x, the
following ACCOUNTS RECEIVABLES due and payable to it, having an
aggregate face value of x x x."
The Deeds of Assignment enabled Great Asian to generate instant cash from
its fifteen checks, which were still not due and demandable then. In short,
instead of waiting for the maturity dates of the fifteen postdated checks,
Great Asian sold the checks to Bancasia at less than the total face value of
the checks. In exchange for receiving an amount less than the face value of
the checks, Great Asian obtained immediately much needed cash. Over
three months, Great Asian entered into four transactions of this nature with
Bancasia, showing that Great Asian availed of a discounting line with
Bancasia.
In the financing industry, the term "discounting line" means a credit facility
with a financing company or bank, which allows a business entity to sell, on
a continuing basis, its accounts receivable at a discount.12 The term
"discount" means the sale of a receivable at less than its face value. The
purpose of a discounting line is to enable a business entity to generate
instant cash out of its receivables which are still to mature at future dates.
The financing company or bank which buys the receivables makes its profit
out of the difference between the face value of the receivable and the
discounted price. Thus, Section 3 (a) of the Financing Company Act of 1998
provides:
"Financing companies" are corporations x x x primarily organized for
the purpose of extending credit facilities to consumers and to
industrial, commercial or agricultural enterprises by discounting or
factoring commercial papers or accounts receivable, or by buying
and selling contracts, leases, chattel mortgages, or other evidences
 of indebtedness, or by financial leasing of movable as well as
immovable property." (Emphasis supplied)
This definition of "financing companies" is substantially the same definition
as in the old Financing Company Act (R.A. No. 5980).13
Moreover, Section 1 (h) of the New Rules and Regulations adopted by the
Securities and Exchange Commission to implement the Financing Company
Act of 1998 states:
"Discounting" is a type of receivables financing whereby evidences of
indebtedness of a third party, such as installment contracts, promissory
notes and similar instruments, are purchased by, or assigned to, a financing
company in an amount or for a consideration less than their face value."
(Emphasis supplied)
Likewise, this definition of "discounting" is an exact reproduction of the
definition of "discounting" in the implementing rules of the old Finance
Company Act.
Clearly, the discounting arrangements entered into by Arsenio under the
Deeds of Assignment were the very transactions envisioned in the two
board resolutions of Great Asian to raise funds for its business. Arsenio
acted completely within the limits of his authority under the two board
resolutions. Arsenio did exactly what the board of directors of Great Asian
directed and authorized him to do.
Arsenio had all the proper and necessary authority from the board of
directors of Great Asian to sign the Deeds of Assignment and to endorse the
fifteen postdated checks. Arsenio signed the Deeds of Assignment as agent
and authorized signatory of Great Asian under an authority expressly
granted by its board of directors. The signature of Arsenio on the Deeds of
Assignment is effectively also the signature of the board of directors of
Great Asian, binding on the board of directors and on Great Asian itself.
Evidently, Great Asian shows its bad faith in disowning the Deeds of
Assignment signed by its own Treasurer, after receiving valuable
consideration for the checks assigned under the Deeds.
Second Issue: Breach of Contract by Great Asian
Bancasia’s complaint against Great Asian is founded on the latter’s breach
of contract under the Deeds of Assignment. The Deeds of Assignment
uniformly stipulate14 as follows:
"If for any reason the receivables or any part thereof cannot be paid
by the obligor/s, the ASSIGNOR unconditionally and irrevocably
agrees to pay the same, assuming the liability to pay, by way of
penalty three per cent (3%) of the total amount unpaid, for the
period of delay until the same is fully paid.
In case of any litigation which the ASSIGNEE may institute to
enforce the terms of this agreement, the ASSIGNOR shall be liable
for all the costs, plus attorney’s fees equivalent to twenty-five (25%)
per cent of the total amount due. Further thereto, the ASSIGNOR
agrees that any and all actions which may be instituted relative
hereto shall be filed before the proper courts of the City of Manila,
all other appropriate venues being hereby waived.
