G.R. No.

L-2516 September 25, 1950

ANG TEK LIAN, petitioner,

vs.
THE COURT OF APPEALS, respondent.

Laurel, Sabido, Almario and Laurel for petitioner.

Office of the Solicitor General Felix Bautista Angelo and Solicitor Manuel Tomacruz for respondent.

BENGZON, J.:

For having issued a rubber check, Ang Tek Lian was convicted of estafa in the Court of First Instance of Manila. The
Court of Appeals affirmed the verdict.

It appears that, knowing he had no funds therefor, Ang Tek Lian drew on Saturday, November 16, 1946, the check
Exhibits A upon the China Banking Corporation for the sum of P4,000, payable to the order of "cash". He delivered it to
Lee Hua Hong in exchange for money which the latter handed in act. On November 18, 1946, the next business day, the
check was presented by Lee Hua Hong to the drawee bank for payment, but it was dishonored for insufficiency of funds,
the balance of the deposit of Ang Tek Lian on both dates being P335 only.

The Court of Appeals believed the version of Lee Huan Hong who testified that "on November 16, 1946, appellant went
to his (complainant's) office, at 1217 Herran, Paco, Manila, and asked him to exchange Exhibit A — which he (appellant)
then brought with him — with cash alleging that he needed badly the sum of P4,000 represented by the check, but could
not withdraw it from the bank, it being then already closed; that in view of this request and relying upon appellant's
assurance that he had sufficient funds in the blank to meet Exhibit A, and because they used to borrow money from each
other, even before the war, and appellant owns a hotel and restaurant known as the North Bay Hotel, said complainant
delivered to him, on the same date, the sum of P4,000 in cash; that despite repeated efforts to notify him that the check
had been dishonored by the bank, appellant could not be located any-where, until he was summoned in the City Fiscal's
Office in view of the complaint for estafa filed in connection therewith; and that appellant has not paid as yet the amount
of the check, or any part thereof."

Inasmuch as the findings of fact of the Court of Appeals are final, the only question of law for decision is whether under
the facts found, estafa had been accomplished.

Article 315, paragraph (d), subsection 2 of the Revised Penal Code, punishes swindling committed "By post dating a
check, or issuing such check in payment of an obligation the offender knowing that at the time he had no funds in the
bank, or the funds deposited by him in the bank were not sufficient to cover the amount of the check, and without
informing the payee of such circumstances".

We believe that under this provision of law Ang Tek Lian was properly held liable. In this connection, it must be stated
that, as explained in People vs. Fernandez (59 Phil., 615), estafa is committed by issuing either a postdated check or an
ordinary check to accomplish the deceit.

It is argued, however, that as the check had been made payable to "cash" and had not been endorsed by Ang Tek Lian, the
defendant is not guilty of the offense charged. Based on the proposition that "by uniform practice of all banks in the
Philippines a check so drawn is invariably dishonored," the following line of reasoning is advanced in support of the
argument:

. . . When, therefore, he (the offended party ) accepted the check (Exhibit A) from the appellant, he did so with
full knowledge that it would be dishonored upon presentment. In that sense, the appellant could not be said to
have acted fraudulently because the complainant, in so accepting the check as it was drawn, must be considered,
by every rational consideration, to have done so fully aware of the risk he was running thereby." (Brief for the
appellant, p. 11.)
We are not aware of the uniformity of such practice. Instances have undoubtedly occurred wherein the Bank required the
indorsement of the drawer before honoring a check payable to "cash." But cases there are too, where no such requirement
had been made . It depends upon the circumstances of each transaction.

Under the Negotiable Instruments Law (sec. 9 [d], a check drawn payable to the order of "cash" is a check payable to
bearer, and the bank may pay it to the person presenting it for payment without the drawer's indorsement.

A check payable to the order of cash is a bearer instrument. Bacal vs. National City Bank of New York (1933),
146 Misc., 732; 262 N. Y. S., 839; Cleary vs. De Beck Plate Glass Co. (1907), 54 Misc., 537; 104 N. Y. S., 831;
Massachusetts Bonding & Insurance Co. vs. Pittsburgh Pipe & Supply Co. (Tex. Civ. App., 1939), 135 S. W.
(2d), 818. See also H. Cook & Son vs. Moody (1916), 17 Ga. App., 465; 87 S. E., 713.

Where a check is made payable to the order of "cash", the word cash "does not purport to be the name of any
person", and hence the instrument is payable to bearer. The drawee bank need not obtain any indorsement of the
check, but may pay it to the person presenting it without any indorsement. . . . (Zollmann, Banks and Banking,
Permanent Edition, Vol. 6, p. 494.)

Of course, if the bank is not sure of the bearer's identity or financial solvency, it has the right to demand identification and
/or assurance against possible complications, — for instance, (a) forgery of drawer's signature, (b) loss of the check by the
rightful owner, (c) raising of the amount payable, etc. The bank may therefore require, for its protection, that the
indorsement of the drawer — or of some other person known to it — be obtained. But where the Bank is satisfied of the
identity and /or the economic standing of the bearer who tenders the check for collection, it will pay the instrument
without further question; and it would incur no liability to the drawer in thus acting.

A check payable to bearer is authority for payment to holder. Where a check is in the ordinary form, and is
payable to bearer, so that no indorsement is required, a bank, to which it is presented for payment, need not have
the holder identified, and is not negligent in falling to do so. . . . (Michie on Banks and Banking, Permanent
Edition, Vol. 5, p. 343.)

. . . Consequently, a drawee bank to which a bearer check is presented for payment need not necessarily have the
holder identified and ordinarily may not be charged with negligence in failing to do so. See Opinions 6C:2 and
6C:3 If the bank has no reasonable cause for suspecting any irregularity, it will be protected in paying a bearer
check, "no matter what facts unknown to it may have occurred prior to the presentment." 1 Morse, Banks and
Banking, sec. 393.

Although a bank is entitled to pay the amount of a bearer check without further inquiry, it is entirely reasonable
for the bank to insist that holder give satisfactory proof of his identity. . . . (Paton's Digest, Vol. I, p. 1089.)

Anyway, it is significant, and conclusive, that the form of the check Exhibit A was totally unconnected with its dishonor.
The Court of Appeals declared that it was returned unsatisfied because the drawer had insufficient funds— not because
the drawer's indorsement was lacking.

Wherefore, there being no question as to the correctness of the penalty imposed on the appellant, the writ of certiorari is
denied and the decision of the Court of Appeals is hereby affirmed, with costs.
G.R. No. L-39641 February 28, 1983

METROPOL (BACOLOD) FINANCING & INVESTMENT CORPORATION, plaintiff-appellee,

vs.
SAMBOK MOTORS COMPANY and NG SAMBOK SONS MOTORS CO., LTD., defendants-appellants.

Rizal Quimpo & Cornelio P. Revena for plaintiff-appellee.

Diosdado Garingalao for defendants-appellants.

DE CASTRO, J.:

The former Court of Appeals, by its resolution dated October 16, 1974 certified this case to this Court the issue issued
therein being one purely of law.

On April 15, 1969 Dr. Javier Villaruel executed a promissory note in favor of Ng Sambok Sons Motors Co., Ltd., in the
amount of P15,939.00 payable in twelve (12) equal monthly installments, beginning May 18, 1969, with interest at the
rate of one percent per month. It is further provided that in case on non-payment of any of the installments, the total
principal sum then remaining unpaid shall become due and payable with an additional interest equal to twenty-five
percent of the total amount due.

On the same date, Sambok Motors Company (hereinafter referred to as Sambok), a sister company of Ng Sambok Sons
Motors Co., Ltd., and under the same management as the former, negotiated and indorsed the note in favor of plaintiff
Metropol Financing & Investment Corporation with the following indorsement:

Pay to the order of Metropol Bacolod Financing & Investment Corporation with recourse. Notice of
Demand; Dishonor; Protest; and Presentment are hereby waived.

SAMBOK MOTORS CO. (BACOLOD)

By:

RODOLFO G. NONILLO Asst. General Manager

The maker, Dr. Villaruel defaulted in the payment of his installments when they became due, so on October 30, 1969
plaintiff formally presented the promissory note for payment to the maker. Dr. Villaruel failed to pay the promissory note
as demanded, hence plaintiff notified Sambok as indorsee of said note of the fact that the same has been dishonored and
demanded payment.

Sambok failed to pay, so on November 26, 1969 plaintiff filed a complaint for collection of a sum of money before the
Court of First Instance of Iloilo, Branch I. Sambok did not deny its liability but contended that it could not be obliged to
pay until after its co-defendant Dr. Villaruel has been declared insolvent.

During the pendency of the case in the trial court, defendant Dr. Villaruel died, hence, on October 24, 1972 the lower
court, on motion, dismissed the case against Dr. Villaruel pursuant to Section 21, Rule 3 of the Rules of Court. 1

On plaintiff's motion for summary judgment, the trial court rendered its decision dated September 12, 1973, the
dispositive portion of which reads as follows:

WHEREFORE, judgment is rendered:

 (a) Ordering Sambok Motors Company to pay to the plaintiff the sum of P15,939.00 plus the legal rate of
interest from October 30, 1969;

(b) Ordering same defendant to pay to plaintiff the sum equivalent to 25% of P15,939.00 plus interest
thereon until fully paid; and

(c) To pay the cost of suit.

Not satisfied with the decision, the present appeal was instituted, appellant Sambok raising a lone assignment of error as
follows:

The trial court erred in not dismissing the complaint by finding defendant appellant Sambok Motors
Company as assignor and a qualified indorsee of the subject promissory note and in not holding it as only
secondarily liable thereof.

Appellant Sambok argues that by adding the words "with recourse" in the indorsement of the note, it becomes a qualified
indorser that being a qualified indorser, it does not warrant that if said note is dishonored by the maker on presentment, it
will pay the amount to the holder; that it only warrants the following pursuant to Section 65 of the Negotiable Instruments
Law: (a) that the instrument is genuine and in all respects what it purports to be; (b) that he has a good title to it; (c) that
all prior parties had capacity to contract; (d) that he has no knowledge of any fact which would impair the validity of the
instrument or render it valueless.

The appeal is without merit.

A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding
to the indorser's signature the words "without recourse" or any words of similar import. 2 Such an indorsement relieves the
indorser of the general obligation to pay if the instrument is dishonored but not of the liability arising from warranties on
the instrument as provided in Section 65 of the Negotiable Instruments Law already mentioned herein. However,
appellant Sambok indorsed the note "with recourse" and even waived the notice of demand, dishonor, protest and
presentment.

"Recourse" means resort to a person who is secondarily liable after the default of the person who is primarily
liable. 3 Appellant, by indorsing the note "with recourse" does not make itself a qualified indorser but a general indorser
who is secondarily liable, because by such indorsement, it agreed that if Dr. Villaruel fails to pay the note, plaintiff-
appellee can go after said appellant. The effect of such indorsement is that the note was indorsed without qualification. A
person who indorses without qualification engages that on due presentment, the note shall be accepted or paid, or both as
the case may be, and that if it be dishonored, he will pay the amount thereof to the holder. 4 Appellant Sambok's intention
of indorsing the note without qualification is made even more apparent by the fact that the notice of demand, dishonor,
protest and presentment were an waived. The words added by said appellant do not limit his liability, but rather confirm
his obligation as a general indorser.

Lastly, the lower court did not err in not declaring appellant as only secondarily liable because after an instrument is
dishonored by non-payment, the person secondarily liable thereon ceases to be such and becomes a principal debtor. 5 His
liabiliy becomes the same as that of the original obligor. 6 Consequently, the holder need not even proceed against the
maker before suing the indorser.

WHEREFORE, the decision of the lower court is hereby affirmed. No costs.

SO ORDERED.
G.R. No. 92244 February 9, 1993

NATIVIDAD GEMPESAW, petitioner,

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

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

In this kind of restrictive indorsement, the prohibition to transfer or negotiate must be written in express words at the back
of the instrument, so that any subsequent party may be forewarned that ceases to be negotiable. However, the restrictive
indorsee acquires the right to receive payment and bring any action thereon as any indorser, but he can no longer transfer
his rights as such indorsee where the form of the indorsement does not authorize him to do so. 12

Although the holder of a check cannot compel a drawee bank to honor it because there is no privity between them, as far
as the drawer-depositor is concerned, such bank may not legally refuse to honor a negotiable bill of exchange or a check
drawn against it with more than one indorsement if there is nothing irregular with the bill or check and the drawer has
sufficient funds. The drawee cannot be compelled to accept or pay the check by the drawer or any holder because as a
drawee, he incurs no liability on the check unless he accepts it. But the drawee will make itself liable to a suit for damages
at the instance of the drawer for wrongful dishonor of the bill or check.

Thus, it is clear that under the NIL, petitioner is precluded from raising the defense of forgery by reason of her gross
negligence. But under Section 196 of the NIL, any case not provided for in the Act shall be governed by the provisions of
existing legislation. Under the laws of quasi-delict, she cannot point to the negligence of the respondent drawee Bank in
the selection and supervision of its employees as being the cause of the loss because negligence is the proximate cause
thereof and under Article 2179 of the Civil Code, she may not be awarded damages. However, under Article 1170 of the
same Code the respondent drawee Bank may be held liable for damages. The article provides —
 Those who in the performance of their obligations are guilty of fraud, negligence or delay, and those who
in any manner contravene the tenor thereof, are liable for damages.