The last Deed of Assignment15 contains the following added stipulation:
"xxx Likewise, it is hereby understood that the warranties which the
ASSIGNOR hereby made are deemed part of the consideration for
this transaction, such that any violation of any one, some, or all of
said warranties shall be deemed as deliberate misrepresentation on
the part of the ASSIGNOR. In such event, the monetary obligation
herein conveyed unto the ASSIGNEE shall be conclusively deemed
defaulted, giving rise to the immediate responsibility on the part of
the ASSIGNOR to make good said obligation, and making the
ASSIGNOR liable to pay the penalty stipulated hereinabove as if the
original obligor/s of the receivables actually defaulted. xxx"
Obviously, there is one vital suspensive condition in the Deeds of
Assignment. That is, in case the drawers fail to pay the checks on maturity,
Great Asian obligated itself to pay Bancasia the full face value of the
dishonored checks, including penalty and attorney’s fees. The failure of the
drawers to pay the checks is a suspensive condition,16 the happening of
which gives rise to Bancasia’s right to demand payment from Great Asian.
This conditional obligation of Great Asian arises from its written contracts
with Bancasia as embodied in the Deeds of Assignment. Article 1157 of the
Civil Code provides that -
 "Obligations arise from:
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts."
By express provision in the Deeds of Assignment, Great Asian
unconditionally obligated itself to pay Bancasia the full value of the
dishonored checks. In short, Great Asian sold the postdated checks on with
recourse basis against itself. This is an obligation that Great Asian is bound
to faithfully comply because it has the force of law as between Great Asian
and Bancasia. Article 1159 of the Civil Code further provides that -
"Obligations arising from contracts have the force of law between
the contracting parties and should be complied with in good faith."
Great Asian and Bancasia agreed on this specific with recourse stipulation,
despite the fact that the receivables were negotiable instruments with the
endorsement of Arsenio. The contracting parties had the right to adopt
the with recourse stipulation which is separate and distinct from the
warranties of an endorser under the Negotiable Instruments Law. Article
1306 of the Civil Code provides that –
"The contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they
are not contrary to law, morals, good customs, public order, or
public policy."
The explicit with recourse stipulation against Great Asian effectively
enlarges, by agreement of the parties, the liability of Great Asian beyond
that of a mere endorser of a negotiable instrument. Thus, whether or not
Bancasia gives notice of dishonor to Great Asian, the latter remains liable to
Bancasia because of the with recourse stipulation which is independent of
the warranties of an endorser under the Negotiable Instruments Law.
There is nothing in the Negotiable Instruments Law or in the Financing
Company Act (old or new), that prohibits Great Asian and Bancasia parties
from adopting the with recourse stipulation uniformly found in the Deeds of
Assignment. Instead of being negotiated, a negotiable instrument may be
assigned.17 Assignment of a negotiable instrument is actually the principal
mode of conveying accounts receivable under the Financing Company Act.
Since in discounting of receivables the assignee is subrogated as creditor of
the receivable, the endorsement of the negotiable instrument becomes
necessary to enable the assignee to collect from the drawer. This is
particularly true with checks because collecting banks will not accept checks
unless endorsed by the payee. The purpose of the endorsement is merely to
facilitate collection of the proceeds of the checks.
The purpose of the endorsement is not to make the assignee finance
company a holder in due course because policy considerations militate
against according finance companies the rights of a holder in due
course.18 Otherwise, consumers who purchase appliances on installment,
giving their promissory notes or checks to the seller, will have no defense
against the finance company should the appliances later turn out to be
defective. Thus, the endorsement does not operate to make the finance
company a holder in due course. For its own protection, therefore, the
finance company usually requires the assignor, in a separate and distinct
contract, to pay the finance company in the event of dishonor of the notes
or checks.
As endorsee of Great Asian, Bancasia had the option to proceed against
Great Asian under the Negotiable Instruments Law. Had it so proceeded, the
Negotiable Instruments Law would have governed Bancasia’s cause of
action. Bancasia, however, did not choose this route. Instead, Bancasia
decided to sue Great Asian for breach of contract under the Civil Code, a
right that Bancasia had under the express with recourse stipulation in the
Deeds of Assignment.
The exercise by Bancasia of its option to sue for breach of contract under
the Civil Code will not leave Great Asian holding an empty bag. Great Asian,
after paying Bancasia, is subrogated back as creditor of the receivables.
Great Asian can then proceed against the drawers who issued the checks.
Even if Bancasia failed to give timely notice of dishonor, still there would be
no prejudice whatever to Great Asian. Under the Negotiable Instruments
Law, notice of dishonor is not required if the drawer has no right to expect
or require the bank to honor the check, or if the drawer has countermanded
payment.19 In the instant case, all the checks were dishonored for any of the
following reasons: "account closed", "account under garnishment",
insufficiency of funds", or "payment stopped". In the first three instances,
the drawers had no right to expect or require the bank to honor the checks,
and in the last instance, the drawers had countermanded payment.
Moreover, under common law, delay in notice of dishonor, where such
notice is required, discharges the drawer only to the extent of the loss
caused by the delay.20 This rule finds application in this jurisdiction pursuant
to Section 196 of the Negotiable Instruments Law which states, "Any case
not provided for in this Act shall be governed by the provisions of existing
legislation, or in default thereof, by the rules of the Law Merchant." Under
Section 186 of the Negotiable Instruments Law, delay in the presentment of
checks discharges the drawer. However, Section 186 refers only to delay in
presentment of checks but is silent on delay in giving notice of dishonor.
Consequently, the common law or Law Merchant can supply this gap in
accordance with Section 196 of the Negotiable Instruments Law.
One other issue raised by Great Asian, that of lack of consideration for the
Deeds of Assignment, is completely unsubstantiated. The Deeds of
Assignment uniformly provide that the fifteen postdated checks were
assigned to Bancasia "for valuable consideration." Moreover, Article 1354 of
the Civil Code states that, "Although the cause is not stated in the contract,
it is presumed that it exists and is lawful, unless the debtor proves the
contrary." The record is devoid of any showing on the part of Great Asian
rebutting this presumption. On the other hand, Bancasia’s Loan Section
Manager, Cynthia Maclan, testified that Bancasia paid Great Asian a
consideration at the discount rate of less than 24% of the face value of the
postdated checks.21 Moreover, in its verified petition for voluntary
insolvency, Great Asian admitted its debt to Bancasia when it listed Bancasia
as one of its creditors, an extra-judicial admission that Bancasia proved
when it formally offered in evidence the verified petition for
insolvency.22 The Insolvency Law requires the petitioner to submit a
schedule of debts that must "contain a full and true statement of all his
debts and liabilities."23 The Insolvency Law even requires the petitioner to
state in his verification that the schedule of debts contains "a full, correct
and true discovery of all my debts and liabilities x x x."24 Great Asian cannot
now claim that the listing of Bancasia as a creditor was not an admission of
its debt to Bancasia but merely an acknowledgment that Bancasia had sent
a demand letter to Great Asian.
Great Asian, moreover, claims that the assignment of the checks is not a
loan accommodation but a sale of the checks. With the sale, ownership of
the checks passed to Bancasia, which must now, according to Great Asian,
sue the drawers and indorser of the check who are the parties primarily
liable on the checks. Great Asian forgets that under the Deeds of
Assignment, Great Asian expressly undertook to pay the full value of the
checks in case of dishonor. Again, we reiterate that this obligation of Great
Asian is separate and distinct from its warranties as indorser under the
Negotiable Instruments Law.
Great Asian is, however, correct in saying that the assignment of the checks
is a sale, or more properly a discounting, of the checks and not a loan
accommodation. However, it is precisely because the transaction is a sale or
a discounting of receivables, embodied in separate Deeds of Assignment,
that the relevant provisions of the Civil Code are applicable and not the
Negotiable Instruments Law.