There is no question that there is a contractual relation between petitioner as depositor (obligee) and the respondent
drawee bank as the obligor. In the performance of its obligation, the drawee bank is bound by its internal banking rules
and regulations which form part of any contract it enters into with any of its depositors. When it violated its internal rules
that second endorsements are not to be accepted without the approval of its branch managers and it did accept the same
upon the mere approval of Boon, a chief accountant, it contravened the tenor of its obligation at the very least, if it were
not actually guilty of fraud or negligence.

Furthermore, the fact that the respondent drawee Bank did not discover the irregularity with respect to the acceptance of
checks with second indorsement for deposit even without the approval of the branch manager despite periodic inspection
conducted by a team of auditors from the main office constitutes negligence on the part of the bank in carrying out its
obligations to its depositors. Article 1173 provides —

The fault or negligence of the obligor consists in the omission of that diligence which is required by the
nature of the obligation and corresponds with the circumstance of the persons, of the time and of the
place. . . .

We hold that banking business is so impressed with public interest where the trust and confidence of the public in general
is of paramount importance such that the appropriate standard of diligence must be a high degree of diligence, if not the
utmost diligence. Surely, respondent drawee Bank cannot claim it exercised such a degree of diligence that is required of
it. There is no way We can allow it now to escape liability for such negligence. Its liability as obligor is not merely
vicarious but primary wherein the defense of exercise of due diligence in the selection and supervision of its employees is
of no moment.

Premises considered, respondent drawee Bank is adjudged liable to share the loss with the petitioner on a fifty-fifty ratio
in accordance with Article 172 which provides:

Responsibility arising from negligence in the performance of every kind of obligation is also demandable,
but such liability may be regulated by the courts according to the circumstances.

With the foregoing provisions of the Civil Code being relied upon, it is being made clear that the decision to hold the
drawee bank liable is based on law and substantial justice and not on mere equity. And although the case was brought
before the court not on breach of contractual obligations, the courts are not precluded from applying to the circumstances
of the case the laws pertinent thereto. Thus, the fact that petitioner's negligence was found to be the proximate cause of her
loss does not preclude her from recovering damages. The reason why the decision dealt on a discussion on proximate
cause is due to the error pointed out by petitioner as allegedly committed by the respondent court. And in breaches of
contract under Article 1173, due diligence on the part of the defendant is not a defense.

PREMISES CONSIDERED, the case is hereby ordered REMANDED to the trial court for the reception of evidence to
determine the exact amount of loss suffered by the petitioner, considering that she partly benefited from the issuance of
the questioned checks since the obligation for which she issued them were apparently extinguished, such that only the
excess amount over and above the total of these actual obligations must be considered as loss of which one half must be
paid by respondent drawee bank to herein petitioner.

SO ORDERED.
G.R. No. 102967 February 10, 2000

BIBIANO V. BAÑAS, JR., petitioner,

vs.
COURT OF APPEALS, AQUILINO T. LARIN, RODOLFO TUAZON AND PROCOPIO TALON, respondents.

For review is the Decision of the Court of Appeals in CA-C.R. CV No. 17251 promulgated on November 29, 1991. It
affirmed in toto the judgment of the Regional Trial Court (RTC), Branch 39, Manila, in Civil Case No. 82-12107. Said
judgment disposed as follows:

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 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 by the Court of Appeals as follows:

On February 20, 1976, petitioner, Bibiano V. Bañas Jr. sold to Ayala Investment Corporation (AYALA), 128,265 square
meters of land located at Bayanan, Muntinlupa, for two million, three hundred eight thousand, seven 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) 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. Each periodic payment of P461,754.00 pesos shall be payable starting on February 20, 1977, and
every year thereafter, or until February 20, 1980.

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 the petitioner and AYALA. AYALA issued nine (9) checks to petitioner, all dated
February 20, 1976, drawn against Bank of the Philippine Islands with the uniform amount of two hundred five thousand,
two hundred twenty-four (P205,224.00) pesos.

In his 1976 Income Tax Return, petitioner reported the P461,754 initial payment as income from disposition of capital
asset.2

Selling Price of Land P2,308,770.00

3
Less Initial Payment 461,754.00

Unrealized Gain P1,847,016.00

1976 Declaration of Income on Disposition of Capital Asset subject to Tax:

Initial Payment P461,754.00
Less: Cost of land and other incidental Expenses ( 76,547.90)

Income P385,206.10

Income subject to tax (P385,206. 10 x 50%) P192,603.65

In the succeeding years, until 1979, petitioner reported a uniform income of two hundred thirty thousand, eight hundred
seventy-seven (P230,877.00) pesos4 as gain from sale of capital asset. In his 1980 income tax amnesty return, petitioner
also reported the same amount of P230,877.00 as the realized gain on disposition of capital asset for the year.
On April 11, 1978, then Revenue Director Mauro Calaguio authorized tax examiners, Rodolfo Tuazon and Procopio
Talon to examine the books and records of petitioner for the year 1976. They discovered that petitioner had no
outstanding receivable from the 1976 land sale to AYALA and concluded that the sale was cash and the entire profit
should have been taxable in 1976 since the income was wholly derived in 1976.

Tuazon and Talon filed their audit report and declared a discrepancy of two million, ninety-five thousand, nine hundred
fifteen (P2,095,915.00) pesos in petitioner's 1976 net income. They recommended deficiency tax assessment for two
million, four hundred seventy-three thousand, six hundred seventy-three (P2,473,673.00) pesos.

Meantime, Aquilino Larin succeeded Calaguio as Regional Director of Manila Region IV-A. After reviewing the
examiners' report, Larin directed the revision of the audit report, with instruction to consider the land as capital asset. The
tax due was only fifty (50%) percent of the total gain from sale of the property held by the taxpayer beyond twelve
months pursuant to Section 345 of the 1977 National Internal Revenue Code (NIRC). The deficiency tax assessment was
reduced to nine hundred thirty six thousand, five hundred ninety-eight pesos and fifty centavos (P936,598.50), inclusive
of surcharges and penalties for the year 1976.

On June 27, 1980, respondent Larin sent a letter to petitioner informing of the income tax deficiency that must be settled
him immediately.

On September 26, 1980, petitioner acknowledged receipt of the letter but insisted that the sale of his land to AYALA was
on installment.

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 recommended the prosecution of a criminal case for conspiring to file false and fraudulent
returns, in violation of Section 51 of the Tax Code against petitioner and his accountants, Andres P. Alejandre and
Conrado Bañas.

On June 17, 1981, Larin filed a criminal complaint for tax evasion against the petitioner.

On July 1, 1981, news items appeared in the now defunct Evening Express with the headline: "BIR Charges Realtor" and
another in the defunct Evening Post with a news item: "BIR raps Realtor, 2 accountants." Another news item also
appeared in the July 2, 1981, issue of the Bulletin Today entitled: "3-face P1-M tax evasion raps." All news items
mentioned petitioner's false income tax return concerning the sale of land to AYALA.

On July 2, 1981, petitioner filed an Amnesty Tax Return under P.D. 1740 and paid the amount of forty-one thousand,
seven hundred twenty-nine pesos and eighty-one centavos (P41,729.81). On November 2, 1981, petitioner again filed an
Amnesty Tax Return under P.D. 1840 and paid an additional amount of one thousand, five hundred twenty-five pesos and
sixty-two centavos (P1,525.62). In both, petitioner did not recognize that his sale of land to AYALA was on cash basis.

Reacting to the complaint for tax evasion and the news reports, petitioner filed with the RTC of Manila an action 6 for
damages against respondents Larin, Tuazon and Talon for extortion and malicious publication of the BIR's tax audit
report. He claimed that the filing of criminal complaints against him for violation of tax laws were improper because he
had already availed of two tax amnesty decrees, Presidential Decree Nos. 1740 and 1840.

The trial court decided in favor of the respondents and awarded Larin damages, as already stated. Petitioner seasonably
appealed to the Court of Appeals. In its decision of November 29, 1991, the respondent court affirmed the trial court's
decision, thus:

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.
 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)

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. L-15380 September 30, 1960

CHAN WAN, plaintiff-appellant,

vs.
TAN KIM and CHEN SO, defendants-appellees.

Manuel Domingo for appellant.

C.M. de los Reyes for appellees.

BENGZON, J.:

This suit to collect eleven checks totalling P4,290.00 is here for decision because it involves no issue of fact.

Such checks payable to "cash or bearer" and drawn by defendant Tan Kim (the other defendant is her husband) upon the
Equitable Banking Corporation, were all presented for payment by Chan Wan to the drawee bank, but they "were all
dishonored and returned to him unpaid due to insufficient funds and/or causes attributable to the drawer."

At the hearing of the case, in the Manila court of first instance, the plaintiff did not take the witness stand. His attorney,
however, testified only to identify the checks — which are Exhibits A to K — plus the letters of demand upon defendants.

On the other hand, Tan Kim declared without contradiction that the checks had been issued to two persons named Pinong
and Muy for some shoes the former had promised to make and "were intended as mere receipts".

In view of such circumstances, the court declined to order payment for two principal reasons: (a) plaintiff failed to prove
he was a holder in due course, and (b) the checks being crossed checks should not have been deposited instead with the
bank mentioned in the crossing.

It may be stated in this connection, that defendants asserted a counterclaim, the court dismissed it for failure of proof, and
from such dismissal they did not appeal.

The only issue is, therefore, the plaintiff's right to collect on the eleven commercial documents.

The Negotiable Instruments Law regulating the issuance of negotiable checks, the rights and the liabilities arising
therefrom, does not mention "crossed checks". Art. 541 of the Code of Commerce refers to such instruments. 1 The bills of
Exchange Act of England of 1882, contains several provisions about them, some of which are quoted in the margin. 2 In
the Philippine National Bank vs. Zulueta, 101 Phil., 1071; 55 Off. Gaz., 222, we applied some provisions of said Bills of
Exchange Act because the Negotiable Law, originating from England and codified in the United States, permits resort
thereto in matters not covered by it and local legislation.3

Eight of the checks here in question bear across their face two parallel transverse lines between which these words are
written: non-negotiable — China Banking Corporation. These checks have, therefore, been crossed specially to the China
Banking Corporation, and should have been presented for payment by China Banking, and not by Chan Wan.4 Inasmuch
as Chan Wan did present them for payment himself — the Manila court said — there was no proper presentment, and the
liability did not attach to the drawer.

We agree to the legal premises and conclusion. It must be remembered, at this point, that the drawer in drawing the check
engaged that "on due presentment, the check would be paid, and that if it be dishonored . . . he will pay the amount thereof
to the holder".5 Wherefore, in the absence of due presentment, the drawer did not become liable.

Nevertheless we find, on the backs of the checks, endorsements which apparently show they had been deposited with the
China Banking Corporation and were, by the latter, presented to the drawee bank for collection. For instance, on the back
of the check Exhibit A (same as in Exh. B), this endorsement appears:

For deposit to the account of White House Shoe Supply with the China Banking Corporation.
and then this:

Cleared through the clearing office of Central Bank of the Philippines. All prior endorsements and/or lack of
endorsements guaranteed. China Banking Corporation.

And on the back of Exh. G:

For deposit to the credit of our account. Viuda e Hijos de Chua Chiong Pio. People's Shoe Company.

followed by the endorsement of China Banking Corporation as in Exhibits A and B. All the crossed checks have the
"clearance" endorsement of China Banking Corporation.

These circumstances would seem to show deposit of the checks with China Banking Corporation and subsequent
presentation by the latter through the clearing office; but as drawee had no funds, they were unpaid and returned, some of
them stamped "account closed". How they reached his hands, plaintiff did not indicate. Most probably, as the trial court
surmised, — this is not a finding of fact — he got them after they had been thus returned, because he presented them in
court with such "account closed" stamps, without bothering to explain. Naturally and rightly, the lower court held him not
to be a holder in due course under the circumstances, since he knew, upon taking them up, that the checks had already
been dishonored.6

Yet it does not follow as a legal proposition, that simply because he was not a holder in due course Chan Wan could not
recover on the checks. The Negotiable Instruments Law does not provide that a holder7 who is not a holder in due course,
may not in any case, recover on the instrument. If B purchases an overdue negotiable promissory note signed by A, he is
not a holder in due course; but he may recover from A,8 if the latter has no valid excuse for refusing payment. The only
disadvantage of holder who is not a holder in due course is that the negotiable instrument is subject to defense as if it were
non- negotiable.9

Now what defense did the defendant Tan Kim prove? The lower court's decision does not mention any; evidently His
Honor had in mind the defense pleaded in defendant's answer, but though it unnecessary to specify, because the "crossing"
and presentation incidents sufficed to bar recovery, in his opinion.1awphîl.nèt

Tan Kim admitted on cross-examination either that the checks had been issued as evidence of debts to Pinong and Muy,
and/or that they had been issued in payment of shoes which Pinong had promised to make for her.

Seeming to imply that Pinong had to make the shoes, she asserted Pinong had "promised to pay the checks for me". Yet
she did not complete the idea, perhaps because she was just answering cross- questions, her main testimony having
referred merely to their counter-claim.

Needless to say, if it were true that the checks had been issued in payment for shoes that were never made and delivered,
Tan Kim would have a good defense as against a holder who is not a holder in due course. 10

Considering the deficiency of important details on which a fair adjudication of the parties' right depends, we think the
record should be and is hereby returned, in the interest of justice, to the court below for additional evidence, and such
further proceedings as are not inconsistent with this opinion. With the understanding that, as defendants did not appeal,
their counterclaim must be and is hereby definitely dismissed. 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 interpleader suit not because
petitioner sued it but because petitioner is laying claim to the same check that Go is claiming. On the very day that the
bank instituted the case in interpleader, it was not aware of any suit for damages filed by petitioner against it as supported
by the fact that the interpleader case was first entitled Associated Bank vs. Jose Go and John Doe, but later on changed to
Marcelo A. Mesina for John Doe when his name became known to respondent bank.

In his third assignment of error, petitioner assails the then respondent IAC in upholding the trial court's order declaring
petitioner in default when there was no proper order for him to plead in the interpleader case. Again, such contention is
untenable. The trial court issued an order, compelling petitioner and respondent Jose Go to file their Answers setting forth
their respective claims. Subsequently, a Pre-Trial Conference was set with notice 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 these non-issues." Respondent IAC cannot rule on whether respondent RTC committed an
abuse of discretion or not, without being apprised of the facts and reasons why respondent Associated Bank instituted the
Interpleader case. Both parties were given an opportunity to present their sides. Petitioner chose to withhold substantial
facts. Respondents were not forbidden to present their side-this is the purpose of the Comment of respondent to the
petition. IAC decided the question by considering both 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.

WHEREFORE, finding that the instant petition is merely dilatory, the same is hereby denied and the assailed orders of the
respondent court are hereby AFFIRMED in toto.

SO ORDERED.
G.R. No. L-15126 November 30, 1961

VICENTE R. DE OCAMPO & CO., plaintiff-appellee,

vs.
ANITA GATCHALIAN, ET AL., defendants-appellants.

Vicente Formoso, Jr. for plaintiff-appellee.

Reyes and Pangalañgan for defendants-appellants.

LABRADOR, J.:

Appeal from a judgment of the Court of First Instance of Manila, Hon. Conrado M. Velasquez, presiding, sentencing the
defendants to pay the plaintiff the sum of P600, with legal interest from September 10, 1953 until paid, and to pay the
costs.

The action is for the recovery of the value of a check for P600 payable to the plaintiff and drawn by defendant Anita C.
Gatchalian. The complaint sets forth the check and alleges that plaintiff received it in payment of the indebtedness of one
Matilde Gonzales; that upon receipt of said check, plaintiff gave Matilde Gonzales P158.25, the difference between the
face value of the check and Matilde Gonzales' indebtedness. The defendants admit the execution of the check but they
allege in their answer, as affirmative defense, that it was issued subject to a condition, which was not fulfilled, and that
plaintiff was guilty of gross negligence in not taking steps to protect itself.

At the time of the trial, the parties submitted a stipulation of facts, which reads as follows:

Plaintiff and defendants through their respective undersigned attorney's respectfully submit the following Agreed
Stipulation of Facts;

First. — That on or about 8 September 1953, in the evening, defendant Anita C. Gatchalian who was then
interested in looking for a car for the use of her husband and the family, was shown and offered a car by Manuel
Gonzales who was accompanied by Emil Fajardo, the latter being personally known to defendant Anita C.
Gatchalian;

Second. — That Manuel Gonzales represented to defend Anita C. Gatchalian that he was duly authorized by the
owner of the car, Ocampo Clinic, to look for a buyer of said car and to negotiate for and accomplish said sale, but
which facts were not known to plaintiff;

Third. — That defendant Anita C. Gatchalian, finding the price of the car quoted by Manuel Gonzales to her
satisfaction, requested Manuel Gonzales to bring the car the day following together with the certificate of
registration of the car, so that her husband would be able to see same; that on this request of defendant Anita C.
Gatchalian, Manuel Gonzales advised her that the owner of the car will not be willing to give the certificate of
registration unless there is a showing that the party interested in the purchase of said car is ready and willing to
make such purchase and that for this purpose Manuel Gonzales requested defendant Anita C. Gatchalian to give
him (Manuel Gonzales) a check which will be shown to the owner as evidence of buyer's good faith in the
intention to purchase the said car, the said check to be for safekeeping only of Manuel Gonzales and to be
returned to defendant Anita C. Gatchalian the following day when Manuel Gonzales brings the car and the
certificate of registration, but which facts were not known to plaintiff;

Fourth. — That relying on these representations of Manuel Gonzales and with his assurance that said check will
be only for safekeeping and which will be returned to said defendant the following day when the car and its
certificate of registration will be brought by Manuel Gonzales to defendants, but which facts were not known to
plaintiff, defendant Anita C. Gatchalian drew and issued a check, Exh. "B"; that Manuel Gonzales executed and
issued a receipt for said check, Exh. "1";

Fifth. — That on the failure of Manuel Gonzales to appear the day following and on his failure to bring the car
and its certificate of registration and to return the check, Exh. "B", on the following day as previously agreed
 upon, defendant Anita C. Gatchalian issued a "Stop Payment Order" on the check, Exh. "3", with the drawee
bank. Said "Stop Payment Order" was issued without previous notice on plaintiff not being know to defendant,
Anita C. Gatchalian and who furthermore had no reason to know check was given to plaintiff;

Sixth. — That defendants, both or either of them, did not know personally Manuel Gonzales or any member of his
family at any time prior to September 1953, but that defendant Hipolito Gatchalian is personally acquainted with
V. R. de Ocampo;

Seventh. — That defendants, both or either of them, had no arrangements or agreement with the Ocampo Clinic at
any time prior to, on or after 9 September 1953 for the hospitalization of the wife of Manuel Gonzales and neither
or both of said defendants had assumed, expressly or impliedly, with the Ocampo Clinic, the obligation of Manuel
Gonzales or his wife for the hospitalization of the latter;

Eight. — That defendants, both or either of them, had no obligation or liability, directly or indirectly with the
Ocampo Clinic before, or on 9 September 1953;

Ninth. — That Manuel Gonzales having received the check Exh. "B" from defendant Anita C. Gatchalian under
the representations and conditions herein above specified, delivered the same to the Ocampo Clinic, in payment of
the fees and expenses arising from the hospitalization of his wife;

Tenth. — That plaintiff for and in consideration of fees and expenses of hospitalization and the release of the wife
of Manuel Gonzales from its hospital, accepted said check, applying P441.75 (Exhibit "A") thereof to payment of
said fees and expenses and delivering to Manuel Gonzales the amount of P158.25 (as per receipt, Exhibit "D")
representing the balance on the amount of the said check, Exh. "B";

Eleventh. — That the acts of acceptance of the check and application of its proceeds in the manner specified
above were made without previous inquiry by plaintiff from defendants:

Twelfth. — That plaintiff filed or caused to be filed with the Office of the City Fiscal of Manila, a complaint for
estafa against Manuel Gonzales based on and arising from the acts of said Manuel Gonzales in paying his
obligations with plaintiff and receiving the cash balance of the check, Exh. "B" and that said complaint was
subsequently dropped;

Thirteenth. — That the exhibits mentioned in this stipulation and the other exhibits submitted previously, be
considered as parts of this stipulation, without necessity of formally offering them in evidence;

WHEREFORE, it is most respectfully prayed that this agreed stipulation of facts be admitted and that the parties
hereto be given fifteen days from today within which to submit simultaneously their memorandum to discuss the
issues of law arising from the facts, reserving to either party the right to submit reply memorandum, if necessary,
within ten days from receipt of their main memoranda. (pp. 21-25, Defendant's Record on Appeal).

No other evidence was submitted and upon said stipulation the court rendered the judgment already alluded above.

In their appeal defendants-appellants contend that the check is not a negotiable instrument, under the facts and
circumstances stated in the stipulation of facts, and that plaintiff is not a holder in due course. In support of the first
contention, it is argued that defendant Gatchalian had no intention to transfer her property in the instrument as it was for
safekeeping merely and, therefore, there was no delivery required by law (Section 16, Negotiable Instruments Law); that
assuming for the sake of argument that delivery was not for safekeeping merely, delivery was conditional and the
condition was not fulfilled.

In support of the contention that plaintiff-appellee is not a holder in due course, the appellant argues that plaintiff-appellee
cannot be a holder in due course because there was no negotiation prior to plaintiff-appellee's acquiring the possession of
the check; that a holder in due course presupposes a prior party from whose hands negotiation proceeded, and in the case
at bar, plaintiff-appellee is the payee, the maker and the payee being original parties. It is also claimed that the plaintiff-
appellee is not a holder in due course because it acquired the check with notice of defect in the title of the holder, Manuel
Gonzales, and because under the circumstances stated in the stipulation of facts there were circumstances that brought
suspicion about Gonzales' possession and negotiation, which circumstances should have placed the plaintiff-appellee
under the duty, to inquire into the title of the holder. The circumstances are as follows:

The check is not a personal check of Manuel Gonzales. (Paragraph Ninth, Stipulation of Facts). Plaintiff could
have inquired why a person would use the check of another to pay his own debt. Furthermore, plaintiff had the
"means of knowledge" inasmuch as defendant Hipolito Gatchalian is personally acquainted with V. R. de Ocampo
(Paragraph Sixth, Stipulation of Facts.).

The maker Anita C. Gatchalian is a complete stranger to Manuel Gonzales and Dr. V. R. de Ocampo (Paragraph
Sixth, Stipulation of Facts).

The maker is not in any manner obligated to Ocampo Clinic nor to Manuel Gonzales. (Par. 7, Stipulation of
Facts.)

The check could not have been intended to pay the hospital fees which amounted only to P441.75. The check is in
the amount of P600.00, which is in excess of the amount due plaintiff. (Par. 10, Stipulation of Facts).

It was necessary for plaintiff to give Manuel Gonzales change in the sum P158.25 (Par. 10, Stipulation of Facts).
Since Manuel Gonzales is the party obliged to pay, plaintiff should have been more cautious and wary in
accepting a piece of paper and disbursing cold cash.

The check is payable to bearer. Hence, any person who holds it should have been subjected to inquiries. EVEN IN
A BANK, CHECKS ARE NOT CASHED WITHOUT INQUIRY FROM THE BEARER. The same inquiries
should have been made by plaintiff. (Defendants-appellants' brief, pp. 52-53)

Answering the first contention of appellant, counsel for plaintiff-appellee argues that in accordance with the best authority
on the Negotiable Instruments Law, plaintiff-appellee may be considered as a holder in due course, citing Brannan's
Negotiable Instruments Law, 6th edition, page 252. On this issue Brannan holds that a payee may be a holder in due
course and says that to this effect is the greater weight of authority, thus:

Whether the payee may be a holder in due course under the N. I. L., as he was at common law, is a question upon
which the courts are in serious conflict. There can be no doubt that a proper interpretation of the act read as a
whole leads to the conclusion that a payee may be a holder in due course under any circumstance in which he
meets the requirements of Sec. 52.

The argument of Professor Brannan in an earlier edition of this work has never been successfully answered and is
here repeated.

Section 191 defines "holder" as the payee or indorsee of a bill or note, who is in possession of it, or the bearer
thereof. Sec. 52 defendants defines a holder in due course as "a holder who has taken the instrument under the
following conditions: 1. That it is complete and regular on its face. 2. 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. 3. That he took it in
good faith and for value. 4. 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."

Since "holder", as defined in sec. 191, includes a payee who is in possession the word holder in the first clause of
sec. 52 and in the second subsection may be replaced by the definition in sec. 191 so as to read "a holder in due
course is a payee or indorsee who is in possession," etc. (Brannan's on Negotiable Instruments Law, 6th ed., p.
543).

The first argument of the defendants-appellants, therefore, depends upon whether or not the plaintiff-appellee is a holder
in due course. If it is such a holder in due course, it is immaterial that it was the payee and an immediate party to the
instrument.
The other contention of the plaintiff is that there has been no negotiation of the instrument, because the drawer did not
deliver the instrument to Manuel Gonzales with the intention of negotiating the same, or for the purpose of giving effect
thereto, for as the stipulation of facts declares the check was to remain in the possession Manuel Gonzales, and was not to
be negotiated, but was to serve merely as evidence of good faith of defendants in their desire to purchase the car being
sold to them. Admitting that such was the intention of the drawer of the check when she delivered it to Manuel Gonzales,
it was no fault of the plaintiff-appellee drawee if Manuel Gonzales delivered the check or negotiated it. As the check was
payable to the plaintiff-appellee, and was entrusted to Manuel Gonzales by Gatchalian, the delivery to Manuel Gonzales
was a delivery by the drawer to his own agent; in other words, Manuel Gonzales was the agent of the drawer Anita
Gatchalian insofar as the possession of the check is concerned. So, when the agent of drawer Manuel Gonzales negotiated
the check with the intention of getting its value from plaintiff-appellee, negotiation took place through no fault of the
plaintiff-appellee, unless it can be shown that the plaintiff-appellee should be considered as having notice of the defect in
the possession of the holder Manuel Gonzales. Our resolution of this issue leads us to a consideration of the last question
presented by the appellants, i.e., whether the plaintiff-appellee may be considered as a holder in due course.