At any rate, there is indeed a fine distinction between a discounting line and
a loan accommodation. If the accounts receivable, like postdated checks,
are sold for a consideration less than their face value, the transaction is one
of discounting, and is subject to the provisions of the Financing Company
Act. The assignee is immediately subrogated as creditor of the accounts
receivable. However, if the accounts receivable are merely used as collateral
for the loan, the transaction is only a simple loan, and the lender is not
subrogated as creditor until there is a default and the collateral is
foreclosed.
In summary, Great Asian’s four contracts assigning its fifteen postdated
checks to Bancasia expressly stipulate the suspensive condition that in the
event the drawers of the checks fail to pay, Great Asian itself will pay
Bancasia. Since the common condition in the contracts had transpired, an
obligation on the part of Great Asian arose from the four contracts, and that
obligation is to pay Bancasia the full value of the checks, including the
stipulated penalty and attorney’s fees.
Third Issue: The liability of surety Tan Chong Lin
Tan Chong Lin, the President of Great Asian, is being sued in his personal
capacity based on the Surety Agreements he signed wherein he solidarily
held himself liable with Great Asian for the payment of its debts to Bancasia.
The Surety Agreements contain the following common condition:
"Upon failure of the Principal to pay at maturity, with or without
demand, any of the obligations above mentioned, or in case of the
Principal’s failure promptly to respond to any other lawful demand
made by the Creditor, its successors, administrators or assigns, both
the Principal and the Surety/ies shall be considered in default and
the Surety/ies agree/s to pay jointly and severally to the Creditor all
outstanding obligations of the Principal, whether due or not due,
and whether held by the Creditor as Principal or agent, and it is
agreed that a certified statement by the Creditor as to the amount
due from the Principal shall be accepted by the Surety/ies as correct
and final for all legal intents and purposes."
Indisputably, Tan Chong Lin explicitly and unconditionally bound himself to
pay Bancasia, solidarily with Great Asian, if the drawers of the checks fail to
pay on due date. The condition on which Tan Chong Lin’s obligation hinged
had happened. As surety, Tan Chong Lin automatically became liable for the
entire obligation to the same extent as Great Asian.
Tan Chong Lin, however, contends that the following warranties in the
Deeds of Assignment enlarge or increase his risks under the Surety
Agreements:
"The ASSIGNOR warrants:
1. the soundness of the receivables herein assigned;
2. that said receivables are duly noted in its books and are
supported by appropriate documents;
3. that said receivables are genuine, valid and subsisting;
4. that said receivables represent bona fide sale of goods,
merchandise, and/or services rendered in the ordinary course of its
business transactions;
5. that the obligors of the receivables herein assigned are solvent;
6. that it has valid and genuine title to and indefeasible right to
dispose of said accounts;
7. that said receivables are free from all liens and encumbrances;
8. that the said receivables are freely and legally transferable, and
that the obligor/s therein will not interpose any objection to this
assignment, and has in fact given his/their consent hereto."
Tan Chong Lin maintains that these warranties in the Deeds of Assignment
materially altered his obligations under the Surety Agreements, and
therefore he is released from any liability to Bancasia. Under Article 1215 of
the Civil Code, what releases a solidary debtor is a "novation, compensation,
confusion or remission of the debt" made by the creditor with any of the
solidary debtors. These warranties, however, are the usual warranties made
by one who discounts receivables with a financing company or bank. The
Surety Agreements, written on the letter head of "Bancasia Finance &
Investment Corporation," uniformly state that "Great Asian Sales Center x x
x has obtained and/or desires to obtain loans, overdrafts, discounts and/or
other forms of credits from" Bancasia. Tan Chong Lin was clearly on notice
that he was holding himself as surety of Great Asian which was discounting
postdated checks issued by its buyers of goods and merchandise. Moreover,
Tan Chong Lin, as President of Great Asian, cannot feign ignorance of Great
Asian’s business activities or discounting transactions with Bancasia. Thus,
the warranties do not increase or enlarge the risks of Tan Chong Lin under
the Surety Agreements. There is, moreover, no novation of the debt of
Great Asian that would warrant release of the surety.