Section 52, Negotiable Instruments Law, defines 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.

The stipulation of facts expressly states that plaintiff-appellee was not aware of the circumstances under which the check
was delivered to Manuel Gonzales, but we agree with the defendants-appellants that the circumstances indicated by them
in their briefs, such as the fact that appellants had no obligation or liability to the Ocampo Clinic; that the amount of the
check did not correspond exactly with the obligation of Matilde Gonzales to Dr. V. R. de Ocampo; and that the check had
two parallel lines in the upper left hand corner, which practice means that the check could only be deposited but may not
be converted into cash — all these circumstances should have put the plaintiff-appellee to inquiry as to the why and
wherefore of the possession of the check by Manuel Gonzales, and why he used it to pay Matilde's account. It was payee's
duty to ascertain from the holder Manuel Gonzales what the nature of the latter's title to the check was or the nature of his
possession. Having failed in this respect, we must declare that plaintiff-appellee was guilty of gross neglect in not finding
out the nature of the title and possession of Manuel Gonzales, amounting to legal absence of good faith, and it may not be
considered as a holder of the check in good faith. To such effect is the consensus of authority.

In order to show that the defendant had "knowledge of such facts that his action in taking the instrument
amounted to bad faith," it is not necessary to prove that the defendant knew the exact fraud that was practiced
upon the plaintiff by the defendant's assignor, it being sufficient to show that the defendant had notice that there
was something wrong about his assignor's acquisition of title, although he did not have notice of the particular
wrong that was committed. Paika v. Perry, 225 Mass. 563, 114 N.E. 830.

It is sufficient that the buyer of a note had notice or knowledge that the note was in some way tainted with fraud.
It is not necessary that he should know the particulars or even the nature of the fraud, since all that is required is
knowledge of such facts that his action in taking the note amounted bad faith. Ozark Motor Co. v. Horton (Mo.
App.), 196 S.W. 395. Accord. Davis v. First Nat. Bank, 26 Ariz. 621, 229 Pac. 391.

Liberty bonds stolen from the plaintiff were brought by the thief, a boy fifteen years old, less than five feet tall,
immature in appearance and bearing on his face the stamp a degenerate, to the defendants' clerk for sale. The boy
stated that they belonged to his mother. The defendants paid the boy for the bonds without any further inquiry.
Held, the plaintiff could recover the value of the bonds. The term 'bad faith' does not necessarily involve furtive
 motives, but means bad faith in a commercial sense. The manner in which the defendants conducted their Liberty
Loan department provided an easy way for thieves to dispose of their plunder. It was a case of "no questions
asked." Although gross negligence does not of itself constitute bad faith, it is evidence from which bad faith may
be inferred. The circumstances thrust the duty upon the defendants to make further inquiries and they had no right
to shut their eyes deliberately to obvious facts. Morris v. Muir, 111 Misc. Rep. 739, 181 N.Y. Supp. 913, affd. in
memo., 191 App. Div. 947, 181 N.Y. Supp. 945." (pp. 640-642, Brannan's Negotiable Instruments Law, 6th ed.).

The above considerations would seem sufficient to justify our ruling that plaintiff-appellee should not be allowed to
recover the value of the check. Let us now examine the express provisions of the Negotiable Instruments Law pertinent to
the matter to find if our ruling conforms thereto. Section 52 (c) provides that a holder in due course is one who takes the
instrument "in good faith and for value;" Section 59, "that every holder is deemed prima facie to be a holder in due
course;" and Section 52 (d), that in order that one may be a holder in due course it is necessary that "at the time the
instrument was negotiated to him "he had no notice of any . . . defect in the title of the person negotiating it;" and lastly
Section 59, that every holder is deemed prima facieto be a holder in due course.

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

The rule applicable to the case at bar is that described in the case of Howard National Bank v. Wilson, et al., 96 Vt. 438,
120 At. 889, 894, where the Supreme Court of Vermont made the following disquisition:

Prior to the Negotiable Instruments Act, two distinct lines of cases had developed in this country. The first had its
origin in Gill v. Cubitt, 3 B. & C. 466, 10 E. L. 215, where the rule was distinctly laid down by the court of King's
Bench that the purchaser of negotiable paper must exercise reasonable prudence and caution, and that, if the
circumstances were such as ought to have excited the suspicion of a prudent and careful man, and he made no
inquiry, he did not stand in the legal position of a bona fide holder. The rule was adopted by the courts of this
country generally and seem to have become a fixed rule in the law of negotiable paper. Later in Goodman v.
Harvey, 4 A. & E. 870, 31 E. C. L. 381, the English court abandoned its former position and adopted the rule that
nothing short of actual bad faith or fraud in the purchaser would deprive him of the character of a bona fide
purchaser and let in defenses existing between prior parties, that no circumstances of suspicion merely, or want of
proper caution in the purchaser, would have this effect, and that even gross negligence would have no effect,
except as evidence tending to establish bad faith or fraud. Some of the American courts adhered to the earlier rule,
while others followed the change inaugurated in Goodman v. Harvey. The question was before this court in Roth
v. Colvin, 32 Vt. 125, and, on full consideration of the question, a rule was adopted in harmony with that
announced in Gill v. Cubitt, which has been adhered to in subsequent cases, including those cited above. Stated
briefly, one line of cases including our own had adopted the test of the reasonably prudent man and the other that
of actual good faith. It would seem that it was the intent of the Negotiable Instruments Act to harmonize this
disagreement by adopting the latter test. That such is the view generally accepted by the courts appears from a
recent review of the cases concerning what constitutes notice of defect. Brannan on Neg. Ins. Law, 187-201. To
effectuate the general purpose of the act to make uniform the Negotiable Instruments Law of those states which
should enact it, we are constrained to hold (contrary to the rule adopted in our former decisions) that negligence
on the part of the plaintiff, or suspicious circumstances sufficient to put a prudent man on inquiry, will not of
themselves prevent a recovery, but are to be considered merely as evidence bearing on the question of bad faith.
See G. L. 3113, 3172, where such a course is required in construing other uniform acts.
 It comes to this then: When the case has taken such shape that the plaintiff is called upon to prove himself a
holder in due course to be entitled to recover, he is required to establish the conditions entitling him to standing as
such, including good faith in taking the instrument. It devolves upon him to disclose the facts and circumstances
attending the transfer, from which good or bad faith in the transaction may be inferred.

In the case at bar as the payee acquired the check under circumstances which should have put it to inquiry, why the holder
had the check and used it to pay his own personal account, the duty devolved upon it, plaintiff-appellee, to prove that it
actually acquired said check in good faith. The stipulation of facts contains no statement of such good faith, hence we are
forced to the conclusion that plaintiff payee has not proved that it acquired the check in good faith and may not be deemed
a holder in due course thereof.

For the foregoing considerations, the decision appealed from should be, as it is hereby, reversed, and the defendants are
absolved from the complaint. With costs against plaintiff-appellee.
G.R. No. 138074 August 15, 2003

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.

For review on certiorari is the decision1 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. 54792 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 cashier’s checks, including the earnings thereof pendente
lite. Petitioner Cely Yang was ordered to pay David moral damages of ₱100,000.00 and attorney’s fees also in the amount of
₱100,000.00.

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 manager’s check in the amount of ₱4.2 million in exchange for two (2) of Yang’s
manager’s checks, each in the amount of ₱2.087 million, both payable to the order of private respondent Fernando David. Yang
and Chandiramani agreed that the difference of ₱26,000.00 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 Cashier’s Check No. CCPS 14-009467 in the sum of ₱2,087,000.00, dated December 22, 1987, payable to
the order of Fernando David;

b) FEBTC Cashier’s Check No. 287078, in the amount of ₱2,087,000.00, 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 o’clock in the afternoon of the same day, Yang gave the aforementioned cashier’s checks and dollar drafts to her
business associate, Albert Liong, to be delivered to Chandiramani by Liong’s messenger, Danilo Ranigo. Ranigo was to meet
Chandiramani at Philippine Trust Bank, Ayala Avenue, Makati City, Metro Manila where he would turn over Yang’s cashier’s
checks and dollar draft to Chandiramani who, in turn, would deliver to Ranigo a PCIB manager’s 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 cashier’s 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 manager’s check and the Hang Seng Bank
dollar draft.

At three o’clock 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 Cashier’s Check No. 287078, dated December 22, 1987, in the sum of ₱2.087 million; and (b)
Equitable Cashier’s Check No. CCPS 14-009467, dated December 22, 1987, also in the amount of ₱2.087 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 Complaint4 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) Cashier’s
Check No. CCPS 14-009467 in the sum of ₱2,087,000.00 dated December 22, 1987, and Far East Bank and Trust
Company (FEBTC) Cashier’s Check No. 287078 in the sum of ₱2,087,000.00 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) cashier’s checks, together with the earnings derived therefrom pendente lite;
ordering the plaintiff to pay the defendant Fernando David moral damages in the amount of ₱100,000.00; attorney’s fees in the
amount of ₱100,000.00 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 cashier’s 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 cashier’s checks in good faith and for value. He parted some
$200,000.00 for the two (2) cashier’s checks which were given to defendant Chandiramani; he had also no notice of any infirmity
in the cashier’s checks or defect in the title of the drawer. As a matter of fact, he asked the manager of the China Banking
Corporation to inquire as to the genuineness of the cashier’s checks (tsn, February 5, 1988, p. 21, September 20, 1991, pp. 13-
14). Another proof that defendant David is a holder in due course is the fact that the stop payment order on [the] FEBTC
cashier’s check was lifted upon his inquiry at the head office (tsn, September 20, 1991, pp. 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 indeed
reached the payee defendant David.9
Yang then moved for reconsideration of the RTC judgment, but the trial court denied her motion in its Order of September 20,
1995.

In the belief that the trial court misunderstood the concept of a holder in due course and misapprehended the factual milieu,
Yang seasonably filed an appeal with the Court of Appeals, docketed as CA-G.R. CV No. 52398.

On March 25, 1999, the appellate court decided CA-G.R. CV No. 52398 in this wise:

WHEREFORE, this court AFFIRMS the judgment of the lower court with modification and hereby orders the plaintiff-appellant
to pay defendant-appellant PCIB the amount of Twenty-Five Thousand Pesos (₱25,000.00).

SO ORDERED.10

In affirming the trial court’s judgment with respect to herein respondent David, the appellate court found that:

In this case, defendant-appellee had taken the necessary precautions to verify, through his bank, China Banking Corporation,
the genuineness of whether (sic) the cashier’s checks he received from Chandiramani. As no 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-appellant and
Chandiramani. All he knew was that the checks were issued to Chandiramani with whom he was he had (sic) a transaction.
Further on, David received the checks in question in due course because Chandiramani, who at the time the checks were
delivered to David, was acting as Yang’s agent.

David had no notice, real or constructive, cogent for him to make further inquiry as to any infirmity in the instrument(s) and defect
of title of the holder. To mandate that each holder inquire about every aspect on how the instrument came about will unduly
impede commercial transactions, Although negotiable instruments do not constitute legal tender, they often take the place
of money as a means of payment.

The mere fact that David and Chandiramani knew one another for a long 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 her theory.11

The appellate court awarded ₱25,000.00 in attorney’s fees to PCIB as it found the action filed by Yang against said bank to be
"clearly unfounded and baseless." Since PCIB was compelled to litigate to protect itself, then it was entitled under Article
220812 of the Civil Code to attorney’s fees and litigation expenses.

Hence, the instant recourse wherein petitioner submits the following issues for resolution:

a - WHETHER THE CHECKS WERE ISSUED TO PREM CHANDIRAMANI BY PETITIONER;

b - WHETHER THE ALLEGED TRANSACTION BETWEEN PREM CHANDIRAMANI AND FERNANDO DAVID IS
LEGITIMATE OR A SCHEME BY BOTH PRIVATE RESPONDENTS TO SWINDLE PETITIONER;

c - WHETHER FERNANDO DAVID GAVE PREM CHANDIRAMANI US$360,000.00 OR JUST A FRACTION OF THE
AMOUNT REPRESENTING HIS SHARE OF THE LOOT;

d - WHETHER PRIVATE RESPONDENTS FERNANDO DAVID AND PCIB ARE ENTITLED TO DAMAGES AND
ATTORNEY’S FEES.13

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 petitioner’s 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 attorney’s 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 cashier’s checks. From the very nature of cashier’s 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, 15meaning 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 facieholder 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 David’s case, otherwise he cannot be deemed a holder in due course.

We find that the petitioner’s challenge to David’s 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) David’s failure to inquire from
Chandiramani as to how the latter acquired possession of the checks, thus resulting in David’s 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 2418 of the Negotiable Instruments Law creates a presumption that every party to an
instrument acquired the same for a consideration19 or for value.20 Thus, the law itself creates a presumption in David’s 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
petitioner’s 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 Chandiramani’s 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 latter’s 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 Chandiramani’s 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 petitioner’s submission.

Petitioner’s 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,
attorney’s 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 petitioner’s 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
1âw phi 1

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, attorney’s fees, and
costs of suit be awarded him.

For its part, respondent PCIB stresses that it was established by both 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 attorney’s
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 attorney’s fees justified under Article 2208
(2)28 of the Civil Code. Hence, we rule that the award of attorney’s 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.

SO ORDERED.
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.
G.R. No. 96160 June 17, 1992

STELCO MARKETING CORPORATION, petitioner,

vs.
HON. COURT OF APPEALS and STEELWELD CORPORATION OF THE PHILIPPINES, INC., respondent.

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
party." 23

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 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.

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.
G.R. No. 76788 January 22, 1990

JUANITA SALAS, petitioner,

vs.
HON. COURT OF APPEALS and FIRST FINANCE & LEASING CORPORATION, respondents.

Arsenio C. Villalon, Jr. for petitioner.

Labaguis, Loyola, Angara & Associates for private respondent.

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.

In its decision dated September 10, 1982, the trial court held, thus:

WHEREFORE, and in view of all the foregoing, judgment is hereby rendered ordering the defendant to pay the plaintiff
the sum of P28,414.40 with interest thereon at the rate of 14% from October 2, 1980 until the said sum is fully paid; and
the further amount of P1,000.00 as attorney's fees.

The counterclaim of defendant is dismissed.

With costs against defendant. 1

Both petitioner and private respondent appealed the aforesaid decision to 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 order. There must always be a specified person named in the instrument and the bill or note
is to be paid to the person designated in the instrument or to any person to whom he has indorsed and delivered the same.
Without 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 subsequent purchaser thereof will not enjoy the advantages of being a 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 defenses available
against the latter. Such being the situation in the above-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

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 bears all the earmarks of negotiability.

The pertinent portion of the note reads:

 PROMISSORY NOTE
(MONTHLY)

P58,138.20
San Fernando, Pampanga, Philippines
Feb. 11, 1980

For value received, I/We jointly and severally, promise to pay Violago Motor Sales Corporation or order, at its office
in San Fernando, Pampanga, the sum of FIFTY EIGHT THOUSAND ONE HUNDRED THIRTY EIGHT & 201/100
ONLY (P58,138.20) Philippine currency, which amount includes interest at 14% per annum based on the diminishing
balance, the said principal sum, to be payable, without need of notice or demand, in installments of the amounts
following and at the dates hereinafter set forth, to wit: P1,614.95 monthly 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_________ monthly for ______
months due and payable on the ______ day of each month starting _____198__ thru and inclusive of _____,
198________ provided that interest at 14% per annum shall be added on each unpaid installment from maturity hereof
until fully paid.

xxx xxx xxx

Maker; Co-Maker:

(SIGNED) JUANITA SALAS _________________

Address:

____________________ ____________________

WITNESSES

SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE

TAN # TAN #

PAY TO THE ORDER OF

FILINVEST FINANCE AND LEASING CORPORATION

VIOLAGO MOTOR SALES CORPORATION

BY: (SIGNED) GENEVEVA V. BALTAZAR
Cash Manager 8

A careful study of the questioned promissory note shows that it is a negotiable instrument, having complied with the requisites
under the law as follows: [a] it is in writing and signed by the maker Juanita Salas; [b] it contains an unconditional promise to pay
the amount of P58,138.20; [c] it is payable at a fixed or determinable future time which is "P1,614.95 monthly for 36 months due
and payable on the 21 st day of each month starting March 21, 1980 thru and inclusive of Feb. 21, 1983;" [d] it is payable to
Violago Motor Sales Corporation, or order and as such, [e] the drawee is named or indicated with certainty. 9

It was negotiated by indorsement in writing on the instrument itself payable to the Order of Filinvest Finance and Leasing
Corporation 10 and it is an indorsement of the entire instrument. 11

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

IN VIEW OF THE FOREGOING, the assailed decision is hereby AFFIRMED. With costs against petitioner.

SO ORDERED.
G.R. No. 72764 July 13, 1989

STATE INVESTMENT HOUSE, petitioner,

vs.
INTERMEDIATE APPELLATE COURT, ANITA PEÑA CHUA and HARRIS CHUA, respondents.

Macalino, Salonga & Associates for petitioner.

Edgardo F. Sundiam for respondents.

FERNAN, C.J.:

Petitioner State Investment House seeks a review of the decision of respondent Intermediate Appellate Court (now Court of
Appeals) in AC-G.R. CV No. 04523 reversing the decision of the Regional Trial Court of Manila, Branch XXXVII dated April 30,
1984 and dismissing the complaint for collection filed by petitioner against private respondents Spouses Anita Pena Chua and
Harris Chua.

It appears that shortly before September 5, 1980, New Sikatuna Wood Industries, Inc. requested for a loan from private
respondent Harris Chua. The latter agreed to grant the same subject to the condition that the former should wait until December
1980 when he would have the money. In view of this agreement, private respondent-wife, Anita Pena Chua issued three (3)
crossed checks payable to New Sikatuna Wood Industries, Inc. all postdated December 22, 1980 as follows:

DRAWEE BANK CHECK NO. DATE AMOUNT

1. China Banking Corporation 589053 Dec. 22, 1980 P98,750.00

2. International Corporate Bank 04045549 Dec. 22, 1980 102,313.00

3. Metropolitan Bank & Trust Co. 036512 Dec. 22, 1980 98,387.00

The total value of the three (3) postdated checks amounted to P 299,450.00.

Subsequently, New Sikatuna Wood Industries, Inc. entered into an agreement with herein petitioner State Investment House,
Inc. whereby for and in consideration of the sum of Pl,047,402.91 under a deed of sale, the former assigned and discounted with
petitioner eleven (11) postdated checks including the aforementioned three (3) postdated checks issued by herein private
respondent-wife Anita Peña Chua to New Sikatuna Wood Industries, Inc.

When the three checks issued by private respondent Anita Pena Chua were allegedly deposited by petitioner, these checks
were dishonored by reason of "insufficient funds", "stop payment" and "account closed", respectively. Petitioner claims that
despite demands on private respondent Anita Peña to make good said checks, the latter failed to pay the same necessitating
the former to file an action for collection against the latter and her husband Harris Chua before the Regional Trial Court of
Manila, Branch XXXVII docketed as Civil Case No. 82-10547.

Private respondents-defendants filed a third party complaint against New Sikatuna Wood Industries, Inc. for reimbursement and
indemnification in the event that they be held liable to petitioner-plaintiff. For failure of third party defendant to answer the third
party complaint despite due service of summons, the latter was declared in default.

On April 30, 1984, the lower court 1 rendered judgment against herein private respondents spouses, the dispositive portion of
which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff or against the defendants ordering the
defendants to pay jointly and severally to the plaintiff the following amounts:

1. P 229,450.00 with interest at the rate of 12% per annum from February 24,1981 until fully
paid;

2. P 29,945.00 as and for attorney's fees; and

 3. the costs of suit.

On the third party complaint, third party defendant New Sikatuna Wood Industries, Inc. is ordered to pay third
party plaintiffs Anita Pena Chua and Harris Chua all amounts said defendants' third- party plaintiffs may pay to
the plaintiff on account of this case. 2

On appeal filed by private respondents in AC-G.R. CV No. 04523, the Intermediate Appellate Court 3 (now Court of Appeals)
reversed the lower court's judgment in the now assailed decision, the dispositive portion of which reads:

WHEREFORE, finding this appeal meritorious, We Reverse and Set Aside the appealed judgment, dated April
30, 1984 and a new judgment is hereby rendered dismissing the complaint, with costs against plaintiff-
appellee. 4

Hence, this petition.

The pivotal issue in this case is whether or not petitioner is a holder in due course as to entitle it to proceed against private
respondents for the amount stated in the dishonored checks.

Section 52(c) of the Negotiable Instruments Law defines a holder in due course as one who takes the instrument "in good faith
and for value". On the other hand, Section 52(d) provides that in order that one may be a holder in due course, it is necessary
that "at the time the instrument was negotiated to him he had no notice of any x x x defect in the title of the person negotiating
it." However, under Section 59 every holder is deemed prima facie to be a holder in due course.

Admittedly, the Negotiable Instruments Law regulating the issuance of negotiable checks as well as the lights and liabilities
arising therefrom, does not mention "crossed checks". But this Court has taken 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 may not be converted into cash.
Consequently, such circumstance should put the payee on inquiry and upon him devolves the duty to ascertain the holder's title
to the check or the nature of his possession. Failing in this respect, the payee is declared guilty of gross negligence amounting
to legal absence of good faith and as such the consensus of authority is to the effect that the holder of the check is not a holder
in good faith. 5

Petitioner submits that at the time of the negotiation and endorsement of the checks in question by New Sikatuna Wood
Industries, it had no knowledge of the transaction and/or arrangement made between the latter and private respondents.

We agree with respondent appellate court.

Relying on the ruling in Ocampo v. Gatchalian (supra), the Intermediate Appellate Court (now Court of Appeals), correctly
elucidated that the effects of crossing a check are: the check may not be encashed but only deposited in the bank; the check
may be negotiated only once to one who has an account with a bank; and the act of crossing the check serves as a warning to
the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to
that purpose, otherwise he is not a holder in due course. Further, the appellate court said:

It results therefore that when appellee rediscounted the check knowing that it was a crossed check he was
knowingly violating the avowed intention of crossing the check. Furthermore, his failure to inquire from the
holder, party defendant New Sikatuna Wood Industries, Inc., the purpose for which the three checks were cross
despite the warning of the crossing, prevents him from being considered in good faith and thus he is not a
holder in due course. Being not a holder in due course, plaintiff is subject to personal defenses, such as lack of
consideration between appellants and New Sikatuna Wood Industries. Note that under the facts the checks
were postdated and issued only as a loan to New Sikatuna Wood Industries, Inc. if and when deposits were
made to back up the checks. Such deposits were not made, hence no loan was made, hence the three checks
are without consideration (Sec. 28, Negotiable Instruments Law).

Likewise New Sikatuna Wood Industries negotiated the three checks in breach of faith in violation of Article
(sic) 55, Negotiable Instruments Law, which is a personal defense available to the drawer of the check.6

In addition, such instruments are mentioned in Section 541 of the Negotiable Instruments Law as follows:

Sec. 541. The maker or any legal holder of a check shall be entitled to indicate therein that it be paid to a
certain banker or institution, which he shall do by writing across the face the name of said banker or institution,
or only the words "and company."
 The payment made to a person other than the banker or institution shall not exempt the person on whom it is
drawn, if the payment was not correctly made.

Under usual practice, crossing a check is done by placing two parallel lines diagonally on the left top portion of the check. The
crossing may be special wherein between the two parallel lines is written the name of a bank or a business institution, in which
case the drawee should pay only with the intervention of that bank or company, or crossing may be general wherein between
two parallel diagonal lines are written the words "and Co." or none at all as in the case at bar, in which case the drawee should
not encash the same but merely accept the same for deposit.

The effect therefore of crossing a check relates to the mode of its presentment for payment. Under Section 72 of the Negotiable
Instruments Law, presentment for payment to be sufficient must be made (a) by the holder, or by some person authorized to
receive payment on his behalf ... As to who the holder or authorized person will be depends on the instructions stated on the
face of the check.

The three subject 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. 7 Consequently, no right of recourse is available to
petitioner against the drawer of the subject checks, private respondent wife, considering that petitioner is not the proper party
authorized to make presentment of the checks in question.

Yet it does not follow as a legal proposition that simply because petitioner was not a holder in due course as found by the
appellate court for having taken the instruments in question with notice that the same is for deposit only to the account of payee
named in the subject checks, petitioner could not recover on the checks. The Negotiable Instruments Law does not provide that
a holder who is not a holder in due course may not in any case recover on the instrument for in the case at bar, petitioner may
recover from the New Sikatuna Wood Industries, Inc. if the latter has no valid excuse for refusing payment. The only
disadvantage of a holder who is not in due course is that the negotiable instrument is subject to defenses as if it were non-
negotiable. 8

That the subject checks had been issued subject to the condition that private respondents 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.

WHEREFORE, the decision appealed from is hereby AFFIRMED with costs against petitioner.

SO ORDERED.
G.R. No. L-34539 July 14, 1986

EULALIO PRUDENCIO and ELISA T. PRUDENCIO, petitioners,

vs.
THE HONORABLE COURT OF APPEALS, THE PHILIPPINE NATIONAL BANK, RAMON C.
CONCEPCION and MANUEL M. TAMAYO, partners of the defunct partnership Concepcion & Tamayo
Construction Company, JOSE TORIBIO, Atty-in-Fact of Concepcion & Tamayo Construction Company, and
THE DISTRICT ENGINEER, Puerto Princesa, Palawan, respondents.

Fernando R. Mangubat, Jr. for respondent PNB.

GUTIERREZ, JR., J.:

This is a petition for review seeking to annul and set aside the decision of the Court of Appeals, now the Intermediate
Appellate Court, affirming the order of the trial court which dismissed the petitioners' complaint for cancellation of their
real estate mortgage and held them jointly and severally liable with the principal debtors on a promissory note which they
signed as accommodation makers.

The factual background of this case is stated in the decision of the appellate court:

Appellants are the registered owners of a parcel of land located in Sampaloc, Manila, and covered by
T.C.T. 35161 of the Register of Deeds of Manila. On October 7, 1954, this property was mortgaged by
the appellants to the Philippine National Bank, hereinafter called PNB, to guarantee a loan of P1,000.00
extended to one Domingo Prudencio.