In any event, the provisions of the Surety Agreements are broad enough to
include the obligations of Great Asian to Bancasia under the warranties. The
first Surety Agreement states that:
 "x x x herein Surety/ies, jointly and severally among themselves and
likewise with principal, hereby agree/s and bind/s
himself/themselves to pay at maturity all the notes, drafts, bills of
exchange, overdraft and other obligations of every kind which the
Principal may now or may hereafter owe the Creditor, including
extensions or renewals thereof in the sum *** ONE MILLION
ONLY*** PESOS (P1,000,000.00), Philippine Currency, plus
stipulated interest thereon at the rate of sixteen percent (16%) per
annum, or at such increased rate of interest which the Creditor may
charge on the Principal’s obligations or renewals or the reduced
amount thereof, plus all the costs and expenses which the Creditor
may incur in connection therewith.
xxx
Upon failure of the Principal to pay at maturity, with or without
demand, any of the obligations above mentioned, or in case of the
Principal’s failure promptly to respond to any other lawful demand
made by the Creditor, its successors, administrators or assigns, both
the Principal and the Surety/ies shall be considered in default and
the Surety/ies agree/s to pay jointly and severally to the Creditor all
outstanding obligations of the Principal, whether due or not due,
and whether held by the Creditor as Principal or agent, and it is
agreed that a certified statement by the Creditor as to the amount
due from the Principal shall be accepted by the Surety/ies as correct
and final for all legal intents and purposes. (Emphasis supplied)
The second Surety Agreement contains the following provisions:
"x x x herein Surety/ies, jointly and severally among themselves and
likewise with PRINCIPAL, hereby agree and bind themselves to pay
at maturity all the notes, drafts, bills of exchange, overdraft and
other obligations of every kind which the PRINCIPAL may now or
may hereafter owe the Creditor, including extensions and/or
renewals thereof in the principal sum not to exceed TWO MILLION
(P2,000,000.00) PESOS, Philippine Currency, plus stipulated interest
thereon, or such increased or decreased rate of interest which the
Creditor may charge on the principal sum outstanding pursuant to
the rules and regulations which the Monetary Board may from time
to time promulgate, together with all the cost and expenses which
the CREDITOR may incur in connection therewith.
If for any reason whatsoever, the PRINCIPAL should fail to pay at
maturity any of the obligations or amounts due to the CREDITOR, or
if for any reason whatsoever the PRINCIPAL fails to promptly
respond to and comply with any other lawful demand made by the
CREDITOR, or if for any reason whatsoever any obligation of the
PRINCIPAL in favor of any person or entity should be considered as
defaulted, then both the PRINCIPAL and the SURETY/IES shall be
considered in default under the terms of this Agreement. Pursuant
thereto, the SURETY/IES agree/s to pay jointly and severally with the
PRINCIPAL, all outstanding obligations of the CREDITOR, whether
due or not due, and whether owing to the PRINCIPAL in its personal
capacity or as agent of any person, endorsee, assignee or
transferee. x x x. (Emphasis supplied)
Article 1207 of the Civil Code provides, "xxx There is a solidary liability only
when the obligation expressly so states, or when the law or nature of the
obligation requires solidarity." The stipulations in the Surety Agreements
undeniably mandate the solidary liability of Tan Chong Lin with Great Asian.
Moreover, the stipulations in the Surety Agreements are sufficiently broad,
expressly encompassing "all the notes, drafts, bills of exchange, overdraft
and other obligations of every kind which the PRINCIPAL may now or may
hereafter owe the Creditor". Consequently, Tan Chong Lin must be held
solidarily liable with Great Asian for the nonpayment of the fifteen
dishonored checks, including penalty and attorney’s fees in accordance with
the Deeds of Assignment.