Sometime in 1955, the Concepcion & Tamayo Construction Company, hereinafter called Company, had a
pending contract with the Bureau of Public Works, hereinafter called the Bureau, for the construction of
the municipal building in Puerto Princess, Palawan, in the amount of P36,800.00 and, as said Company
needed funds for said construction, Jose Toribio, appellants' relative, and attorney-in-fact of the
Company, approached the appellants asking them to mortgage their property to secure the loan of
P10,000.00 which the Company was negotiating with the PNB.

After some persuasion appellants signed on December 23, 1955 the 'Amendment of Real Estate
Mortgage', mortgaging their said property to the PNB to guaranty the loan of P10,000.00 extended to the
Company. The terms and conditions of the original mortgage for Pl,000.00 were made integral part of the
new mortgage for P10,000.00 and both documents were registered with the Register of Deeds of Manila.
The promissory note covering the loan of P10,000.00 dated December 29, 1955, maturing on April 27,
1956, was signed by Jose Toribio, as attorney-in-fact of the Company, and by the appellants. Appellants
also signed the portion of the promissory note indicating that they are requesting the PNB to issue the
Check covering the loan to the Company. On the same date (December 23, 1955) that the 'Amendment of
Real Estate' was executed, Jose Toribio, in the same capacity as attorney-in- fact of the Company,
executed also the 'Deed of Assignment' assigning all payments to be made by the Bureau to the Company
on account of the contract for the construction of the Puerto Princesa building in favor of the PNB.

This assignment of credit to the contrary notwithstanding, the Bureau; with approval, of the PNB,
conditioned, however that they should be for labor and materials, made three payments to the Company
on account of the contract price totalling P11,234.40. The Bureau's last request for P5,000.00 on June 20,
1956, however, was denied by the PNB for the reason that since the loan was already overdue as of April
28, 1956, the remaining balance of the contract price should be applied to the loan.

The Company abandoned the work, as a consequence of which on June 30, 1956, the Bureau rescinded
the construction contract and assumed the work of completing the building. On November 14, 1958,
appellants wrote the PNB contending that since the PNB authorized payments to the Company instead of
 on account of the loan guaranteed by the mortgage there was a change in the conditions of the contract
without the knowledge of appellants, which entitled the latter to a cancellation of their mortgage contract.

Failing in their bid to have the real estate mortgage cancelled, appellants filed on June 27, 1959 this action
against the PNB, the Company, the latter's attorney-in-fact Jose Toribio, and the District Engineer of
Puerto Princesa, Palawan, seeking the cancellation of their real estate mortgage. The complaint was
amended to exclude the Company as defendant, it having been shown that its life as a partnership had
already expired and, in lieu thereof, Ramon Concepcion and Manuel M. Tamayo, partners of the defunct
Company, were impleaded in their private capacity as defendants.

After hearing, the trial court rendered judgment, denying the prayer in the complaint that the petitioners be absolved from
their obligation under the mortgage contract and that the said mortgage be released or cancelled. The petitioners were
ordered to pay jointly and severally with their co-makers Ramon C. Concepcion and Manuel M. Tamayo the sum of
P11,900.19 with interest at the rate of 6% per annum from the date of the filing of the complaint on June 27, 1959 until
fully paid and Pl,000.00 attorney's fees.

The decision also provided that if the judgment was not satisfied within 90 days from its receipt, the mortgaged properties
together with all the improvements thereon belonging to the petitioners would be sold at public auction and applied to the
judgment debt.

The Court of Appeals affirmed the trial court's decision in toto stating that, as accommodation makers, the petitioners'
liability is that of solidary co-makers and that since "the amounts released to the construction company were used therein
and, therefore, were spent for the successful accomplishment of the work constructed for, the authorization made by the
Philippine National Bank of partial payments to the construction company which was also one of the solidary debtors
cannot constitute a valid defense on the part of the other solidary debtors. Moreover, those who rendered services and
furnished materials in the construction are preferred creditors and have a lien on the price of the contract." The appellate
court further held that PNB had no obligation whatsoever to notify the petitioners of its authorizing the three payments in
the total amount of Pll,234.00 in favor of the Company because aside from the fact that the petitioners were not parties to
the deed of assignment, there was no stipulation in said deed making it obligatory on the part of the PNB to notify the
petitioners everytime it authorizes payment to the Company. It ruled that the petitioners cannot ask to be released from the
real estate mortgage.

In this petition, the petitioners raise the following issues which they present in the form of errors:

I. First Assignment of Error.

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT HEREIN PETITIONERS

WERE SOLIDARY CO-DEBTORS INSTEAD OF SURETIES:

II. Second Assignment of Error.

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONERS WERE

NOT RELEASED FROM THEIR OBLIGATION TO THE RESPONDENT PNB, WHEN THE PNB,
WITHOUT THE KNOWLEDGE AND CONSENT OF PETITIONERS, CHANGED THE TENOR AND
CONDITION OF THE ASSIGNMENT OF PAYMENTS MADE BY THE PRINCIPAL DEBTOR;
CONCEPCION & TAMAYO CONSTRUCTION COMPANY; AND RELEASED TO SUCH
PRINCIPAL DEBTOR PAYMENTS FROM THE BUREAU OF PUBLIC WORKS WHICH WERE
MORE THAN ENOUGH TO WIPE OUT THE INDEBTEDNESS TO THE PNB.

The petitioners contend that as accommodation makers, the nature of their liability is only that of mere sureties instead of
solidary co-debtors such that "a material alteration in the principal contract, effected by the creditor without the
knowledge and consent of the sureties, completely discharges the sureties from all liability on the contract of suretyship. "
They state that when respondent PNB did not apply the initial and subsequent payments to the petitioners' debt as
provided for in the deed of assignment, they were released from their obligation as sureties and, therefore, the real estate
mortgage executed by them should have been cancelled.
Section 29 of the Negotiable Instrument Law provides:

Liability of 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.

In the case of Philippine Bank of Commerce v. Aruego (102 SCRA 530, 539), we held that "... in lending his name to the
accommodated party, the accommodation party is in effect a surety. ... . " However, unlike in a contract of suretyship, the
liability of the accommodation party remains not only primary but also unconditional to a holder for value such that even
if the accommodated party receives an extension of the period for payment without the consent of the accommodation
party, the latter is still liable for the whole obligation and such extension does not release him because as far as a holder
for value is concerned, he is a solidary co- debtor.

Expounding on the nature of the liability of an accommodation petition party under the aforequoted section, we ruled
in Ang Tiong v. Ting (22 SCRA 713, 716):

3. That the appellant, again assuming him to be an accommodation indorser, may obtain security from the
maker to protect himself against the danger of insolvency of the latter, cannot in any manner affect his
liability to the appellee, as the said remedy is a matter of concern exclusively between accommodation
indorser and accommodated party. So that the appellant stands only as a surety in relation to the maker,
granting this to be true for the sake of argument, is immaterial to the claim of the appellee, and does not a
whit diminish nor defeat the rights of the latter who is a holder for value. The liability of the appellant
remains primary and unconditional. To sanction the appellant's theory is to give unwarranted legal
recognition to the patent absurdity of a situation where an indorser, when sued on an instrument by a
holder in due course and for value, can escape liability on his indorsement by the convenient expedient of
interposing the defense that he is a mere accommodation indorser.

There is, therefore, no question that as accommodation makers, petitioners would be primarily and unconditionally liable
on the promissory note to a holder for value, regardless of whether they stand as sureties or solidary co-debtors since such
distinction would be entirely immaterial and inconsequential as far as a holder for value is concerned. Consequently, the
petitioners cannot claim to have been released from their obligation simply because the time of payment of such
obligation was temporarily deferred by PNB without their knowledge and consent. There has to be another basis for their
claim of having been freed from their obligation. The question which should be resolved in this instant petition, therefore,
is whether or not PNB can be considered a holder for value under Section 29 of the Negotiable Instruments Law such that
the petitioners must be necessarily barred from setting up the defense of want of consideration or some other personal
defenses which may be set up against a party who is not a holder in due course.

A holder for value under Section 29 of the Negotiable Instruments Law is one who must meet all the requirements of a
holder in due course under Section 52 of the same law except notice of want of consideration. (Agbayani, Commercial
Laws of the Philippines, 1964, p. 208). If he does not qualify as a holder in due course then he holds the instrument
subject to the same defenses as if it were non-negotiable (Section 58, Negotiable Instruments Law).

In the case at bar, can PNB, the payee of the promissory note be considered a holder in due course?

Petitioners contend that the payee PNB is an immediate party and, therefore, is not a holder in due course and stands on
no better footing than a mere assignee.

In those cases where a payee was considered a holder in due course, such payee either acquired the note from another
holder or has not directly dealt with the maker thereof. As was held in the case of Bank of Commerce and Savings v.
Randell (186 NorthWestern Reporter 71):

We conclude, therefore, that a payee who receives a negotiable promissory note, in good faith, for value,
before maturity, and without any notice of any infirmity, from a holder, not the maker. to whom it was
 negotiated as a completed instrument, is a holder in due course within the purview of a Negotiable
Instruments law, so as to preclude the defense of fraud and failure of consideration between the maker
and the holder to whom the instrument, was delivered.

Similarly, in the case of Stone v. Goldberg & Lewis (60 Southern Reporter 748) on rehearing and quoting Daniel on
Negotiable Instruments, it was held:

It is a general principle of the law merchant that, as between the immediate parties to a negotiable
instrument-the parties between whom there is a privity-the consideration may be inquired into; and as to
them the only superiority of a bill or note over other unsealed evidence of debt is that it prima facie
imports a consideration.

Although as a general rule, a payee may be considered a holder in due course we think that such a rule cannot apply with
respect to the respondent PNB. Not only was PNB an immediate party or in privy to the promissory note, that is, it had
dealt directly with the petitioners knowing fully well that the latter only signed as accommodation makers but more
important, it was the Deed of Assignment executed by the Construction Company in favor of PNB which principally
moved the petitioners to sign the promissory note also in favor of PNB. Petitioners were made to believe and on that
belief entered into the agreement that no other conditions would alter the terms thereof and yet, PNB altered the same.
The Deed of Assignment specifically provided that Jose F. Toribio, on behalf of the Company, "have assigned, transferred
and conveyed and by these presents, do assign, transfer and convey unto the said Philippine National Bank, its successors
and assigns all payments to be received from the Bureau of Public Works on account of contract for the construction of
the Puerto Princesa Municipal Building in Palawan, involving the total amount of P 36,000.00" and that "This assignment
shall be irrevocable and subject to the terms and conditions of the promissory note and or any other kind of documents
which the Philippine National Bank have required or may require the assignor to execute to evidence the above-mentioned
obligation."

Under the terms of the above Deed, it is clear that there are no further conditions which could possibly alter the agreement
without the consent of the petitioners such as the grant of greater priority to obligations other than the payment of the loan
due to the PNB and part of which loan was guaranteed by the petitioners in the amount of P10,000.00.

This, notwithstanding, PNB approved the Bureau's release of three payments directly to the Company instead of paying
the same to the Bank. This approval was in violation of the Deed of Assignment and without any notice to the petitioners
who stood to lose their property once the promissory note falls due without the same having been paid because the PNB,
in effect, waived payments of the first three releases. From the foregoing circumstances, PNB can not be regarded as
having acted in good faith which is also one of the requisites of a holder in due course under Section 52 of the Negotiable
Instruments Law. The PNB knew that the promissory note which it took from the accommodation makers was signed by
the latter because of full reliance on the Deed of Assignment, which, PNB had no intention to comply with strictly.
Worse, the third payment to the Company in the amount of P4,293.60 was approved by PNB although the promissory
note was almost a month overdue, an act which is clearly detrimental to the petitioners.

We, therefore, hold that respondent PNB is not a holder in due course. Thus, the petitioners can validly set up their
personal defense of release from the real estate mortgage against PNB. The latter, in authorizing the third payment to the
Company after the promissory note became due, in effect, extended the term of the payment of the note without the
consent of the accommodation makers who stand as sureties to the accommodated party and to all other parties who are
not holders in due course or who do not derive their right from the same, including PNB.

It may be argued that the Prudencios could have mortgaged their property even without the promissory note. The records
show, however, that they would not have mortgaged the lot were it not for the sake of the Company whose attorney-in-
fact was their relative. The spouses did not need the money for themselves.

The attorney-in-fact tried twice to convince the Prudencios to mortgage their property in order to secure a loan in favor of
the Company but the Prudencios refused. It was only when the deed of assignment was shown to the spouses that they
consented to the mortgage and signed the promissory note in the Bank's favor.
Article 2085 of the Civil Code enumerates the requisites of a valid mortgage contract. Petitioners do not dispute the
validity of the mortgage. They only want to have it cancelled because the Bank violated the deed of assignment and
extended the period of time of payment of the promissory note without the petitioners' consent and to the latter's
detriment.

The mortgage cannot be separated from the promissory note for it is the latter which is the basis of determining whether
the mortgage should be foreclosed or cancelled. Without the promissory note which determines the amount of
indebtedness there would have been no basis for the mortgage.

True, if the Bank had not been the assignee, then the petition petitioners would be obliged to pay the Bank as their creditor
on the promissory note, irrespective of whether or not the deed of assignment had been violated. However, the assignee
and the creditor in this case are one and the same—the Bank itself. When the Bank violated the deed of assignment, it
prejudiced itself because its very violation was the reason why it was not paid on time in its capacity as creditor in the
promissory note. It would be unfair to make the petitioners now answer for the debt or to foreclose on their property.

Neither can PNB justify its acts on the ground that the Bureau of Public Works approved the deed of assignment with the
condition that the wages of laborers and materials needed in the construction work must take precedence over the payment
of the promissory note. In the first place, PNB did not need the approval of the Bureau. But even if it did, it should have
informed the petitioners about the amendment of the deed of assignment. Secondly, the wages and materials have already
been paid. That issue is academic. What is in dispute is who should bear the loss in this case. As between the petitioners
and the Bank, the law and the equities of the case favor the petitioners, And thirdly, the wages and materials constitute a
lien only on the constructed building but do not enjoy preference over the loan unless there is a liquidation proceeding
such as in insolvency or settlement of estate. (See Philippine Savings Bank v. Lantin, 124 SCRA 476). There were
remedies available at the time if the laborers and the creditors had not been paid. The fact is, they have been paid. Hence,
when the PNB accepted the condition imposed by the Bureau without the knowledge or consent of the petitioners, it
amended the deed of assignment which, as stated earlier, was the principal reason why the petitioners consented to
become accommodation makers.

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals affirming the decision of the trial court
is hereby REVERSED and SET ASIDE and a new one entered absolving the petitioners from liability on the promissory
note and under the mortgage contract. The Philippine National Bank is ordered to release the real estate mortgage
constituted on the property of the petitioners and to pay the amount of THREE THOUSAND PESOS (P3,000.00) as
attorney's fees.

SO ORDERED.
G.R. No. L-34539 July 14, 1986

EULALIO PRUDENCIO and ELISA T. PRUDENCIO, petitioners,

vs.
THE HONORABLE COURT OF APPEALS, THE PHILIPPINE NATIONAL BANK, RAMON C.
CONCEPCION and MANUEL M. TAMAYO, partners of the defunct partnership Concepcion & Tamayo
Construction Company, JOSE TORIBIO, Atty-in-Fact of Concepcion & Tamayo Construction Company, and
THE DISTRICT ENGINEER, Puerto Princesa, Palawan, respondents.

Fernando R. Mangubat, Jr. for respondent PNB.

GUTIERREZ, JR., J.:

This is a petition for review seeking to annul and set aside the decision of the Court of Appeals, now the Intermediate
Appellate Court, affirming the order of the trial court which dismissed the petitioners' complaint for cancellation of their
real estate mortgage and held them jointly and severally liable with the principal debtors on a promissory note which they
signed as accommodation makers.

The factual background of this case is stated in the decision of the appellate court:

Appellants are the registered owners of a parcel of land located in Sampaloc, Manila, and covered by
T.C.T. 35161 of the Register of Deeds of Manila. On October 7, 1954, this property was mortgaged by
the appellants to the Philippine National Bank, hereinafter called PNB, to guarantee a loan of P1,000.00
extended to one Domingo Prudencio.

Sometime in 1955, the Concepcion & Tamayo Construction Company, hereinafter called Company, had a
pending contract with the Bureau of Public Works, hereinafter called the Bureau, for the construction of
the municipal building in Puerto Princess, Palawan, in the amount of P36,800.00 and, as said Company
needed funds for said construction, Jose Toribio, appellants' relative, and attorney-in-fact of the
Company, approached the appellants asking them to mortgage their property to secure the loan of
P10,000.00 which the Company was negotiating with the PNB.

After some persuasion appellants signed on December 23, 1955 the 'Amendment of Real Estate
Mortgage', mortgaging their said property to the PNB to guaranty the loan of P10,000.00 extended to the
Company. The terms and conditions of the original mortgage for Pl,000.00 were made integral part of the
new mortgage for P10,000.00 and both documents were registered with the Register of Deeds of Manila.
The promissory note covering the loan of P10,000.00 dated December 29, 1955, maturing on April 27,
1956, was signed by Jose Toribio, as attorney-in-fact of the Company, and by the appellants. Appellants
also signed the portion of the promissory note indicating that they are requesting the PNB to issue the
Check covering the loan to the Company. On the same date (December 23, 1955) that the 'Amendment of
Real Estate' was executed, Jose Toribio, in the same capacity as attorney-in- fact of the Company,
executed also the 'Deed of Assignment' assigning all payments to be made by the Bureau to the Company
on account of the contract for the construction of the Puerto Princesa building in favor of the PNB.

This assignment of credit to the contrary notwithstanding, the Bureau; with approval, of the PNB,
conditioned, however that they should be for labor and materials, made three payments to the Company
on account of the contract price totalling P11,234.40. The Bureau's last request for P5,000.00 on June 20,
1956, however, was denied by the PNB for the reason that since the loan was already overdue as of April
28, 1956, the remaining balance of the contract price should be applied to the loan.

The Company abandoned the work, as a consequence of which on June 30, 1956, the Bureau rescinded
the construction contract and assumed the work of completing the building. On November 14, 1958,
appellants wrote the PNB contending that since the PNB authorized payments to the Company instead of
 on account of the loan guaranteed by the mortgage there was a change in the conditions of the contract
without the knowledge of appellants, which entitled the latter to a cancellation of their mortgage contract.

Failing in their bid to have the real estate mortgage cancelled, appellants filed on June 27, 1959 this action
against the PNB, the Company, the latter's attorney-in-fact Jose Toribio, and the District Engineer of
Puerto Princesa, Palawan, seeking the cancellation of their real estate mortgage. The complaint was
amended to exclude the Company as defendant, it having been shown that its life as a partnership had
already expired and, in lieu thereof, Ramon Concepcion and Manuel M. Tamayo, partners of the defunct
Company, were impleaded in their private capacity as defendants.

After hearing, the trial court rendered judgment, denying the prayer in the complaint that the petitioners be absolved from
their obligation under the mortgage contract and that the said mortgage be released or cancelled. The petitioners were
ordered to pay jointly and severally with their co-makers Ramon C. Concepcion and Manuel M. Tamayo the sum of
P11,900.19 with interest at the rate of 6% per annum from the date of the filing of the complaint on June 27, 1959 until
fully paid and Pl,000.00 attorney's fees.

The decision also provided that if the judgment was not satisfied within 90 days from its receipt, the mortgaged properties
together with all the improvements thereon belonging to the petitioners would be sold at public auction and applied to the
judgment debt.

The Court of Appeals affirmed the trial court's decision in toto stating that, as accommodation makers, the petitioners'
liability is that of solidary co-makers and that since "the amounts released to the construction company were used therein
and, therefore, were spent for the successful accomplishment of the work constructed for, the authorization made by the
Philippine National Bank of partial payments to the construction company which was also one of the solidary debtors
cannot constitute a valid defense on the part of the other solidary debtors. Moreover, those who rendered services and
furnished materials in the construction are preferred creditors and have a lien on the price of the contract." The appellate
court further held that PNB had no obligation whatsoever to notify the petitioners of its authorizing the three payments in
the total amount of Pll,234.00 in favor of the Company because aside from the fact that the petitioners were not parties to
the deed of assignment, there was no stipulation in said deed making it obligatory on the part of the PNB to notify the
petitioners everytime it authorizes payment to the Company. It ruled that the petitioners cannot ask to be released from the
real estate mortgage.

In this petition, the petitioners raise the following issues which they present in the form of errors:

I. First Assignment of Error.

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT HEREIN PETITIONERS

WERE SOLIDARY CO-DEBTORS INSTEAD OF SURETIES:

II. Second Assignment of Error.

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONERS WERE

NOT RELEASED FROM THEIR OBLIGATION TO THE RESPONDENT PNB, WHEN THE PNB,
WITHOUT THE KNOWLEDGE AND CONSENT OF PETITIONERS, CHANGED THE TENOR AND
CONDITION OF THE ASSIGNMENT OF PAYMENTS MADE BY THE PRINCIPAL DEBTOR;
CONCEPCION & TAMAYO CONSTRUCTION COMPANY; AND RELEASED TO SUCH
PRINCIPAL DEBTOR PAYMENTS FROM THE BUREAU OF PUBLIC WORKS WHICH WERE
MORE THAN ENOUGH TO WIPE OUT THE INDEBTEDNESS TO THE PNB.

The petitioners contend that as accommodation makers, the nature of their liability is only that of mere sureties instead of
solidary co-debtors such that "a material alteration in the principal contract, effected by the creditor without the
knowledge and consent of the sureties, completely discharges the sureties from all liability on the contract of suretyship. "
They state that when respondent PNB did not apply the initial and subsequent payments to the petitioners' debt as
provided for in the deed of assignment, they were released from their obligation as sureties and, therefore, the real estate
mortgage executed by them should have been cancelled.
Section 29 of the Negotiable Instrument Law provides:

Liability of 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.

In the case of Philippine Bank of Commerce v. Aruego (102 SCRA 530, 539), we held that "... in lending his name to the
accommodated party, the accommodation party is in effect a surety. ... . " However, unlike in a contract of suretyship, the
liability of the accommodation party remains not only primary but also unconditional to a holder for value such that even
if the accommodated party receives an extension of the period for payment without the consent of the accommodation
party, the latter is still liable for the whole obligation and such extension does not release him because as far as a holder
for value is concerned, he is a solidary co- debtor.

Expounding on the nature of the liability of an accommodation petition party under the aforequoted section, we ruled
in Ang Tiong v. Ting (22 SCRA 713, 716):

3. That the appellant, again assuming him to be an accommodation indorser, may obtain security from the
maker to protect himself against the danger of insolvency of the latter, cannot in any manner affect his
liability to the appellee, as the said remedy is a matter of concern exclusively between accommodation
indorser and accommodated party. So that the appellant stands only as a surety in relation to the maker,
granting this to be true for the sake of argument, is immaterial to the claim of the appellee, and does not a
whit diminish nor defeat the rights of the latter who is a holder for value. The liability of the appellant
remains primary and unconditional. To sanction the appellant's theory is to give unwarranted legal
recognition to the patent absurdity of a situation where an indorser, when sued on an instrument by a
holder in due course and for value, can escape liability on his indorsement by the convenient expedient of
interposing the defense that he is a mere accommodation indorser.

There is, therefore, no question that as accommodation makers, petitioners would be primarily and unconditionally liable
on the promissory note to a holder for value, regardless of whether they stand as sureties or solidary co-debtors since such
distinction would be entirely immaterial and inconsequential as far as a holder for value is concerned. Consequently, the
petitioners cannot claim to have been released from their obligation simply because the time of payment of such
obligation was temporarily deferred by PNB without their knowledge and consent. There has to be another basis for their
claim of having been freed from their obligation. The question which should be resolved in this instant petition, therefore,
is whether or not PNB can be considered a holder for value under Section 29 of the Negotiable Instruments Law such that
the petitioners must be necessarily barred from setting up the defense of want of consideration or some other personal
defenses which may be set up against a party who is not a holder in due course.

A holder for value under Section 29 of the Negotiable Instruments Law is one who must meet all the requirements of a
holder in due course under Section 52 of the same law except notice of want of consideration. (Agbayani, Commercial
Laws of the Philippines, 1964, p. 208). If he does not qualify as a holder in due course then he holds the instrument
subject to the same defenses as if it were non-negotiable (Section 58, Negotiable Instruments Law).

In the case at bar, can PNB, the payee of the promissory note be considered a holder in due course?

Petitioners contend that the payee PNB is an immediate party and, therefore, is not a holder in due course and stands on
no better footing than a mere assignee.

In those cases where a payee was considered a holder in due course, such payee either acquired the note from another
holder or has not directly dealt with the maker thereof. As was held in the case of Bank of Commerce and Savings v.
Randell (186 NorthWestern Reporter 71):

We conclude, therefore, that a payee who receives a negotiable promissory note, in good faith, for value,
before maturity, and without any notice of any infirmity, from a holder, not the maker. to whom it was
 negotiated as a completed instrument, is a holder in due course within the purview of a Negotiable
Instruments law, so as to preclude the defense of fraud and failure of consideration between the maker
and the holder to whom the instrument, was delivered.

Similarly, in the case of Stone v. Goldberg & Lewis (60 Southern Reporter 748) on rehearing and quoting Daniel on
Negotiable Instruments, it was held:

It is a general principle of the law merchant that, as between the immediate parties to a negotiable
instrument-the parties between whom there is a privity-the consideration may be inquired into; and as to
them the only superiority of a bill or note over other unsealed evidence of debt is that it prima facie
imports a consideration.