The Deeds of Assignment stipulate that in case of suit Great Asian shall pay
attorney’s fees equivalent to 25% of the outstanding debt. The award of
attorney’s fees in the instant case is justified,25 not only because of such
stipulation, but also because Great Asian and Tan Chong Lin acted in gross
and evident bad faith in refusing to pay Bancasia’s plainly valid, just and
demandable claim. We deem it just and equitable that the stipulated
attorney’s fee should be awarded to Bancasia.
The Deeds of Assignment also provide for a 3% penalty on the total amount
due in case of failure to pay, but the Deeds are silent on whether this
penalty is a running monthly or annual penalty. Thus, the 3% penalty can
only be considered as a one-time penalty. Moreover, the Deeds of
Assignment do not provide for interest if Great Asian fails to pay. We can
only award Bancasia legal interest at 12% interest per annum, and only from
the time it filed the complaint because the records do not show that
Bancasia made a written demand on Great Asian prior to filing the
complaint.26 Bancasia made an extrajudicial demand on Tan Chong Lin, the
surety, but not on the principal debtor, Great Asian.

WHEREFORE, the assailed Decision of the Court of Appeals in CA-G.R. CV No.

20167 is AFFIRMED with MODIFICATION. Petitioners are ordered to pay,
solidarily, private respondent the following amounts: (a) P1,042,005.00 plus
3% penalty thereon, (b) interest on the total outstanding amount in item (a)
at the legal rate of 12% per annum from the filing of the complaint until the
same is fully paid, (c) attorney’s fees equivalent to 25% of the total amount
in item (a), including interest at 12% per annum on the outstanding amount
of the attorney’s fees from the finality of this judgment until the same is
fully paid, and (c) costs of suit.

SO ORDERED.
G.R. No. L-53194 March 14, 1988
PHILIPPINE NATIONAL BANK petitioner,
vs.
HON. ROMULO S. QUIMPO, Presiding Judge, Court of First Instance of
Rizal, Branch XIV, and FRANCISCO S. GOZON II, respondents.
GANCAYCO, J.:
On July 3, 1973, Francisco S. Gozon II, who was a depositor of the Caloocan
City Branch of the Philippine National Bank, went to the bank in his car
accompanied by his friend Ernesto Santos whom he left in the car while he
transacted business in the bank. When Santos saw that Gozon left his check
book he took a check therefrom, filled it up for the amount of P5,000.00,
forged the signature of Gozon, and thereafter he encashed the check in the
bank on the same day. The account of Gozon was debited the said amount.
Upon receipt of the statement of account from the bank, Gozon asked that
the said amount of P5,000.00 should be returned to his account as his
signature on the check was forged but the bank refused.
Upon complaint of private respondent on February 1, 1974 Ernesto Santos
was apprehended by the police authorities and upon investigation he
admitted that he stole the check of Gozon, forged his signature and
encashed the same with the Bank.
Hence Gozon filed the complaint for recovery of the amount of P5,000.00,
plus interest, damages, attorney's fees and costs against the bank in the
Court of First Instance of Rizal. After the issues were joined and the trial on
the merits ensued, a decision was rendered on February 4, 1980, the
dispositive part of which reads as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff. The
defendant is hereby condemned to return to plaintiff the amount of
P5,000.00 which it had unlawfully withheld from the latter, with interest at
the legal rate from September 22, 1972 until the amount is fully delivered.
The defendant is further condemned to pay plaintiff the sum of P2,000.00
as attorney's fees and to pay the costs of this suit.
Not satisfied therewith, the bank now filed this petition for review on
certiorari in this Court raising the sole legal issue that —
THE ACT OF RESPONDENT FRANCISCO GOZON, II IN PUTTING HIS CHECK
BOOK CONTAINING THE CHECK IN QUESTION INTO THE HANDS OF ERNESTO
SANTOS WAS INDEED THE PROXIMATE CAUSE OF THE LOSS, THEREBY
PRECLUDING HIM FROM SETTING UP THE DEFENSE OF FORGERY OR WANT
0F AUTHORITY UNDER SECTION 23 OF THE NEGOTIABLE INSTRUMENTS
LAW, ACT NO. 3201
The petition is devoid of merit.