Although as a general rule, a payee may be considered a holder in due course we think that such a rule cannot apply with
respect to the respondent PNB. Not only was PNB an immediate party or in privy to the promissory note, that is, it had
dealt directly with the petitioners knowing fully well that the latter only signed as accommodation makers but more
important, it was the Deed of Assignment executed by the Construction Company in favor of PNB which principally
moved the petitioners to sign the promissory note also in favor of PNB. Petitioners were made to believe and on that
belief entered into the agreement that no other conditions would alter the terms thereof and yet, PNB altered the same.
The Deed of Assignment specifically provided that Jose F. Toribio, on behalf of the Company, "have assigned, transferred
and conveyed and by these presents, do assign, transfer and convey unto the said Philippine National Bank, its successors
and assigns all payments to be received from the Bureau of Public Works on account of contract for the construction of
the Puerto Princesa Municipal Building in Palawan, involving the total amount of P 36,000.00" and that "This assignment
shall be irrevocable and subject to the terms and conditions of the promissory note and or any other kind of documents
which the Philippine National Bank have required or may require the assignor to execute to evidence the above-mentioned
obligation."

Under the terms of the above Deed, it is clear that there are no further conditions which could possibly alter the agreement
without the consent of the petitioners such as the grant of greater priority to obligations other than the payment of the loan
due to the PNB and part of which loan was guaranteed by the petitioners in the amount of P10,000.00.

This, notwithstanding, PNB approved the Bureau's release of three payments directly to the Company instead of paying
the same to the Bank. This approval was in violation of the Deed of Assignment and without any notice to the petitioners
who stood to lose their property once the promissory note falls due without the same having been paid because the PNB,
in effect, waived payments of the first three releases. From the foregoing circumstances, PNB can not be regarded as
having acted in good faith which is also one of the requisites of a holder in due course under Section 52 of the Negotiable
Instruments Law. The PNB knew that the promissory note which it took from the accommodation makers was signed by
the latter because of full reliance on the Deed of Assignment, which, PNB had no intention to comply with strictly.
Worse, the third payment to the Company in the amount of P4,293.60 was approved by PNB although the promissory
note was almost a month overdue, an act which is clearly detrimental to the petitioners.

We, therefore, hold that respondent PNB is not a holder in due course. Thus, the petitioners can validly set up their
personal defense of release from the real estate mortgage against PNB. The latter, in authorizing the third payment to the
Company after the promissory note became due, in effect, extended the term of the payment of the note without the
consent of the accommodation makers who stand as sureties to the accommodated party and to all other parties who are
not holders in due course or who do not derive their right from the same, including PNB.

It may be argued that the Prudencios could have mortgaged their property even without the promissory note. The records
show, however, that they would not have mortgaged the lot were it not for the sake of the Company whose attorney-in-
fact was their relative. The spouses did not need the money for themselves.

The attorney-in-fact tried twice to convince the Prudencios to mortgage their property in order to secure a loan in favor of
the Company but the Prudencios refused. It was only when the deed of assignment was shown to the spouses that they
consented to the mortgage and signed the promissory note in the Bank's favor.
Article 2085 of the Civil Code enumerates the requisites of a valid mortgage contract. Petitioners do not dispute the
validity of the mortgage. They only want to have it cancelled because the Bank violated the deed of assignment and
extended the period of time of payment of the promissory note without the petitioners' consent and to the latter's
detriment.

The mortgage cannot be separated from the promissory note for it is the latter which is the basis of determining whether
the mortgage should be foreclosed or cancelled. Without the promissory note which determines the amount of
indebtedness there would have been no basis for the mortgage.

True, if the Bank had not been the assignee, then the petition petitioners would be obliged to pay the Bank as their creditor
on the promissory note, irrespective of whether or not the deed of assignment had been violated. However, the assignee
and the creditor in this case are one and the same—the Bank itself. When the Bank violated the deed of assignment, it
prejudiced itself because its very violation was the reason why it was not paid on time in its capacity as creditor in the
promissory note. It would be unfair to make the petitioners now answer for the debt or to foreclose on their property.

Neither can PNB justify its acts on the ground that the Bureau of Public Works approved the deed of assignment with the
condition that the wages of laborers and materials needed in the construction work must take precedence over the payment
of the promissory note. In the first place, PNB did not need the approval of the Bureau. But even if it did, it should have
informed the petitioners about the amendment of the deed of assignment. Secondly, the wages and materials have already
been paid. That issue is academic. What is in dispute is who should bear the loss in this case. As between the petitioners
and the Bank, the law and the equities of the case favor the petitioners, And thirdly, the wages and materials constitute a
lien only on the constructed building but do not enjoy preference over the loan unless there is a liquidation proceeding
such as in insolvency or settlement of estate. (See Philippine Savings Bank v. Lantin, 124 SCRA 476). There were
remedies available at the time if the laborers and the creditors had not been paid. The fact is, they have been paid. Hence,
when the PNB accepted the condition imposed by the Bureau without the knowledge or consent of the petitioners, it
amended the deed of assignment which, as stated earlier, was the principal reason why the petitioners consented to
become accommodation makers.

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals affirming the decision of the trial court
is hereby REVERSED and SET ASIDE and a new one entered absolving the petitioners from liability on the promissory
note and under the mortgage contract. The Philippine National Bank is ordered to release the real estate mortgage
constituted on the property of the petitioners and to pay the amount of THREE THOUSAND PESOS (P3,000.00) as
attorney's fees.

SO ORDERED.
G.R. No. L-19461 March 28, 1923

CHARLES A. FOSSUM, plaintiff-appellant,

vs.
FERNANDEZ HERMANOS, a general partnership, and JOSE F. FERNANDEZ Y CASTRO and RAMON
FERNANDEZ Y CASTRO, members of the said partnership of FERNANDEZ HERMANOS, defendants-appellees.

Chas. E. Tenney for appellant.

Ernesto Zaragoza and Jose Varela Calderon for appellees.

STREET, J.:

Prior to the date of the making of the contract which gave rise to this litigation the plaintiff, Charles A. Fossum, was the
resident agent in Manila of the American Iron Products Company, Inc., a concern engaged in business in New York City;
and on February 10, 1920, the said Fossum, acting as agent of that company, procured an order from Fernandez
Hermanos, a general commercial partnership engaged in business in the Philippine Islands, to deliver to said firm a tail
shaft, to be installed on the ship Romulus, then operated by Fernandez Hermanos, as managers of La Compañía Marítima.
It was stipulated that said tail shaft would be in accordance with the specifications contained in a blueprint which had
been placed in the hands of Fossum on or about December 18, 1919; and it was further understood that the shaft should be
shipped from New York upon some steamer sailing in March or April of the year 1920.

Considerable delay seems to have been encountered in the matter of the manufacture and shipment of the shaft; but in the
autumn of 1920 it was dispatched to Manila, having arrived in January, 1921. Meanwhile the American Iron Products
Company, Inc., had drawn a time draft, at sixty days, upon Fernandez Hermanos, for the purchase price of the shaft, the
same being in the amount of $2,250, and payable to the Philippine National Bank. In due course the draft was presented to
Fernandez Hermanos for acceptance, and was accepted by said firm on December 15, 1920, according to its tenor.

Upon inspection after arrival in Manila the shaft was found not to be in conformity with the specifications and was
incapable of use for the purpose for which it had been intended. Upon discovering this, Fernandez Hermanos refused to
pay the draft, and it remained for a time dishonored in the hands of the Philippine National Bank in Manila. Later the bank
indorsed the draft in blank, without consideration, and delivered it to the plaintiff, Charles A. Fossum, who thereupon
instituted the present action on the instrument against the acceptor, Fernandez Hermanos, and the two individuals named
as defendants in the complaint, in the character of members of said partnership.

On the foregoing statement it is evident that the consideration for the draft in question and for the acceptance placed
thereon by Fernandez Hermanos, has completely failed; and no action whatever can be maintained on the instrument by
the American Iron Products Company, Inc., or by any other person against whom the defense of failure of consideration is
available. In recognition of this fact, and considering that the plaintiff Fossum, in whose name the action is brought, was
the individual who had acted for the American Iron Products Company, Inc., in the making of the contract, the trial court
held that the action could not be maintained and absolved the defendants from the complaint. From this judgment the
plaintiff appealed.

We are of the opinion that the trial judge has committed no error. To begin with, the plaintiff himself is far from being a
holder of this draft in due course. In the fact place, he was himself a party to the contract which supplied the consideration
for the draft, albeit he there acted in a representative capacity. In the second place, he procured the instrument to be
indorsed by the bank and delivered to himself without the payment of value, after it was overdue, and with full notice that,
as between the original parties, the consideration had completely failed. Under these circumstance recovery on this draft
by the plaintiff by virtue of any merit in his own position is out of the question. His attorney, however, calls attention to
the familiar rule that a person who is not himself a holder in due course may yet recover against the person primarily
liable where it appears that such holder derives his title through a holder in due course.

The difficulty of the plaintiff's position from this point of view is that there is not a line of proof in the record tending to
show as a fact that the bank itself was ever a holder of this draft in due course. In this connection it was incumbent on the
plaintiff to show, as an independent claims, i.e., the bank, was a holder in due course; and upon this point the plaintiff can
have no assistance from the presumption, expressed in section 59 of the Negotiable Instrument Law, to the effect that
every holder is deemed prima facie to be a holder in due course. The presumption expressed in that section arise only in
favor of a person who is a holder in the sense defined in section 191 of the same Law, that is, a payee or indorsee who is
in possession of the draft, or the bearer thereof. Under this definition, in order to be a holder, one must be in possession of
the note or the bearer thereof. (Night & Day Bank vs. Rosenbaum, 191 Mo. App., 559, 574.) If this action had been
instituted by the bank itself, the presumption that the bank was a holder in due course would have arisen from the tenor of
the draft and the fact that it was in the bank's possession; but when the instrument passed out of the possession of the bank
and into the possession of the present plaintiff, no presumption arises as to the character in which the bank held the paper.
The bank's relation to the instrument became past history when it delivered the document to the plaintiff; and it was
incumbent upon the plaintiff in this action to show that the bank had in fact acquired the instrument for value and under
such conditions as would constitute it a holder in due course. In the entire absence of proof on this point, the action must
fail.

There is another circumstance which exerted a decisive influence on the mind of the trial judge in deciding the case for the
defendants. This is found in the fact that the plaintiff personally made the contract which constituted the consideration for
this draft. He was therefore a party in fact, if not in law, to the transaction giving origin to the instrument; and it is difficult
to see how the plaintiff could strip himself of the character to agent with respect to the origin of the contract and maintain
this action in his own name where his principal could not. Certainly an agent who actually makes a contract, and who has
notice of all equities emanating therefrom, can stand on no better footing than his principal with respect to commercial
paper growing out of the transaction. To place him on any higher plane would be incompatible with the fundamental
conception underlying the relation of principal and agent. We note that in the present case there is no proof that the
plaintiff Fossum has ceased to be the agent of the American Iron Products Company, Inc.; and in the absence of proof the
presumption must be that he still occupies the relation of agent to that company.

it is a well-known rule of law that if the original payee of a note unenforceable for lack of consideration repurchase the
instrument after transferring it to a holder in due course, the paper again becomes subject in the payee's hands to the same
defenses to which it would have been subject if the paper had never passed through the hands of a holder in due course.
(Kost vs. Bender, 25 Mich., 515; Shade vs. Hayes, L. R. A. [1915D], 271; 8 C. J., 470.) The same is true where the
instrument is retransferred to an agent of the payee (Battersbee vs. Calkins, 128 Mich., 569).

In Dollarhide vs. Hopkins (72 Ill. App., 509), the plaintiff, as agent of a corporation engaged in manufacturing agricultural
implements, sold to the defendant a separator for threshing small grain, with a general warranty that the machine, properly
handled, would thresh and clean grain as well as any other separator of like size. The notes in suit were executed by the
defendant in payment of the separator, and were assigned to the plaintiff before maturity. They were then indorsed by the
plaintiff to a bank which became holder in due course; but afterwards, and before the commencement of the action, the
notes were retransferred by the bank to the plaintiff. In an action upon the notes the defendant alleged and proved breach
of warranty and showed that the plaintiff knew of the defect in the separator at the time he purchased the notes. It was
held that the plaintiff could not recover, notwithstanding the fact that the notes had passed through a bank, in whose hands
they would not have been subject to the defense which had been interposed (54 L. R. A., 678).

We find nothing in the Negotiable Instrument Law that would interfere with the application of the doctrine applied in the
cases above cited, for the rule that identifies the agent with the principal, so far as the legal consequences of certain acts
are concerned, is a rule of general jurisprudence that must operate in conjunction with that Law. We consider the situation
to be the same in practical effect as if the action had been brought in the name of the American Iron Products Company,
Inc., itself; and the use of the name of Fossum strikes us as a mere attempt at an evasion of the rule of law that would have
been fatal to the success of an action instituted by that company.

It appears from statements of Mr. Fossum on the witness stand that the draft in question was indorsed and delivered to
him by the bank in order that suit might be brought thereon in his name for the use and benefit of the bank, which is said
to be the real party in interest. In addition to this it appears that during the pendency of the cause in this court on appeal a
formal transfer, or assignment, to the bank was made by Fossum of all his interest in the draft and in the cause of action.

Assuming that the suggestion thus made is true, and that the bank is the real party in interest, the result of the lawsuit in
this court is not thereby affected, since it has not been affirmatively shown that the bank is an innocent purchaser for
value. It is therefore unnecessary to discuss the bearing of this circumstance on the second feature to the case discussed in
this opinion.
For the reasons stated the judgment appealed from must be affirmed, and it is so ordered, with costs against the appellant.