This Court reproduces with approval the disquisition of the court a quo as
follows:
A bank is bound to know the signatures of its customers; and if it pays a
forged check, it must be considered as making the payment out of its own
funds, and cannot ordinarily change the amount so paid to the account of
the depositor whose name was forged' (San Carlos Milling Co. vs. Bank of
the P.I., 59 Phil. 59).
This rule is absolutely necessary to the circulation of drafts and checks, and
is based upon the presumed negligence of the drawee in failing to meet its
obligation to know the signature of its correspondent. ... There is nothing
inequitable in such a rule. If the paper comes to the drawee in the regular
course of business, and he, having the opportunity ascertaining its
character, pronounces it to be valid and pays it, it is not only a question of
payment under mistake, but payment in neglect of duty which the
commercial law places upon him, and the result of his negligence must rest
upon him (12 ALR 1901, citing many cases found in I Agbayani, supra).
Defendant, however, interposed the defense that it exercised diligence in
accordance with the accepted norms of banking practice when it accepted
and paid Exhibit "A". It presented evidence that the check had to pass
scrutiny by a signature verifier as well as an officer of the bank.
A comparison of the signature (Exhibit "A-l") on the forged check (Exhibit
"A") with plaintiffs exemplar signatures (Exhibits "5-N" and "5-B") found in
the PNB Form 35-A would immediately show the negligence of the
employees of the defendant bank. Even a not too careful comparison would
immediately arrest one's attention and direct it to the graceful lines of
plaintiffs exemplar signatures found in Exhibits "5-A" and "5-B". The
formation of the first letter "F" in the exemplars, which could be regarded
as artistic, is completely different from the way the same letter is formed in
Exhibit "A-l". That alone should have alerted a more careful and prudent
signature verifier.
when defendant left his car, Ernesto Santos, a long time classmate and
friend remained in the same. Defendant could not have been expected to
know that the said Ernesto Santos would remove a check from his
checkbook. Defendant had trust in his classmate and friend. He had no
reason to suspect that the latter would breach that trust .
We agree.

The prime duty of a bank is to ascertain the genuineness of the signature of Private respondent trustee Ernesto Santos as a classmate and a friend. He
the drawer or the depositor on the check being encashed. 1 It is expected to brought him along in his car to the bank and he left his personal belongings
use reasonable business prudence in accepting and cashing a check in the car. Santos however removed and stole a check from his cheek book
presented to it. without the knowledge and consent of private respondent. No doubt
private respondent cannot be considered negligent under the circumstances
In this case the findings of facts of the court a quo are conclusive. The trial of the case.
court found that a comparison of the signature on the forged check and the
sample signatures of private respondent show marked differences as the WHEREFORE, the petition is DISMISSED for lack of merit with costs against
graceful lines in the sample signature which is completely different from petitioner.
those of the signature on the forged check. Indeed the NBI handwriting
expert Estelita Santiago Agnes whom the trial court considered to be an SO ORDERED.
"unbiased scientific expert" indicated the marked differences between the
signature of private respondent on the sample signatures and the
questioned signature. Notwithstanding the testimony of Col. Fernandez,
witness for petitioner, advancing the opinion that the questioned signature
appears to be genuine, the trial court by merely examining the pictorial
report presented by said witness, found a marked difference in the second
"c" in Francisco as written on the questioned signature as compared to the
sample signatures, and the separation between the "s" and the "c" in the
questioned signature while they are connected in the sample signatures.2

Obviously, petitioner was negligent in encashing said forged check without

carefully examining the signature which shows marked variation from the
genuine signature of private respondent.

In reference to the allegation of the petitioner that it is the negligence of

private respondent that is the cause of the loss which he suffered, the trial
court held:

The act of plaintiff in leaving his checkbook in the car while he went out for
a short while can not be considered negligence sufficient to excuse the
defendant bank from its own negligence. It should be home in mind that